Chinese companies pursue overseas oil and gas assets

China in the 1990s embarked on a path of overseas upstream oil and gas investments and intensified the activities during the latter part of the decade. The start of the new millennium marked a new era in which Chinese state oil companies began an all-out effort to expand overseas, strongly favored and encouraged by the Chinese government. The Chinese state oil companies are taking advantage of the government’s growing concern over energy security to realize their desires to have larger business operations around the world. “Going out” has become part of the overall investment strategy for every state oil company in China.

This article reviews China’s overseas oil and gas investment activities and implications of those activities on Chinese energy security and the rest of the world. The companion article examines unique features of the investments by Chinese state companies.

For individual companies, China National Petroleum Corp. (CNPC) is leading the charge in overseas upstream petroleum investment. CNPC is now joined by its publicly listed subsidiary PetroChina. China National Offshore Oil Corp. Ltd. (CNOOC) is following CNPC for the pursuit of overseas ventures but has focused more on gas deals lately. China Petrochemical Corp. (Sinopec) is a latecomer and is trying to catch up with the other two. In addition to these three, the state-owned Sinochem Corp., the Singapore-listed Chinese Aviation Oil Corp. Ltd. (CAO), and China International Trust & Investment Corp. (CITIC), a nonoil state company, have also moved into overseas oil investment.

CNPC, PetroChina

CNPC is currently involved in multiple overseas projects, large and small, from Peru to Canada and Sudan.

Compared with the parent company CNPC, the publicly listed PetroChina is a new starter, and its shares in the above production and equity are small. When PetroChina was established in 1999, with stock later listed in New York, all of the overseas assets were left with the parent company. PetroChina has recently teamed up with CNPC to jointly conduct overseas upstream ventures.

Overseas oil production in which CNPC and PetroChina shared interests reached 602,000 b/d in 2004 (of which 321,000 b/d was CNPC-PetroChina equity oil), up from 271,000 b/d in 2000 (equity oil 137,000 b/d). CNPC-PetroChina’s target in 2005 is to increase overseas oil-producing capacity to over 600,000 b/d and equity oil to 360,000 b/d.

Some of the latest developments in individual countries for CNPC and CNPC-PetroChina combined (mainly since 2003) are discussed here.

Kazakhstan

Since early 1997, CNPC has invested nearly $10 billion in Kazakhstan. CNPC bought a 60% equity share in CNPC Aktobemunaygaz (Aktobe Oil & Gas) in 1997, turning the company into a CNPC subsidiary in which CNPC now has a 74.88% share. Also in 1997, CNPC took a 60% stake in a joint venture formed with another Kazakh oil company, Uzenmunaigas, to invest in Uzen oil field. As part of the agreement, a 156-mile pipeline from Uzen field to the Turkmen border was completed in 2001, connecting to pipelines to Iran, as part of an oil-swap agreement among these Caspian Sea countries.

CNPC Aktobemunaygaz conducts operations in two oil fields: Zhanazhol and Kenkijak. Total production of Aktobemunaygaz reached 93,000 b/d in 2003 and is projected to rise to 140,000 b/d in 2005. The company also produces natural gas and invests in various oil processing and infrastructure projects in the country.

In March 2003, CNPC completed the 279-mile Atyrau-Kenkijak oil pipeline with a total investment of $160 million, so oil can be transported from Kenkijak field to the Caspian Sea. Pipeline capacity, initially 120,000 b/d, is expected to increase to 240,000 b/d in 2006. For China, the pipeline serves sequential purposes: 1. in the near term, as an outlet for CNPC’s oil in Kazakhstan to the Caspian Sea, and 2. in the long term, after reversal of flow, as access to Caspian oil when Kazakh-China pipelines are built.

The idea for building a long-distance pipeline from Kazakhstan to China’s Xinjiang emerged in 1997, when CNPC signed a series of agreements to invest in the Central Asian country. The plan remained idle until CNPC’s attempt to secure the Angarsk (Russia)-Daqing (China) pipeline failed. That development rekindled the Kazakhstan-China pipeline project, in which PetroChina now participates.

