China and Iraqi Oil

From today's NYT by KEITH BRADSHER As Iraq Stabilizes, China Eyes Its Oil Fields

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In another sign of China’s interest in Iraqi oil fields, Sinopec, China’s refining giant, offered $7.22 billion on Wednesday to buy Addax Petroleum, a Swiss-Canadian company with operations in the Kurdistan region of Iraq and in West Africa. If Addax’s shareholders and Canadian regulators approve the deal, which Addax’s board is recommending, it would be China’s largest overseas energy acquisition.

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But China’s oil consumption has soared since then, thanks to an economic boom and climbing car sales that have produced traffic jams in big cities. China surpassed the United States this year as the world’s largest car market, partly because China has weathered the global economic downturn better than the United States; China’s oil consumption reached 8 million barrels per day last year, up from 4.9 million in 2001, according to a statistical review from BP, the British oil company.

Oil production has grown much more slowly, as older oil fields have run dry. New fields, either offshore or in western China, have barely replaced them. China produced 3.8 million barrels per day of oil last year, up from 3.3 million barrels per day in 2001, which still left the country dependent on imports for more than half its oil.

Iraq has the world’s third-largest proven reserves, after Saudi Arabia and Iran. Many geologists say that the true oil resources of Iraq are even greater than official statistics suggest, because Iraq’s oil industry has suffered from decades of disruption and underinvestment. Many oil fields have not been fully explored as a result.

Addax has oil licenses in two oil fields in northern Iraq, the Taqtaq and Sangaw North fields, both near Kirkuk, and its drilling has already struck large quantities of oil repeatedly in the Taqtaq field.

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http://www.forbes.com/feeds/ap/2009/...ap6602591.html

BAGHDAD -- The first international bidding process in more than 30 years for development rights to some of Iraq's oil fields has finished, with only one field being awarded.

Iraq had offered six oil and two gas fields in a landmark auction the government hoped would help boost output to 4 million barrels per day and generate cash it desperately needs for postwar reconstruction.

But the bidding round Tuesday faltered quickly as companies demanded terms far greater than what the government was willing to provide.

There's a popular misconception that China's oil deals in Iraq means that the Chinese are somehow beating Western companies to the jackpot. The reality is that the terms being offered are so restrictive that only the Chinese - who have demonstrated a very high risk tolerance in this and other markets - are interested. Given the terms being offered, this is not about oil companies fighting for the privilege of working in Iraq, but about the Iraqi Government struggling to find anyone willing to invest on its terms.

Another common misconception is that if Chinese oil companies do the investing the oil will automatically go to China, if US oil companies do the investing the US gets the oil, etc. This is simply inaccurate: the oil will be sold to the highest bidder no matter who pumps it. All oil consuming countries have an interest in seeing Iraqi production increase, but as long as that oil comes onto the market it doesn't matter at all where the oil actually goes. If Iraqi production went up to 5 mbpd the US would benefit from lower prices even if every drop produced in Iraq went to China.

Unfortunately for all concerned, that kind of production increase is not likely under the investment terms now being offered.

Don't mean to imply that we can't all get along :wry: however it's interesting to watch what's happening:

Sinopec's business model from wikipedia:

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Sinopec, or the China Petroleum and Chemical Corporation (SSE: 600028, NYSE: SNP, HKEX: 0386) (simplified Chinese: 中国石化, traditional Chinese: 中國石化), is one of the major petroleum companies in China. Sinopec's business includes oil and gas exploration, refining, and marketing; production and sales of petrochemicals, chemical fibers, chemical fertilizers, and other chemical products; storage and pipeline transportation of crude oil and natural gas; import, export and import/export agency business of crude oil, natural gas, refined oil products, petrochemicals, and other chemicals. In 2008, it is ranked 16th by Fortune Global 500, up from its rank of 17 in 2007.[2] In 2007 it ranked first in the Top 500 Enterprises of China ranking.[3]

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CNPC's business model from wikipedia:

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The China National Petroleum Corporation (CNPC) (simplified Chinese: 中国石油天然气集团公司, traditional Chinese: 中國石油天然氣集團公司, Hanyu Pinyin: Zhongguo Shiyou Tianranqi Jituan Gongsi)[2] is a state-owned fuel-producing corporation and the largest integrated oil and gas company in the People's Republic of China. As of 2006, it was the second largest company in the world in terms of number of employees.

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The China backgrounder from the EIA:

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With China's expectation of growing future dependence on oil imports, the country has been acquiring interests in exploration and production abroad. CNPC has acquired exploration and production interests in 21 countries spanning four continents. During 2005, CNPC announced its
intentions to invest a further $18 billion in foreign oil and gas assets between 2005 and 2020. In Sudan, CNPC has invested more than $8 billion in the country’s oil sector, including investments in a 900-mile pipeline to the Red Sea. In October 2005, CNPC finalized the purchase of PetroKazakhstan, whose assets include 11 oil fields and licenses to seven exploration blocks. In
December 2005, this purchase was complemented by the completion of the 600-mile Sino- Kazakh oil pipeline that will deliver 200,000 bbl/d of crude oil to China by the end of 2006. In 2005, some of CNPC’s other overseas investments included purchasing Encana’s oil and gas assets in Ecuador and PetroCanada’s oil and gas assets in Syria.

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From the CFR, Author: Stephanie Hanson, News Editor China, Africa, and Oil

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China's booming economy, which has averaged annual 9 percent growth for the last two decades, requires massive levels of energy to sustain its growth. Though China relies on coal for most of its energy needs, it is the second-largest consumer of oil in the world behind the United States. Once the largest oil exporter in Asia, China became a net importer of oil in 1993. The International Energy Agency projects China's net oil imports will jump to 13.1 million barrels per day by 2030 from 3.5 million barrels per day in 2006. China currently imports about half its oil supplies from the Middle East, and that percentage is projected to grow in coming decades. Yet the extent of the country's energy demand has also compelled China to push into new markets, and particularly Africa.

