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Financial Times: Chinese companies: Willing to go where western companies fear to tread

By Martin Clark
Published: January 28 2008 05:38 | Last updated: January 28 2008 05:38

Chinese oil companies have made a beeline for Africa’s natural resources in recent years to secure fuel supplies for the country’s own blistering growth, but not all of these investments will pay off.

State-backed groups such as China National Petroleum Corporation (CNPC) have established strong interests in oil-rich territories such as Nigeria, as well as frontier exploration zones, often muscling traditional western rivals aside. By 2008, Chinese companies had amassed 56 upstream contracts between them across the continent, according to consultants IHS Energy. That is not much compared with the collective total of the international oil companies, but impressive given the lateness of China’s engagement with Africa’s energy industry.

CNPC first planted its flag in Africa in Sudan back in 1995, taking advantage of the general absence of US and European competition in the country. This willingness to engage with regimes vilified in the west is one factor that has enabled the Chinese access to reserves that might otherwise have been unavailable.

It is a policy that has worked well with Sudan, now a big crude supplier to the China market. It also represents CNPC’s single biggest foreign investment. The company heads Sudan’s top oil producing joint venture, the Greater Nile Petroleum Operating Company (GNPOC), among other local upstream and downstream projects.

At the same time, these different rules of engagement have brought with them widespread criticism from western governments and human rights groups keen to isolate Khartoum. It is no coincidence that China’s partners in GNPOC include other heavyweight Asia-based players such as ONGC of India and Malaysia’s Petronas. Most western companies, such as Canada’s Talisman Energy, which used to own a stake in GNPOC, fled after protests from shareholders.

China’s willingness to go into countries where western companies are “too squeamish” reflects the strong influence of Beijing which plays an almost parental role in supporting its flagship institutions, says Andrew Hayman of IHS Energy. “There is no doubt that China plays the government card.” In return, the oil companies must bear reciprocal corporate obligations to national security, he says.

China’s deal-making in Africa has risen dramatically in a few years, a fact that has driven up competition for assets. What is more, it is not just China that has been seduced by Africa’s oil wealth, but other operators from elsewhere in Asia. More recently, Russia’s Gazprom has shown an interest in Nigeria’s gas potential.

The rise in oil investment mirrors a huge surge in overall trade volumes between China and Africa. This has been heavily focused on natural resources, as well as manufacturing and information technology. In 2006, Angola overtook Saudi Arabia as the country’s largest single oil supplier, albeit briefly.

Much of this commodities trade has been linked to aid in one form or another, with China keen to stress its understanding of African development issues. Some of these agreements are vague, with oil blocks awarded in return for pledges of infrastructure investment. This is not confined to oil either. Zimbabwe’s power sector has received spare parts and supplies in return for cash crops such as tobacco.

But some question whether China can make these investments work, especially in frontier locations that require huge skill in areas such as drilling and seismic. Aside from Sudan, there is little to show for China’s own exploration efforts in many parts of the continent, says Mr Hayman. “Have they been successful in their frontier exploration efforts? I’m not sure that they yet have.”

A number of contracts have been relinquished following disappointing starts, in places such as Ivory Coast. Chinese interests in the Democratic Republic of Congo, Mali, Morocco and Kenya have all been scaled back, according to IHS Energy, following the initial flurry.

Better luck has come where Chinese companies have teamed up with international partners. BP’s 240,000 b/d Greater Plutonio deep-water development in Angola, launched in October 2007 with Sonangol Sinopec International, a pairing of the Angolan state oil company with China Petroleum & Chemical Corporation , holding 50 per cent.

In Nigeria, CNOOC paid $2.3bn for a 45 per cent stake in Nigeria’s Akpo field, reflecting its desire to learn deep-water techniques. This field is due onstream at the end of this year. It also shows buying into proven oilfields is often a safer way to add reserves to the books than tricky frontier exploration.

While the surge in investment by China may have generated competition for western oil companies, the two are at differing levels in technology and exploration prowess. European service providers working for the likes of Shell and BP are also used to offering a highly specialised service in a tough environment.

Andrew Moorfield, head of Lloyd’s TSB’s oil & gas unit, says US and European groups are keen to play this card. “Western service providers believe their products are more bespoke.”

Copyright The Financial Times Limited 2008 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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