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China in Africa: the honeymoon is over

China's national oil companies remain a central feature of energy operations in Africa, but their influence has been tempered, writes Ian Lewis

AFRICAN governments are taking a more cautious approach to Chinese investment in energy operations as they seek to establish multiple markets for their oil. Angola and Libya have recently blocked oil-asset sales to Chinese companies. Nigeria has played down talk of Chinese interest in taking oilfield stakes held by Western international oil companies (IOCs). But it is too soon to conclude that African governments are turning away from their new Asian partner.

"The relationship is becoming a more normal one," says Alex Vines, head of the Africa Programme at Chatham House, a London-based think tank. "It's less of a honeymoon period now." African governments are becoming more interested in ensuring that the markets into which they sell their oil are diversified to improve their chances of increasing oil income, rather than building up a dependency on any one nation, he says.

In any case, while much has been made of China's Africa push, it remains a much less powerful player in the oil sector than IOCs. "The only operatorships Chinese companies have in Africa remain those in Sudan; otherwise it's all equity oil," Vines says. And, despite much publicity, China's agreements across the continent give it direct access to less than 4% of African oil reserves, says Wood Mackenzie, a consultancy.

Big ambitions in Nigeria

But China's continued interest in Africa's hydrocarbons reserves remains a useful bargaining chip to cash-strapped countries eager to boost oil revenues. This is illustrated by a leaked letter from the office of Nigerian President Umaru Yar'Adua to Sunrise, a representative for China's CNOOC, written in August, the contents of which were revealed by the Financial Times. It concerns the acquisition of 6bn barrels of Nigerian oil, with an indication from the government that CNOOC would need to raise its price to achieve this. The price was not disclosed in the letter, but industry estimates suggest it would need to be upwards of $30bn.

The idea of such an agreement will have alarmed IOCs negotiating a renewal of existing Nigerian contracts. The fear is that Chinese firms will be allocated acreage they hold or had assumed would be theirs. Government officials were quick to stress that no deal had been struck with CNOOC and that talks with IOCs continue, but the leaking of the letter may have benefited the Nigerian government and China's oil firms.

"You have to ask yourself why this document has been leaked now. Is it about achieving more competition between the IOCs and the Chinese and seeing what the government can extract? It is messy politics, but then the Nigerian oil business is like that," Vines says.

From the Chinese perspective, the letter highlights CNOOC's continued interest in Nigeria's oil sector, despite the failure of the previous government's oil-for-infrastructure deals (PE 9/09 p26). CNOOC and other Chinese firms appear to be pursuing a more conventional approach to African oil investments, bidding for acreage and taking stakes in firms that already have African assets, such as Sinopec's acquisition of Canada's Addax for $7.24bn, which has acreage in the Joint Development Zone offshore Nigeria and São Tomé e Princípe (PE 8/09 p2).

And while CNOOC may not end up securing the 6bn barrels it was apparently looking for – representing around one-sixth of Nigeria's proved reserves – it could end up with a sizeable chunk of this, analysts say.

It could be argued that the emergence of such details reflect a slow move towards increased transparency in Nigerian oil sector deal making, Vines says. Certainly, the cause of greater independence from government interference received a boost in late August when a Nigerian federal court ruled that the government had illegally revoked offshore exploration rights awarded to South Korea's KNOC and ordered it not to interfere further. The willingness of the judiciary to stand up to the government in this case is seen as a positive sign for future oil negotiations.

Some analysts have interpreted the decision by Angola's state-owned Sonangol to buy an oilfield stake that had been destined for CNOOC and Sinopec as an indication that Angola feels more financially secure and less reliant on Chinese investors; this would certainly be a shift away from its policy in recent years, during which oil-for-infrastructure deals have made Angola China's single-biggest crude supplier.

In September, Sonangol exercised its pre-emption right to buy a 20% stake in Block 32, held by Marathon. The US firm had previously agreed to sell the shares to CNOOC and Sinopec for around $1.3bn – a price Sonangol was required to match. Sonangol already has a 20% stake in the block, which is operated by Total. Marathon will retain 10%.

Angola may indeed be feeling more secure financially. In September, it reached a preliminary loan agreement with the IMF, as a result of which the fund is recommending a 27-month loan programme for the country, also amounting to $1.3bn. The programme is expected to involve a number of Western financial institutions, but Sonangol's intervention in the Marathon stake sale may have more to do with the price of oil and the politics of licensing rounds than any shift in geopolitical allegiances.

"With lower oil prices, the payment offered to Marathon was much less than had been talked about last year. The Angolans, at the presidential level, may have decided to hold off on this sale for now to see what happens in the next licensing round," says Vines.

Sonangol head Miguel Vicente said in September that the country would not hold a new licensing round until towards the end of 2010 at the earliest, after presidential elections have been held – the last round was suspended in 2008, before the country held its first parliamentary elections since its civil war ended in 2002.

Angola could yet decide to sell its newly acquired Block 32 stake. Both KNOC and India's ONGC, for example, are keen to increase their presence in Angola's oil sector and could be favoured if the government wants to diversify its investor base. But the stake could end up, at least partly, in Chinese hands, as Angola may be prepared to sell it to Sonangol Sinopec International, the Angolan-Chinese joint-venture through which much Chinese investment in the country is channelled.

Libya's unsettling moves

China's unhappy experiences in Libya are not necessarily linked to a fissure in Sino-African relations either. Libya's decision to block the sale of Verenex, a Canadian firm predominantly holding oil assets in the country, to China's CNPC for around $415m will have done little to endear the regime of President Muammar Qadhafi to China. But the September agreement, under which Verenex is to be sold instead to Libyan Investment Authority, a state-controlled sovereign wealth fund, for only around $294m, suggests rising government interference in the oil sector and, as such, a concern for all oil firms operating in Libya (see p8).

 

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