China really does not get enough credit for its generosity. The latest wave of investment by Chinese companies in oil production in Brazil, Russia, Venezuela and Kazakhstan is a reminder that the country is exporting billions of dollars of capital to create benefits not just for China itself, but to be shared by the whole world. There are reasons why such a strategy makes sense, but the caricature of planners in Beijing steering China Inc to “tie up” the world’s natural resources is a long way from the truth.
The game was given away recently by Jose Gabrielli, the CEO of Petrobras, who told Bloomberg that the loan of up to $10bn that he expects to get from China, “will not be collateralized with oil.”
As Bloomberg put it:
Chinese companies will instead receive right of first refusal on some future output as part of a deal being finalized between Brazil and China’s Development Bank
In other words, the Chinese will be able to buy some oil, if they want. That’s not much of a return for $10bn.
That deal is only the most extreme example of a common theme in Chinese oil investment: China is putting up money to raise oil production, but not claiming the full benefit of that increased production. In fact, the point would be the same even if China secured every drop of Brazil’s oil, because in a broad, liquid global market such as oil, barrels are – to a first approximation – fully interchangeable. Every barrel that China imports from Brazil or Venezuela or Russia is one less that it will need to import from Saudi Arabia, which can then export more to Japan, Europe or the US.
That is true for all China’s oil investments. It is, for example, a little-considered truth about CNPC’s hugely controversial involvement in Sudan – a country that was one of the world’s fastest-growing oil producers in 2007 – that the US and Europe are beneficiaries as much as China.
China is not tying up resources that no-one else will be able to use. The truth is exactly the opposite: by investing in resource production, China is making a contribution to global supply that benefits oil consumers everywhere.
Gas is somewhat different, because there is less of a global market (so far, at least). If China builds pipelines to take gas from Turkmenistan or Russia that are cheaper and more reliable than the export routes for those countries to sell in the EU, then Chinese customers can get a better deal than Europeans. Even there, though, the growth of LNG has created arbitrage opportunities that smooth out differences in gas markets worldwide. If China buys more gas from Turkmenistan, it will import less LNG from Australia, which will as a result be able to export more to Japan and the US.
The point is not that naive Chinese investors are being fleeced by canny operators in Brazil and Russia. The deals may very well make sense from the point of view of the different Chinese companies and banks involved, which are seeking to extend their global reach. The oil may also be sold at below-market price, which makes them attractive for the Chinese buyers. But to see these moves as reflecting the grand strategy of “China Inc” is a profound misunderstanding.
Even worse is being alarmed by these moves and trying to block them. The world needs all the investment in energy it can get; even more so at this time when finances are constrained by low oil and gas prices and the credit crunch. China still has capital to invest, and its dollars are as good as anyone else’s. Turning them away would be madness.
China takes the long view on oil (FT Energy Source)
Why do international oil companies partner with Chinese NOCs? (FT Energy Source)
China gets busy (FT Energy Source)