Construction of the pipeline has been under way since late September 2004. The entire Kazakh-China pipeline system is divided into several sections. The Atyrau-Kenkijak pipeline is considered the first section of the plan; the second section, now under construction, stretches from the central Kazakh site of Atasu to the Chinese border town of Alashankou. The cost of the Atasu-Alashankou line is $700-800 million, divided equally between China and Kazakhstan. The pipeline project for this segment is expected to be completed by the end of 2005. In China, the pipeline will extend from Alashankou to Dushanzi. The Atasu-Dushanzi pipeline is 809 miles long, 168 miles of it in China. The next section is to connect Kenkijak with Atasu, a distance of 834 miles.

The total length from the Caspian Sea’s Atyrau to Dushanzi thus will be 1,922 miles. The rate of Kazakh crude exports to China via these pipelines is initially set at 200,000 b/d and is expected to rise to 400,000 b/d.

CNPC-PetroChina is looking for more upstream projects in Kazakhstan in order to fill the long oil pipeline.

Sudan

CNPC’s upstream and refining investment in Sudan is by far the company’s most successful overseas venture. CNPC started the investment in 1995. An initial foreign aid agreement was reached by the two governments in September 1995, followed by a production-sharing contract (PSC) signed by CNPC and the Sudanese Ministry of Energy and Mineral Resources for Block 6 in the Muglad basin. This was CNPC’s first self-financed foreign exploration project. It registered CNPC International Sudan Ltd. to operate the project.

In March 1997, CNPC signed three contracts with Sudan to explore and develop Blocks 1, 2, and 4 of the Muglad basin, committing an investment of over $670 million. The project involving those blocks became operational in June 1999. Production from Blocks 1, 2, and 4 was 33,000 b/d in 2000, 254,000 b/d in 2002, and now stands at around 300,000 b/d. CNPC now has a 40% share in Greater Nile Petroleum & Oil Corp. of Sudan. Other partners include Petronas of Malaysia (30%), ONGC of India (25%), and state-owned Sudapet of Sudan (5%).

In 2003, CNPC signed an agreement with Sudan to explore Blocks 3 and 7. Production from this project is expected to start this year. CNPC has an equity share of 41% in the Block 3/7 consortium. Other partners are Petronas (40%), Sinopec (6%), Al Thani Oil Corp. of the UAE (5%), and Sudapet (8%).

CNPC is also the operator of Block 6 in the central province of West Kodafa. CNPC has a 92% equity share in the operation, while Sudapet has the remaining 8%.

Also in Sudan, CNPC built and jointly owns a 50,000 b/d refinery, a polypropylene plant, a number of gas stations, and two crude oil pipelines. One of the pipelines, 937 miles long, transports oil out of Blocks 1, 2, and 4. The other, 450 miles long, was completed in March 2004 to transport oil out of Block 6. Altogether, CNPC is involved in 280,000 b/d of oil production capacity in Sudan.

Venezuela

CNPC won a contract in October 1997 with Petroleos de Venezuela SA, the Venezuelan state oil company, for the exploration around Intercampo Norte, a marginal oil field in western Venezuela. The 20-year contract covers an area of 25 sq miles. Intercampo Norte is located off Lake Maracaibo in the state of Zulia, and covers approximately 15 sq miles. CNPC holds a 100% working interest. In another bid, with the highest offer, CNPC won the marginal field of Caracoles in eastern Venezuela’s Anzoategui state. Separately, CNPC is also involved in Venezuela’s Orimulsion projects.

Peru

CNPC entered Peru in the early 1990s with development contracts for Blocks 6 and 7 in Talala oil field. In January 2004, CNPC acquired part of the Argentine company Pluspetrol’s shares in Peruvian oil fields in Blocks 8 and 1 A/B. This has made CNPC the second largest oil producer in Peru after Pluspetrol.

