• <div class="header-image" style="background-image: url(/live/image/gid/4/2756_V6N7Web_Header_small.rev.1533574420.jpg);">​</div><div class="header-background-color"/>

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. [1] 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.

Energy Acquisitions:

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. [2] 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.

China's Contribution to Oil Demand Growth 

 

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. [3] CNOOC’s acquisition of Nexen in 2011 for 15.1 billion US dollars is considered the characteristic deal of this movement. [4] 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. 

Implications:

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. [5] 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.

References:

  1.  “List of State Owned Enterprises.” State-owned Assets Supervision and Administration Commission of the State Council, 28 Sept 2015.

  2.  Jiang, Julie, and Jonathan Sinton. “Overseas Investments by Chinese National Oil Companies.” International Energy Agency, Feb 2011

  3.  “Chinese national oil companies’ investments: going global for energy.” International Energy Agency, 4 Nov 2014.

  4.  Euan Rocha, “CNOOC closes $15.1 billion acquisition of Canada’s Nexen.” Reuters, 25 Feb 2013.

  5.  Steven W. Lewis. “Chinese NOCs and World Energy Markets: CNPC, Sinopec and CNOOC.” Rice University: Baker Institute, Mar 2007.

Student Blog Disclaimer
  • The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.

PENN WHARTON PPI
RESOURCE SPOTLIGHT:

