As Asian economies and populations boom, NOCs are looking to Africa as their latest resource for supplies to match growing demands
ASIAN national oil companies (ANOCs) are waging a new battle for oil reserves in Africa. Human-rights, anti-corruption campaigns and good governance have all become victims of the scramble, as state-owned companies from countries with weak commitments to all of them invest in host countries with weaker interest in any of them, writes Derek Brower.
Or at least that is the perception of many in the West, from non-governmental organisations, to the media, to the international oil companies (IOCs) that previously had Africa to themselves. But is the perception fair?
Not necessarily, says a report from Chatham House, a think tank. And nor is it the whole picture, say the report's authors, John Mitchell and Glada Lahn. Furthermore, ANOCs are challenging the conventional IOC model and their reach is extending beyond Africa. Above all, the ANOCs' motivation is commercial – but the execution of their expansion into Africa is wedded to, and supported by, their countries' foreign policies.
The main driver, say Mitchell and Lahn, is rapidly rising oil demand coupled with static or declining domestic output. Consumption in Asia has risen by 25% since 2000. In China, the trend is especially marked: demand has risen by 46% since 2000, while output has increased by just 12%. By 2005, China's dependence on foreign oil had risen to 44% of total demand. Imports already account for around 70% of India's needs – but the country's demand for oil and gas is expected to triple by 2025, compared with around 387m tonnes of oil equivalent a year now.
Raw demand growth is not the only driver. As in the West, Asian economies are concerned about security of energy supply. "Foreign equity crude cannot dissolve all insecurities – its production is not exempt from political disruption in the exporting country, war, piracy, terrorism or UN sanctions." But, say Mitchell and Lahn, "diversification can help reduce the overall risk."
Capacity growth is important. Another motivation is purely commercial. And getting more oil abroad plays well at home. "Size counts in domestic politics and markets and in the status of the management," says the report. In other words, it helps the state-owned company justify its budgets, provided by the government, and it helps raise the profile of its managers.
The effect on the production profiles of the ANOCs shows how important foreign oil has become (see Figure 1). Petronas, of Malaysia, produces about 26% of its oil overseas – or some 22% of Malaysia's total demand. In 2005, Chinese foreign equity production amounted to around 16% of the country's total imports of 3.4m barrels a day (b/d).
Oil that Chinese firms bought from foreign producers, such as Angola or Saudi Arabia (about 0.5m b/d from each in 2006), was imported back to the home country, while some (such as from Venezuela and Peru) was traded on the world market. Mitchell and Lahn predict output from Chinese interests in existing projects will rise by another 300,000 b/d between 2009-13. That figure would grow by another 150,000 b/d if Sinopec's contract to develop Iran's Yadavaran field goes ahead, taking total foreign output to around 1m b/d.
Meanwhile, the ANOCs, like the IOCs, are unable to invest in the very largest oil projects, which generally remain under tight state control. The ANOCs' answer has been to develop a larger portfolio of "smaller, usually higher-cost or higher-risk projects". Chinese firms, in particular, want those kinds of projects, say Mitchell and Lahn, because they are keen on "learning by doing".
That has brought companies such as China National Petroleum Corporation (CNPC) into Kazakhstan, Sudan – alongside Petronas and India's ONGC – and Iran, with Japan's Inpex. CNPC is involved in 74 projects (out of 122 Chinese company projects abroad) in 23 countries – a similar number to the major IOCs, notes the report.
Overall, ANOCs are active in 40 of the world's 100 countries in which oil exploration is undertaken. Of the 25 countries that account for 90% of undiscovered oil, says the report, ANOCs are active in 16.
While they continue to lag – just – behind IOCs in terms of technology and know-how, they have other advantages. One is a willingness to pay more for a contract than an IOC, where shareholders watch spending carefully. It seems ANOCs face premiums on whatever they try to buy – China National Offshore Oil Corporation's (CNOOC) offer of $18.5bn for Unocal in 2005 failed, despite coming in at more than $2bn above Chevron's initial bid for the company (Chevron eventually sealed the deal for $17.3bn).
Among the reasons why ANOCs seem willing to pay more are: the lower interests on capital they can secure in their home countries; lower expectations for return on capital by the state; a higher tolerance of risk; and a willingness to pay a so-called entry premium as latecomers to the sector.
Another advantage is the diplomatic support they receive. Lines of credit extended from Beijing to countries such as Angola have helped secure assets for Chinese firms – and oil to bring home. In Angola's case, that credit was used to pay for a railway line and power station, although some suggested that much of the money went to less visible recipients.
Another advantage is that ANOCs show greater enthusiasm for investing in refining and other infrastructure projects than IOCs, which helps them secure contracts. Building refineries is especially important to African producers because of their deficient capacity, says the report. CNPC is involved downstream in Algeria and Sudan; likewise ONGC in Nigeria and Petronas in Sudan. Nigeria's mini-bid round last year made clear that winning companies would be expected to invest downstream.
ANOCs are also involved in pipeline projects in many of the countries they are exploring in, from Africa to Central Asia, and are able to offer downstream access to exporting NOCs. Saudi and Kuwaiti NOCs, notes the report, are partnering Sinopec in two refining and petrochemicals projects in China – foreign shares in Chinese refining capacity could soon amount to 360,000 b/d.
There are other reasons why the ANOCs are more popular in the host countries than IOCs. They do not carry the same "imperialist baggage", say Mitchell and Lahn, and some "are attracted because some Asian government agencies and financial institutions do not apply conditions regarding transparency and external monitoring of operations affecting human rights and ethical issues to loans and aid packages connected with upstream deals".
CNPC and CNOOC have not signed up to the UN's Global Compact, an initiative that aims to bind companies to a range of human-rights and good-practice guarantees. ONGC and Sinopec are listed as "inactive" members of the compact.
The ANOCs' governments are also able to win more diplomatic influence in the host country. In China's case, that means securing international support for foreign-policy goals. It does not want Taiwan recognised as a country (only six African countries now recognise it), UN reform that would allow Japan a seat on the permanent Security Council, or other measures against corruption, says the report.n