Indonesia

In April 2002, PetroChina acquired a share of Devon Energy Corp.’s Indonesian oil and gas assets, covering six blocks. PetroChina is the operator of five of the six blocks, with the exception of South Jambi Block B. The major production areas are onshore, with good geological and operating conditions. This was PetroChina’s first acquired upstream asset outside of China.

In April 2003, PetroChina purchased 50% of Amerada Hess Indonesia Holding Co. Through this purchase, PetroChina’s share in the Jabung PSC block increased from 30% to 42.86%. Other equity holders are Petronas (42.86%) and the Indonesian government (14.29%).

Algeria

During the first half of 2003, CNPC was awarded the Adrar-Sbaa basin integrated upstream-downstream project in Algeria, which involves construction of a 20,000 b/d refinery in the southern Adrar region to be supplied by crude oil and gas from the Sbaa basin.

In late 2003, CNPC was awarded two upstream blocks, Block 102a/112 (Chellif) and Block 350.

In July 2004, CNPC won a block in the Oued Mya basin in the country’s fifth international licensing round. Under the contract, CNPC will conduct 3D seismic surveys, and drill exploratory and appraisal wells over 5 years in two phases, for a total cost of $27 million. Other block winners included Norway’s Statoil ASA, BHP Billiton and Woodside Petroleum Ltd. of Australia, Amerada Hess of the US, Repsol YPF SA and Gas Natural SDG SA of Spain, Petroceltic of Ireland, and Sinopec.

Russia

CNPC has long been interested in acquiring upstream assets in Russia. So far, it has not been successful. In December 2002, CNPC had to withdraw from the bid on Russia’s state-owned Slavneft because of strong resistance from Russian nationalists. Such resistance is likely to continue, further affecting CNPC’s goal of upstream investment in Russia.

Other countries

CNPC and PetroChina also have investments or other interests in Myanmar, Canada, Turkmenistan, Azerbaijan, Uzbekistan, Mongolia, Yemen, Iran, Iraq, Oman, Thailand, Papua New Guinea, Syria, Nigeria, Mauritania, Angola, Libya, Gabon, and others. Among the activity:

In Iran, CNPC in August 2000 won a contract to drill 19 gas wells in the southern part of the country. In early 2004, CNPC purchased the Cyprus-based subsidiary of Canada’s Sheer Energy. As a result, CNPC became an operator of the Masjed-I-Suleyman development project.

In Turkmenistan, CNPC signed a 5-year service contract for Gumdag oil field in 2002. CNPC holds a 100% interest in the project.

In Azerbaijan, CNPC finalized a PSC for the K and K oil field project in January 2001. CNPC holds a 50% interest in the project.

In Canada, CNPC bought into Canada’s North Twing oil field in northern Alberta in 1993. In 1994, CNPC gained production rights in Pouce Coupe and Drunhekker oil fields. It later received a 4% development right in Lone Golden Lake oil field. However, oil production from CNPC’s Canadian operations is negligible. Since late 2004, PetroChina, like Sinopec, has shown growing interest in oil sands projects in Canada.

In Iraq, CNPC signed a PSC in 1997 for development of al-Ahdab oil field. It committed $660 million to the field’s development but never started the work because of United Nations (UN) sanctions. The project remains frozen.

In Syria, CNPC and Syrian Petroleum Co. (SPC) formed Syrian Chinese Oil (Kokab), a 50-50 joint venture, in July 2004. Kokab will work on redevelopment of Qubibe oil field in northeastern Syria, aiming at raising production to 10,000 b/d from 4,400 b/d.

In Mauritania, CNPC signed three production-sharing agreements in September 2004 covering the one offshore block in the coastal basin region and two onshore blocks in the far northern area of the country. The initial exploration period is 3 years and can be extended twice for 3 years each time. CNPC will be granted a 25-year license if commercial volumes of oil are found.