Africa holds a fraction of the world's proven oil reserves—9 percent compared to the Middle East's nearly 62 percent—but industry analysts believe it could hold significant undiscovered reserves. As a result, China is seeking to increase its oil imports from the continent. It now receives about one-third of its oil imports from Africa, 9 percent of the continent's total exports in 2006 (by contrast, the United States purchased 33 percent of that year's exports from Africa). China's biggest suppliers in Africa as of 2006 were Angola, the Republic of Congo, Equatorial Guinea, and Sudan. It has also sought supplies from Chad, Nigeria, Algeria, and Gabon.

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Interactive graphic of Iraqi Oilfields from the FT

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Iraq’s early attempts to attract foreign investment into its oil sector have been largely unsuccessful so far, as Tuesday’s auctions of six oil fields and two gas fields have yielded only one sale. BP of the UK and China’s CNPC agreed to Baghdad’s tough pricing terms, and will turn the South Rumaila field into the world’s second largest oil producer. However, the remaining oil and gas fields, including the highly sought-after West Qurna field, did not attract high enough bids to meet the Iraqi oil ministry’s conditions.

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FT reports the Iraqi governments bid requirement for the Rumailia and Kirkuk fields as "$2.00 per extra barrel"

Khour al-Zubeir Port in Basra

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Al-Baṣrah (Arabic: البصرة‎; BGN: Al Basrah, also called 'Basorah) is the capital of Basra Province, and had an estimated population of 1,052,200 as of 2003.[1] Basra is also Iraq's main port, although is incapable of deep water access, which is handled at the the port of Umm Qasr. The city is the historic location of Sumer, the home of Sinbad the Sailor, and a proposed location of the Garden of Eden. It also played an important role in early Islamic history, being built in 636 CE, or 14 AH. It is Iraq's second largest and most populated city after Baghdad.

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Pricing is given as the reason for the disinterest shown by major oil companies toward the Iraqi auctions, but there is more to it than that. The investments required to develop these fields are very large and the recovery horizon is long. There is a quite understandable reluctance to make long term deals with a government that may or may not be around in a year, let alone ten years. If another government decides to unilaterally change the deal, there is nothing an oil company - US, Chinese, or other - can do about it.

We all know that China uses a lot of oil, that Chinese oil companies are large, and that they are aggressively pursuing investment, even in areas posing higher risks than most other companies are willing to take. But really, so what? How does this negatively impact anyone else's interests?

It could be argued that China's willingness to pay bribes and to cut deals with corrupt and repressive governments is not a good thing for Africa (in particular), but it does no harm to oil markets. If the Chinese weren't pumping oil out of places like Angola, Sudan, and Iraq, where local companies lack the money and/or expertise to develop resources and other foreign companies are unwilling to invest, they'd be competing to buy oil from other producers, pushing prices even higher. The more oil the Chinese pump, the cheaper oil gets - for everyone. Of course the Chinese are taking risks - a future government in any of these countries could easily nationalize their investments and there is very little they could do about it - but how does that hurt us?

Again, there are many interesting data points to consider on this topic, here are a few more:

From the Chinese Economic and Commercial Counselors Office in Pakistan:

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ISLAMABAD (April 18 2009): Pakistan and China are set to sign memorandum of understanding (MoU) to enter into joint venture for oil and gas exploration. The MoU will be signed by Advisor to Prime Minister on Petroleum and Natural Resources Dr Asim Hussain, who left here for China on Friday.

Sources revealed to the Business Recorder that the MoU would enable Pakistan Petroleum Limited (PPL) to enter into joint venture with China state run oil and gas exploration companies for exploration activities in Pakistan as well as in foreign countries.

The government had increased the well-head gas price cap to 100 dollars per barrel crude oil price from 45 dollars per barrel crude oil in 2009 Petroleum and Exploration Policy that would also attract the Chinese companies to explore oil and gas reserves in Pakistan, sources said.

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A 2007 posting on Gulf Oil & Gas: China's CNPC Close to MoU on $3.6B Iran LNG Project

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China National Petroleum Corp. is close to signing a memorandum of understanding to invest around $3.6 billion for developing Iran's South Pars natural gas field, a Chinese official familiar with the deal said Friday.

The MoU with Iran's oil ministry will involve a pledge by CNPC to spend around $1.8 billion on exploration and production in the SP14 gas block in the field and a further $1.8 billion on building a liquefied natural gas plant, the official said.

State-owned CNPC is in talks with Norway's Statoil ASA (STL.OS) about joining the SP14 project, the official added.

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Again this tells us what we already know: the Chinese are pursuing exploration and production opportunities, even in places posing risks that most other oil companies find unacceptable. I suppose we could complain that they are not following our sanctions on Iran, but neither are the Norwegians, or practically anyone else. So again, is this a threat, a problem, a concern? If so, how?

Would we rather see China spending money to develop new production in places too risky to attract other investment, or using that big pile of dollars to bid against us for the output of existing producers?

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Originally Posted by Dayuhan

Again this tells us what we already know: the Chinese are pursuing exploration and production opportunities, even in places posing risks that most other oil companies find unacceptable. I suppose we could complain that they are not following our sanctions on Iran, but neither are the Norwegians, or practically anyone else. So again, is this a threat, a problem, a concern? If so, how?

Would we rather see China spending money to develop new production in places too risky to attract other investment, or using that big pile of dollars to bid against us for the output of existing producers?

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My purpose in posting the above datapoints is not to assign a value judgment, but instead to note that Iraq's future landscape, IMHO, includes a Chinese presence. See this post for additional clarification.