Photo Credit: AFP/Getty Images/Adalberto Roque
China’s state oil companies have spent $92 billion on acquiring oil and gas assets around the world since 2009, according to Dealogic as reported in the Financial Times. What have they got for their money, and have they got value for it?
China National Petroleum Corp. (CNPC), China Petroleum & Chemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC), China’s Big 3 national oil companies, now have access to oil and gas resources in 31 countries from Angola to the U.S. and Venezuela — and the world’s second largest consumer of energy in general and oil in particular has secured supplies for the next quarter of a century. The International Energy Agency reckons China’s oil production outside its borders will reach 3 billion barrels a day by 2015, twice its output of last year, a third of what China currently consumes and the same output volume as a top-ten global oil producer such as Kuwait or Mexico.
China now consumes 45% of the world’s commodities. Even if, as is inevitable, its GDP growth slows from the double-digit rate it has averaged for the past three decades, its need to secure natural resources, including energy, remains a national strategic objective. The global economic slowdown after the 2008 financial crisis has presented China’s national oil companies with an unprecedented opportunity to buy quality assets abroad from stricken companies and to secure long-term supply deals by extending loans to resource-rich countries in need of capital. At the same time their rivals have not been in a position to match them.
Our back-of-the-envelope calculation is that they have paid $3-4 dollars a barrel to secure those supplies. That compares to the $2-3 dollars that the oil industry factors into the cost of every barrel of oil sold for exploration and development. Our calculation makes some arbitrary assumptions about output capacities and the productive life of oil and gas fields, and makes no allowance for financing costs and inflation. The premium is probably worth the security of supply — especially if predictions that global peak oil production will be reached at some point over the next quarter century prove true.
Known fields will also be cheaper to work than new fields. The oil majors are having to search for new reserves in ever-more-difficult places. Drilling three miles out from shore through two miles of sea or into shale and tar sands is not cheap, and oil companies are still left at the end of it with a similar barrel of oil to the one that bubbles up from the sands of Saudi Arabia for $10. Big oil’s working estimate for the total cost of new oil, including local taxes and royalties, is now $80 a barrel – a reason oil will stay around the current $100 a price for the foreseeable future.
Within that there is plenty of scope for China’s national oil companies to absorb the extra buck or so they paid to acquire their oil. They are also more likely to be able to get better tax and royalty deals from the countries where they will be extracting than their privately owned Western counterparts. All in all, China’s buying spree that will prove to be not bad business at all.