In Oman, CNPC is a 50-50 partner with Petrogas in Daleel Petroleum. Daleel Petroleum is the operator of Block 5. Petrogas is a subsidiary of Oman’s MB Petroleum.

In Brazil, CNPC and Petroleo Brasileiro SA signed a cooperative agreement in early 2005 to jointly invest in the areas of oil refining, pipelines, and exploration and development. This may put CNPC in direct competition with Sinopec, which is expected to be involved in natural gas pipeline projects in Brazil.

In Nigeria, PetroChina has expressed interest in investing in the country’s four ailing refineries and participating in the 2005 licensing round. Another Chinese company, China Export & Credit Insurance Corp. (Sinosure), has revealed multibillion-dollar plans to invest in Nigeria’s power, coal, and petrochemical sectors. The projects may include a 180,000 b/d export refinery and petrochemical plant.

CNOOC

Even by international standards, CNOOC is considered relatively well equipped and managed and has often been compared with other independent oil companies worldwide. It is efficient and competitive in the international oil business. In recent years, CNOOC has been pushing aggressively in overseas oil and gas investments and acquisitions.

CNOOC’s overseas operations started with the formation in 1993 of its Department for Overseas Development, whose chief responsibility was to evaluate possible overseas oil and gas projects. The company furthered its overseas ventures through an affiliate named CNOOC International Ltd., registered in the British Virgin Islands.

In 2003, CNOOC’s equity oil from overseas projects was 40,000 b/d, and production rose in 2004. The company’s target is to raise equity oil production to 70,000 b/d in 2005.

CNOOC’s first overseas upstream oil project was in Indonesia’s Malacca Strait Contract Area. CNOOC bought a 32.58% share in the PSC-based block in September 1994. Overseas Malacca Petroleum Ltd., a CNOOC International subsidiary, now manages the share, which CNOOC increased with the acquisition of a further 6.93% stake in 1995.

In January 2002, CNOOC Ltd. spent $585 million to purchase Repsol YPF’s equity interests in the following oil and gas fields in Indonesia: 65.34% in Southeast Sumatra, 36.72% in Offshore Northwest Java, 25% in West Madura, 50% in Poleng, and 16.7% in Blora. CNOOC has thus become the largest offshore oil producer in Indonesia. In December 2004, CNOOC signed an agreement with Indonesia’s Perusahann Listrik Negara to supply natural gas to the state utility during 2006-18.

In May 2003, CNOOC invested $348 million in Australia’s Northwest Shelf (NWS) gas project and acquired a 25% stake in the newly established China LNG Joint Venture, which will supply LNG from NWS gas to Guangdong beginning in 2006 or 2007. Through its share in China LNG Joint Venture, CNOOC has obtained roughly a 5.3% stake in the entire NWS production license, gaining rights to conduct future exploration.

In December 2002, CNOOC invested $275 million to acquire from BP PLC a 12.5% interest in the Indonesian Tangguh LNG Project, a 44% stake in the Muturi PSC, and a 42.4% stake in the Wiriagar PSC. In February 2004, CNOOC Muturi Ltd., a wholly owned subsidiary of CNOOC Ltd., bought the BG Group’s 20.77% interest in the Muturi PSC for $98.1 million. The deal increased CNOOC Ltd.’s stake in the Muturi PSC to 64.77% and its interest in the Tangguh project to 16.96%.

Also in Australia, CNOOC is considering purchase of 12.5% of ChevronTexaco Corp.’s interest in Gorgon gas field. CNOOC reached an agreement with ChevronTexaco in late 2003 for the deal but has not proceeded with the purchase. Separately, CNOOC may also be considering purchase of Shell’s 34% share in Woodside Petroleum if Shell decides to sell the interest.

In North America, CNOOC teamed up with Kerr-McGee Corp. in 1997 to invest in the Gulf of Mexico, forming CNOOC America Inc., Houston, to oversee investments in blocks operated by the American company.

