Overseas activities of China’s oil companies are demystified in new report

17 February 2011

New research published today by the International Energy Agency highlights inaccuracies in some commonly held views of China’s National Oil Companies (NOCs).

Until now, there has been little analysis to test the widely held presumption that these companies act under the instructions and in close co-ordination with the Chinese government. Nor have critics been challenged on the validity of their concerns about investments made by these NOCs, and how they could be blocking supplies of oil for other importing countries.

The IEA report, however, finds that contrary to these views, the NOCs actually operate with a high degree of independence from the Chinese government, and their investments have in fact largely boosted global supplies of oil and gas, which other importers rely on.

“These are far from puppet companies operating under control of the Chinese government, as many have assumed,” said Julie Jiang, who co-wrote the report with a fellow IEA expert on China, Jonathan Sinton. “Their investments in recent years have been driven by a strong commercial interest, not the whim of the state.”

Origins

Chinese NOCs emerged in the 1980s when the government decided to convert ministry assets (e.g. refineries) into state-owned enterprises. The principle aim of this move, which took place in the early years of China’s economic reform, was to stimulate competition so that the new companies were subject to market discipline and could vie with each other for the best results.

Yet still finding themselves relatively weak when compared with international oil firms, these companies looked abroad in the early 1990’s and invested in countries like Sudan and Peru, which others had avoided because of concerns over the unstable conditions that may impact on production.

By boldly investing in these and other countries, NOCs have subsequently grown significantly, becoming serious international players. The largest NOC – the China National Petroleum Corporation – is now the fifth largest oil company in the world, boasting 1.6 million employees. Increasingly, however, China’s NOCs are partnering with International Oil Companies on deals, and competing for the same commercial opportunities as other oil companies.

Meeting a quota?

Another common perception about the management of these NOCs was that the government imposed a quota on the amount of equity oil – a piece of ownership in a company that produces oil – they must send back to China. The research, however, uncovered no evidence to support this claim.

“Decisions about the marketing of equity oil, where the Chinese companies have control over the disposition of its share of production, appear to be dominated by market considerations,” the report concludes.

“For instance, almost all the equity production Chinese NOCs have in the Americas was sold locally instead of being shipped back to China.”

Investing in import routes

The IEA report also sheds light on recent investment activities in transnational pipelines which the NOCs have been exploring.

“By the end of 2009, China had secured agreements with neighbouring countries to import oil and gas from all directions,” the report explains.

Increasing supplies has been the main driver for this, but diversification of routes has been an important goal as well. One important reason for this activity, though certainly not the only one, is to reduce reliance on the Strait of Malacca, an extremely busy channel which links the Indian and Pacific oceans.

The report finds that “investments by NOCs in transnational pipelines could provide alternatives to diminish the reliance on the Strait of Malacca and diversify its imports from other sources, such as Russia and Central Asia, to bring oil and gas imports from new routes.” Even though a rising share of China’s oil imports is set to arrive via other routes, however, the volume of imports shipped through the Strait is set to keep rising.

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IEA facts on China and oil

  • In the next five years, almost half of global oil demand growth will come from China.
  • In 2010, China imported 4.8 million barrels per day of crude oil, up 17.5 % from 2009.
  • By late 2010, Chinese NOCs operated in 31 countries and had equity oil in 20 of these countries.
  • In 2010, China’s NOCs invested nearly USD 16 billion in acquiring assets, such as refineries, in Latin America.
  • 77% of China’s crude oil imports pass through the Strait of Malacca. By 2015, it is estimated that crude oil passing through the Strait to China will rise to 3.5 million barrels per day. In 2009, 3.1 million barrels per day went through the Strait.