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.