On October 20, 2004, Algeria invited CNOOC to explore for oil and gas in its offshore area. There were also discussions of cooperation in LNG projects.

Sinopec

Sinopec is a late starter. At present, Sinopec’s overseas equity oil is negligible. For 2005, its target 40,000-50,000 b/d of equity oil from overseas investments.

In Iran, Sinopec signed an upstream contract in 2001 with National Iranian Oil Company (NIOC) covering 4,670 sq km in Zavareh-Kashan. In the downstream area, during 2000-03 Sinopec provided engineering services worth a total of $150 million to upgrade the Tehran and Tabriz refineries and conducted two infrastructure projects in northern Iran. The upgrading was part of Iran’s oil swap program in which Caspian oil is refined in northern Iran in exchange for Iranian crude exports in the south. In 2004, Sinopec reached an agreement with Iran to develop Yadavaran oil field, one of the largest undeveloped fields in the country.

In Algeria, Sinopec won two blocks in Algeria’s fifth licensing round, out of 10 offered by state-owned Sonatrach in July 2004. The two blocks are in the Oued Mya basin, where CNPC won its block. For a total of $29.2 million, Sinopec will conduct 2D seismic surveys and drill exploratory wells over the next 5 years. In September 2002, Sinopec won an enhanced oil recovery contract for Zarzaitine field. Through Sinopec’s work, the recovery rate of the field was raised to 60% from 40%.

In Kuwait, Sinopec participated as part of the ChevronTexaco-led consortium in bidding during July 2004 for oil service contracts for Project Kuwait. The consortium, in which Sinopec has a 10% stake, is one of three approved for the bidding.

In May 2003, Sinopec, with CNOOC Ltd., suffered a major setback in its attempt to acquire shares from BG in the North Caspian Project for work off Kazakhstan. The project’s other partners had exercised their preemptive rights and successfully blocked the bidding efforts of the two Chinese state oil companies.

In March 2004, Sinopec made headway in Saudi Arabia by signing a natural gas exploration and development agreement for Section B in the Rub Al-Khaili basin with the Ministry of Petroleum and Saudi Aramco. The agreement formed a joint venture of Sinopec (80%) and Saudi Aramco (20%). In an initial phase, Sinopec will invest $300 million over the next 5 years. Separately, Sinopec in June 2004 won a service contract with Saudi Aramco for oil-well repairs.

Sinopec and Petrobras signed a memorandum of understanding to build the 1,175-km Gasene interconnection between the Brazilian Northeast and Southeast Gas Networks. Estimated completion date of the pipeline is December 2006. In May 2003, Sinopec reached an agreement to conduct deepwater exploration with Petrobras.

In Bolivia, Sinopec planned in September 2004 to form a joint venture with state-owned YPFB to invest in the country’s energy sector. The deal awaits passage of new oil legislation. If approved, the company’s subsidiary Sinopec’s Shengli will be involved in the joint venture.

Sinopec Shengli in June 2003 signed a rehabilitation, exploration, and production-sharing agreement (PSA) with State Oil Co. of Azerbaijan Republic (Socar). The 25-year agreement includes a 3-year exploration period. The PSA interests are Sinopec Shengli 50%, Socar 30%, and Middle East Petroleum (MEP) 20%. MEP is part of the Azerbaijan holding company Azersun Holding.

Sinopec also is investigating oil sands projects in Alberta, Canada. PetroChina apparently shares the interest in Canada’s huge oil sand resources. Sinopec, PetroChina, and CNOOC are all in discussions with Hong Kong’s Hutchinson Whampoa to purchase the latter’s equity in Canada’s Husky Energy Inc.

In Yemen, Sinopec acquired 37% of the interests in Block S2 in January 2001. Later in 2003, Sinopec Jiangsu Oilfield Co. signed a memorandum of understanding (MOU) with Yemen’s Ministry of Oil and Minerals to explore Block 1 in the eastern Shabwah province.

Sinopec in August 2004 signed an exploration and production-sharing agreement covering Blocks 36 and 38 in Oman.

