Getting cosy with China on energy deals

In a week coloured by the Stern Hu/Rio Tinto trial and Google’s exit from mainland China, some of the country’s efforts to broaden its access to energy resources have been a little more politic.

Last April, we wrote about the phenomenon of Chinese companies partnering with western oil groups, which has been a feature of many Chinese forays into foreign oil and gas development. This type of agreement is still on the rise. Shell for example is bidding for Australia’s Arrow Energy with PetroChina, and on Wednesday announced a 30-year partnership with PetroChina’s parent company CNPC on developing tight gas in China’s own Sichuan Basin. Total and CNOOC in Uganda is another recent example.

Shell’s announcement is interesting because access to China’s domestic energy markets are heavily regulated and difficult for foreign companies to access.

So, that example aside, what’s in these partnerships for the western or the Chinese companies?

The appeal for the western partners comes down to China’s long-term focus on the prize of energy resources – a goal that gives them more tolerance for lower profits in the short-term, and for doing business in risky areas in the pursuit of energy. Chinese companies partnering with international oil companies (IOCs) can also provide cheaper labour, access to supplies and plenty of cash.

IHS Global Insight’s Samuel Ciszuk has laid it out rather more clearly than we’ve seen in some time, using BP and CNPC in Iraq as an example:

CNPC and its compatriots also have the ability to draw on a large well-trained cadre of workers at all levels, which they are generally willing to deploy in very risky areas at a fraction of the cost of IOC-employed workers. This has arguably been one of the main early benefits enjoyed by the BP/CNPC Rumaila project in Iraq, where operator BP has said that wherever possible Chinese workers will be brought in to do the work that Iraqi local workers cannot do, while Western exports as far as possible will work from outside of Iraq. Similarly, Chinese industry can provide cheaper materials and machinery in many cases-especially with regard to bulk-wares-keeping project costs down.

The benefits for Chinese companies of teaming up with western oil partners are a little more obvious.

Some of the majors possess technical knowledge that is in short supply elsewhere. And in developed countries (such as Australian LNG and Canadian oil sands), the memory of the failed CNOOC/Unocol bid has spurred more political caution. Even in developing countries, the IOCs have had many years of practice attempting to sooth local concerns, whether over revenues going overseas or the environment and human rights.

The use of Chinese labour can also cause tensions as China’s suspension of 10 power projects in India highlights (conversely, some countries are more inclined to favour Chinese investments over those of western countries). A report earlier this week in the Wall Street Journal (via Rigzone) points out some of the benefits for Chinese companies entering into these sorts of partnerships:

Several recent deals signal that the shift toward joining forces with foreign firms is panning out, for a variety of reasons: Securing China’s energy needs often goes smoother with a partner, helping Chinese firms avoid the kind of nationalist backlash that famously torpedoed Cnooc Ltd.’s 2005 bid for California-based Unocal Corp.

As the story mentions, these partnerships tie China’s energy future to that of the rest of the world. Which, in the current circumstances, is probably not a bad thing.

Related links:

China suspends Indian power projects - FT
Chinese oil groups court west for partnerships - FT

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