Chinese NOCs' expansion

April 22, 2013
Backed by vast foreign exchange reserves and taking advantage of the world economic downturn, Chinese national oil companies (NOCs) have purchased assets in the Middle East, North America, Latin America, Africa, and Asia.

Conglin Xu
Senior Editor-Economics

Backed by vast foreign exchange reserves and taking advantage of the world economic downturn, Chinese national oil companies (NOCs) have purchased assets in the Middle East, North America, Latin America, Africa, and Asia. China's overseas equity oil production increased from 140,000 b/d in 2000 to more than 1.5 million b/d of oil production in 2011, according to the International Energy Agency. As the NOCs have expanded overseas, they also have adapted strategy to experience and encountered new questions at home.

Chinese NOCs work as high-ranking bureaucracies, growing out of government ministries and serving national welfare. They also work as profit-maximization enterprises whose strategy does not always reflect state interests in venturing abroad. In 2011, IEA carried out a systematic assessment of the international investment activities of Chinese NOCs and concluded that "while China's NOCs are majority-owned by the government, they are not government-run" and "commercial motives play a large and perhaps the largest part."

Expanding and diversifying reserves and production drive Chinese NOCs' expansion plans and serve the interests of the government and the Communist party. The state thus has provided tremendous financial support for the NOCs' international investments. But Chinese NOCs need more than money as they strive to become world-class energy operators.

As noted by PFC Energy, Chinese NOCs want to be integrated energy companies and look for "parts of the value chain that bring synergies to existing portfolios." China Petroleum & Chemical Corp. (Sinopec), for example, seeks international upstream assets to feed to its domestic refineries, while China National Offshore Oil Corp. (CNOOC) focuses on global downstream assets to coordinate with its growing production.

NOCs invest increasingly in unconventional resources, particularly in liquids-rich areas in North America. In 2011, unconventional resources and deepwater assets accounted for more than 70% of the NOCs' acquisition expenditures, according to China National Petroleum Corp. (CNPC)'s annual report. NOCs invested $12 billion in 2011, out of a total $18 billion of oil and gas assets purchases, to gain access to unconventional gas and LNG, according to IEA.

Chinese NOCs also have evolved in their economic power, supported by China's strong economic growth. The companies have formed consortiums with international oil companies (IOCs), purchased equity in projects and acquired stakes in energy companies. They also have made multibillion-dollar acquisitions of well-established companies, as in CNOOC's $15.1 billion takeover of Nexen Inc.

In the course of this evolution, NOCs' attitude toward risk has changed. The companies used to operate in regions with troubled relationships with western nations but soon found that they are not immune to political and fiscal risks. According to a 2010 report by the China University of Petroleum, many overseas investments of Chinese NOCs ended up in deficit or abandonment because of misassessment of risk and poor decisions. The companies more recently have shown a preference for mature, stable areas with less political and fiscal risk.

Challenges and debates

NOCs have found that expansion draws attention to their management and cultural-integration challenges. Operating in mature and stable markets requires solid knowledge of local markets, including the related political, economic, legal, and cultural environments. NOCs also face challenges of gaining frontier technical experience, increasing transparency, contributing to local communities and preventing reemergence of fears in the West about Chinese competition for international resources. For Beijing, enhancing cooperation between NOCs with overlapping overseas interests is also a subject to reduce expansion cost and increase national welfare.

In China, NOCs being more autonomous is acceptable as their commercial success is in the interest of both the government and the party. However, the companies' prioritizing profits over national mandate and their monopolistic power to Chinese consumers are receiving criticisms from the Chinese media and public. NOCs choose to sell the majority of their overseas equity productions in international markets rather than sending them back for domestic use, which is regarded by many Chinese as a deviation from national mandate. CNPC and Sinopec's monopoly gas pipeline positions, as another example, are believed responsible for high gas prices in the China market.