In Egypt, the state-owned Tharwa Petroleum reached an agreement with Sinopec to form a 50-50 joint venture drilling and rehabilitation company.

Sinopec’s Dian-Qian-Gui subsidiary in July 2004 signed an exploration contract for Block D in Myanmar with Myanmar Oil & Gas Enterprises. The block is in the area of Mahudaung in the state of Rakhine. Sinopec plans to invest around $21 million over the next 6 years.

In Nigeria, Sinopec signed an agreement with Nigerian Petroleum Development Co. to develop Oil Mining Leases (OML) 64 and 66 in November 2004.

Sinochem

Sinochem has become the fourth Chinese oil company to pursue overseas investment. In the early 2000s, Sinochem formed its first upstream oil and gas exploration and development company solely for the purpose of investing in upstream projects outside of China.

Sinochem’s first such venture was the acquisition of Atlantis from Norwegian Petroleum Geo-Services (PGS) in February 2003. As the owner of Atlantic Holdings, Sinochem now has around 100 million boe of reserves in Tunisia, the UAE, and Oman. The state oil trading company is now seeking other opportunities in the Middle East and Africa.

Sinochem’s push overseas made headway in the downstream sector. In April 2004, Sinochem was selected as the preferred bidder for bankrupt South Korean Inchon Oil Refinery Co. A deal was reached in September 2004 paving the way for Sinochem’s takeover of the Inchon refinery at a price tag of $553 million. In November 2004, the State Council-China’s cabinet-approved Sinochem’s investment plan. However, in January, Sinopec’s attempt to buy the Inchon refinery was thwarted by creditors, led by Citigroup. Should the deal proceed, Sinochem would have its second refinery, the first being the joint venture WEPEC (West Pacific Petrochemical Corp.) Dalian refinery.

In Thailand, Sinopec signed a memorandum of agreement with various parties for possible investment in a series of projects in 2003.

Other Chinese companies

China Aviation Oil Holding Co. (CAOHC), a state-owned aviation transportation logistics company with a monopoly over jet fuel in China, has also engaged in a series of overseas investment through its Singapore-listed subsidiary, CAO. The publicly listed subsidiary at the center of Asia’s biggest energy-trading scandal involving years of huge losses from energy-derivatives trading.

CAO’s overseas investment activities include:

The July 2002 purchase of a 5% stake in CLH Co., an oil infrastructure leader in Spain.

The January 2004 purchase of a 100% stake in Hong Kong Fortune, a subsidiary of UK-based Fortune Oil PLC.

The March 2004 acquisition of a 20% stake in Horizon Terminals, a wholly owned unit of the Emirates National Oil Co., Dubai.

An August 2004 agreement to purchase a 20.6% stake in Singapore Petroleum Co. Satya Capital of Indonesia. CAO canceled the deal in late November 2004, citing losses accrued due to the rising cost of operations.

In November 2004, CAO suffered $550 million in losses from its speculative energy derivatives trades on the Singapore Exchange. CAO is now being restructured, and it is highly unlikely that its investment plan for an oil terminal and other infrastructure projects in Singapore will proceed. In fact, CAO’s investment in Horizon Terminals is in jeopardy.

Another Chinese state company interested in overseas oil and gas investment is CITIC, which is teaming up with the Canadian company Ivanhoe Energy Inc.

Security, global implications

China’s overseas energy investment activities have increased substantially since the beginning of the new century. With rising oil prices, tighter global oil supply, and the Chinese government’s growing concern over energy security, the Chinese state companies are expected to move even faster into upstream ventures outside China in the future.

Does China’s overseas oil and gas investment help promote China’s energy security? On the surface, it is always helpful to have more options as far as energy security is concerned. However, China’s push can be costly. When political and other noneconomic considerations (including the desire of the Chinese state oil companies to grow for domestic justification) are given higher priority, overseas investment could prove to be an expensive and far less effective way of addressing the issue of energy security.