  • <h3>Internal Revenue Service: Tax Statistics</h3><p><img width="155" height="200" alt="" src="/live/image/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg" class="lw_image lw_image486 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/155/height/200/486_irs_logo.rev.1407789424.jpg 2x" data-max-w="463" data-max-h="596"/>Find statistics on business tax, individual tax, charitable and exempt organizations, IRS operations and budget, and income (SOI), as well as statistics by form, products, publications, papers, and other IRS data.</p><p> Quick link to <strong>Tax Statistics, where you will find a wide range of tables, articles, and data</strong> that describe and measure elements of the U.S. tax system: <a href="http://www.irs.gov/uac/Tax-Stats-2" target="_blank">http://www.irs.gov/uac/Tax-Stats-2</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Reserve Economic Data (FRED®)</h3><p><strong><img width="180" height="79" alt="" src="/live/image/gid/4/width/180/height/79/481_fred-logo.rev.1407788243.jpg" class="lw_image lw_image481 lw_align_right" data-max-w="222" data-max-h="97"/>An online database consisting of more than 72,000 economic data time series from 54 national, international, public, and private sources.</strong> FRED®, created and maintained by Research Department at the Federal Reserve Bank of St. Louis, goes far beyond simply providing data: It combines data with a powerful mix of tools that help the user understand, interact with, display, and disseminate the data.</p><p> Quick link to data page: <a href="http://research.stlouisfed.org/fred2/tags/series" target="_blank">http://research.stlouisfed.org/fred2/tags/series</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>HUD State of the Cities Data Systems</h3><p><strong><img width="200" height="200" alt="" src="/live/image/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg" class="lw_image lw_image482 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/200/482_hud_logo.rev.1407788472.jpg 3x" data-max-w="612" data-max-h="613"/>The SOCDS provides data for individual Metropolitan Areas, Central Cities, and Suburbs.</strong> It is a portal for non-national data made available through a number of outside institutions (e.g. Census, BLS, FBI and others).</p><p> Quick link: <a href="http://www.huduser.org/portal/datasets/socds.html" target="_blank">http://www.huduser.org/portal/datasets/socds.html</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>MapStats</h3><p> A feature of FedStats, MapStats allows users to search for <strong>state, county, city, congressional district, or Federal judicial district data</strong> (demographic, economic, and geographic).</p><p> Quick link: <a href="http://www.fedstats.gov/mapstats/" target="_blank">http://www.fedstats.gov/mapstats/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Bureau of Economic Research (Public Use Data Archive)</h3><p><img width="180" height="43" alt="" src="/live/image/gid/4/width/180/height/43/478_nber.rev.1407530465.jpg" class="lw_image lw_image478 lw_align_right" data-max-w="329" data-max-h="79"/>Founded in 1920, the <strong>National Bureau of Economic Research</strong> is a private, nonprofit, nonpartisan research organization dedicated to promoting a greater understanding of how the economy works. The NBER is committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.</p><p> Quick Link to <strong>Public Use Data Archive</strong>: <a href="http://www.nber.org/data/" target="_blank">http://www.nber.org/data/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Congressional Budget Office</h3><p><img width="180" height="180" alt="" src="/live/image/gid/4/width/180/height/180/380_cbo-logo.rev.1406822035.jpg" class="lw_image lw_image380 lw_align_right" data-max-w="180" data-max-h="180"/>Since its founding in 1974, the Congressional Budget Office (CBO) has produced independent analyses of budgetary and economic issues to support the Congressional budget process.</p><p> The agency is strictly nonpartisan and conducts objective, impartial analysis, which is evident in each of the dozens of reports and hundreds of cost estimates that its economists and policy analysts produce each year. CBO does not make policy recommendations, and each report and cost estimate discloses the agency’s assumptions and methodologies. <strong>CBO provides budgetary and economic information in a variety of ways and at various points in the legislative process.</strong> Products include baseline budget projections and economic forecasts, analysis of the President’s budget, cost estimates, analysis of federal mandates, working papers, and more.</p><p> Quick link to Products page: <a href="http://www.cbo.gov/about/our-products" target="_blank">http://www.cbo.gov/about/our-products</a></p><p> Quick link to Topics: <a href="http://www.cbo.gov/topics" target="_blank">http://www.cbo.gov/topics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>Federal Aviation Administration: Accident & Incident Data</h3><p><img width="100" height="100" alt="" src="/live/image/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg" class="lw_image lw_image80 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 2x, /live/image/scale/3x/gid/4/width/100/height/100/80_faa-logo.rev.1402681347.jpg 3x" data-max-w="550" data-max-h="550"/>The NTSB issues an accident report following each investigation. These reports are available online for reports issued since 1996, with older reports coming online soon. The reports listing is sortable by the event date, report date, city, and state.</p><p> Quick link: <a href="http://www.faa.gov/data_research/accident_incident/" target="_blank">http://www.faa.gov/data_research/accident_incident/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The World Bank Data (U.S.)</h3><p><img width="130" height="118" alt="" src="/live/image/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg" class="lw_image lw_image484 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 2x, /live/image/scale/3x/gid/4/width/130/height/118/484_world-bank-logo.rev.1407788945.jpg 3x" data-max-w="1406" data-max-h="1275"/>The <strong>World Bank</strong> provides World Development Indicators, Surveys, and data on Finances and Climate Change.</p><p> Quick link: <a href="http://data.worldbank.org/country/united-states" target="_blank">http://data.worldbank.org/country/united-states</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>NOAA National Climatic Data Center</h3><p><img width="200" height="198" alt="" src="/live/image/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg" class="lw_image lw_image483 lw_align_left" srcset="/live/image/scale/2x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 2x, /live/image/scale/3x/gid/4/width/200/height/198/483_noaa_logo.rev.1407788692.jpg 3x" data-max-w="954" data-max-h="945"/>NOAA’s National Climatic Data Center (NCDC) is responsible for preserving, monitoring, assessing, and providing public access to the Nation’s treasure of <strong>climate and historical weather data and information</strong>.</p><p> Quick link to home page: <a href="http://www.ncdc.noaa.gov/" target="_blank">http://www.ncdc.noaa.gov/</a></p><p> Quick link to NCDC’s climate and weather datasets, products, and various web pages and resources: <a href="http://www.ncdc.noaa.gov/data-access/quick-links" target="_blank">http://www.ncdc.noaa.gov/data-access/quick-links</a></p><p> Quick link to Text & Map Search: <a href="http://www.ncdc.noaa.gov/cdo-web/" target="_blank">http://www.ncdc.noaa.gov/cdo-web/</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>National Center for Education Statistics</h3><p><strong><img width="400" height="80" alt="" src="/live/image/gid/4/width/400/height/80/479_nces.rev.1407787656.jpg" class="lw_image lw_image479 lw_align_right" data-max-w="400" data-max-h="80"/>The National Center for Education Statistics (NCES) is the primary federal entity for collecting and analyzing data related to education in the U.S. and other nations.</strong> NCES is located within the U.S. Department of Education and the Institute of Education Sciences. NCES has an extensive Statistical Standards Program that consults and advises on methodological and statistical aspects involved in the design, collection, and analysis of data collections in the Center. To learn more about the NCES, <a href="http://nces.ed.gov/about/" target="_blank">click here</a>.</p><p> Quick link to NCES Data Tools: <a href="http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4" target="_blank">http://nces.ed.gov/datatools/index.asp?DataToolSectionID=4</a></p><p> Quick link to Quick Tables and Figures: <a href="http://nces.ed.gov/quicktables/" target="_blank">http://nces.ed.gov/quicktables/</a></p><p> Quick link to NCES Fast Facts (Note: The primary purpose of the Fast Facts website is to provide users with concise information on a range of educational issues, from early childhood to adult learning.): <a href="http://nces.ed.gov/fastfacts/" target="_blank">http://nces.ed.gov/fastfacts/#</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>USDA Nutrition Assistance Data</h3><p><img width="180" height="124" alt="" src="/live/image/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg" class="lw_image lw_image485 lw_align_right" srcset="/live/image/scale/2x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 2x, /live/image/scale/3x/gid/4/width/180/height/124/485_usda_logo.rev.1407789238.jpg 3x" data-max-w="1233" data-max-h="850"/>Data and research regarding the following <strong>USDA Nutrition Assistance</strong> programs are available through this site:</p><ul><li>Supplemental Nutrition Assistance Program (SNAP) </li><li>Food Distribution Programs </li><li>School Meals </li><li>Women, Infants and Children </li></ul><p> Quick link: <a href="http://www.fns.usda.gov/data-and-statistics" target="_blank">http://www.fns.usda.gov/data-and-statistics</a></p><p>See all <a href="/data-resources/">data and resources</a> »</p>
  • <h3>The Penn World Table</h3><p> The Penn World Table provides purchasing power parity and national income accounts converted to international prices for 189 countries/territories for some or all of the years 1950-2010.</p><p><a href="https://pwt.sas.upenn.edu/php_site/pwt71/pwt71_form.php" target="_blank">Quick link.</a> </p><p>See all <a href="/data-resources/">data and resources</a> »</p>