The Future of Chinese Oil Control
November 06, 2015
With China becoming a more economically prominent nation every year, attention must be placed on how their government and markets differ from those of other dominant nations, such as the United States and Japan. In the oil and gas industry, where production is mainly controlled by a small number of large firms, this difference is magnified. In this article, we will examine the actions of Chinese oil companies and their global acquisitions.
Chinese Enterprise Structure:
Foreign ownership of all companies has always been a concern, but in today’s world, there has been greater fears of the effects of National Oil Companies (NOCs) due to the control exercised over them by the governments that own them, and the control the companies have over oil and gas, which are integral resources to every country’s day-to-day operations. While in the past, many NOCs operated primarily within their own nations, recent changes have resulted in these companies exerting their influence on a global scale, challenging the dominance of supermajors such as ExxonMobil and BP. With their high level of capitalization and strong government support, the Chinese NOCs – CNOOC, CNPC (the parent company of PetroChina), and Sinopec – are among the most prominent NOCs that have succeeded as a result of this shift. Their actions have changed the industry, and continue to have results unexpected by even industry veterans.
The three major NOCs are all tied together and to the Chinese Communist Party, both in a clear way, owning to their existence as state owned enterprises, but also indirectly, which can best be understood by examining historical changes in their executive suites. The Chinese government administers their ownership in all three of these companies through the same board – the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), demonstrating the inevitability of the three companies having overlapping interests and the use of cooperative, rather than competitive, strategy.  The indirect link was demonstrated in 2011, and again in 2015. In April 2011, Fu Chengyu, an executive at CNOOC, became the chairman of Sinopec. In 2015, CNOOC’s chairman, Wang Yilin, was appointed to the position of chairman at CNPC. This scenario, which would be unheard of when looking at publically traded oil companies, demonstrates the extent to which these companies are tied together. These executives are able to take confidential information from firm to firm, unburdened by non-compete agreements, because, since the firms already share strategy, this is a non-issue.
The danger that this link poses for nations other than China has become an issue in recent years due to new actions taken by these NOCs. The greatest shift in China’s natural resource strategy occurred in the mid-2000s, with a rise in foreign acquisitions and the opening up of the nation’s own resources forcing Chinese NOCs to conduct themselves in a new way. The second aspect was not done due to the government’s own desires, but instead mandated by the World Trade Organization as a condition when the country joined in 2001. In contrast, the first aspect – a rise in foreign acquisitions – was supported and planned by these NOCs, as demonstrated by their public offerings. In the early 21st century, each of these firms raised capital through the listing of subsidiaries on the Hong Kong Stock exchange, where each raised around 2 billion US dollars.  These offerings ensured the companies had sufficient capitalization to carry out their acquisitions.
Another possible reason for the increase in acquisitions is the desire of the Chinese government to have a stable supply of oil that is within their control. As previously mentioned, these companies operate with strong influence from the Communist Party and the Chinese government, and as a result, are subject to many of the concerns of those groups. Through an examination of China’s increasing demand, as compared to the rest of the world, this view becomes clear. Although growth has begun to slow in China, GDP growth has remained well above 7% for the past 15 years, with this growth fueling increased demand for oil and gas. Chinese demand requires an increasing share of global supply, and with Chinese energy reserves being inadequate, the government has turned to external sources to fill this gap.
Source: International Energy Agency
While this has continued to demonstrate itself in recent years, with these three companies spending over 73 billion US dollars worldwide between 2012 and 2014, one area where their ownership is prominent is in the oilsands, in Alberta, Canada.  CNOOC’s acquisition of Nexen in 2011 for 15.1 billion US dollars is considered the characteristic deal of this movement.  One of the largest acquisitions in Chinese history, this deal attracted significant media attention, as a result of both the size of the deal, and the involvement of American antitrust regulators, who had to approve the deal. While this deal did receive approval, the opposition CNOOC experienced to this deal demonstrated itself in a decline in the prevalence of Canadian acquisitions by Chinese NOCs.
While many of these acquisitions were hailed as beneficial for the shareholders of the acquired companies, and promised to bring synergies to areas such as the Alberta oilsands, other issues have been ignored as a result. With the price of oil reaching new lows, the number of small cap oil companies has begun to decline, with the majority of the remaining growth being experienced by the large and established energy firms. As many of the larger firms are either wholly owned by NOCs, as Nexen is today, or joint ventures with Chinese NOCs, such as the Talisman-Sinopec JV in the North Sea, off the coast of the United Kingdom, nations are becoming more dependent on the actions of Chinese NOCs, and therefore, on the actions of the Chinese government. The impacts of these deals include a greater dependence on the Chinese economy for the nations where the acquired companies operate. This dependence arises as a result of the Chinese government’s association with the deals, as the government tends to strike trade agreements in conjunction with energy company purchases. For example, Sinopec’s acquisition of a stake in the Yadavaran oil field in Iran came with a commitment from China to import a certain amount of natural gas from Iran.  Nations must balance shareholder interests, who benefit from such deals due to the high level of capital employed by Chinese NOCs, and economic independence, which could particularly harm nations dependent on natural resource exports such as Canada, Australia, or Kazakhstan.
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