If Chinese investors can reduce the weight of noneconomic factors in forming overseas investment strategies and instead take advantage of their rich labor resources and cost-effective, well-developed engineering and drilling technologies, their ventures abroad can be efficient and effective.

But Chinese oil companies have a long way to go to reach the stage at which economics, not politics, is the main factor in overseas investment strategies. The Chinese state oil companies also need to be better coordinated to avoid destructive competition among themselves and overinvestment in the same areas and countries.

Overall, China will not be shy about global energy investments. China can learn from its own mistakes and those of other countries, such as Japan, to not overdo the strategy. If China overspends, the whole overseas investment strategy can be costly and ineffective in addressing the issue of energy security.

For the rest of the world, the Chinese strategy for pushing investment overseas may seem incompletely thought out, poorly coordinated, and complicated by noneconomic factors. It is nevertheless part of a broader phenomenon in which the impact of state oil companies-whether Chinese, Indian, Malaysian, or Brazilian-on the global oil and gas business is growing and likely to continue doing so. ✦

Taking advantage of government concerns over energy security and investing overseas, the Chinese state oil companies are trying to diversify and globalize. They are expanding through investment for political survival, international profits, and full utilization of China’s technologies and labor force.

Because goals for state oil companies vary and are not limited to the quest for international profit, China’s overseas oil and gas investment push has these unique features:

Chinese energy investors can be aggressive in pursuing overseas investment and may overspend or promise too much just to secure a contract. For instance, Chinese companies have outspent rival bidders by large margins to win contracts in Venezuela, Kazakhstan, and elsewhere.

Chinese investors are willing to go to countries that may be considered risky to major oil companies. For example, investments by Chinese companies in Sudan, and to a lesser extent in Iran, take advantage of the fact that these countries are to varying degrees shunned by companies from the US and other western countries. This exposes China to high risk. In the case of Sudan, continuous civil conflict and the possibility of United Nations sanctions against the Sudanese government has apparently threatened the interest of CNPC and other foreign investors.

The Chinese state oil companies, like their counterparts in India and Malaysia, may indeed offer an inexpensive option for countries that need foreign capital but that are avoided by international majors because of insufficient investment returns.

All Chinese investors are state-owned companies. For this reason, economic concerns and commercial interest may not be priorities in making investments overseas. The Chinese state oil companies may be strongly motivated by the need to expand or to avoid being downsized or absolved by the Chinese government as the country is in the process of economic restructuring. Transparency of the Chinese state companies is another issue. The recent failure of China Aviation Oil Holding Co.’s Singapore-listed unit China Aviation Oil Corp. Ltd. on the Singapore Stock Exchange has sent a shock wave to all Chinese state oil companies and the world as a whole about the risk of energy trading and lack of financial discipline and business transparency, particularly for state oil companies.

Because all Chinese state oil companies are taking advantage of the government’s policy to encourage overseas investment and form individual strategies, they are increasingly in competition with each other. Competition between PetroChina and Sinopec was evident in Sudan and Libya and between CNOOC and Sinopec in Brazil. As the latecomer, Sinopec is eager to catch up with CNPC-PetroChina and CNOOC. Beyond the competition, the presence of multiple state companies from the same country can be confusing to host nations.

Because China is a new player in the global oil business, fighting for investment opportunities and aggressively seeking to buy equity shares in existing projects globally, chances for resistance in certain host countries will be high. China has already had several high-profile setbacks in its attempt to buy into existing energy companies in Kazakhstan, Russia, and elsewhere.

The authors

Kang Wu (WuK@EastWest Center.org) is a fellow at the East-West Center, Honolulu. He conducts research on energy economic links, energy security, the environmental impact of transportation fuel use, and energy and economic policies in China and the Asia-Pacific region, with a particular emphasis on oil and gas. Wu holds a BA (1985) in international economics from Peking University and an MA (1987) and PhD (1991) in economics from the University of Hawaii, Manoa.