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MENAFN - Arab News - 23/12/2012

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Sulieman Saleh Al-Khataf
(MENAFN - Arab News) China has been the fastest developing economy over the last 30 years with an annual growth of more than 10 percent.

This is accompanied by a growing demand on energy for power generation, and to meet the needs of both manufacturers and the general population.

China is taking major steps to secure its needs of energy. This is done by focusing the bulk of its foreign investments on international companies rich with either resources, or technologies related to energy extraction and processing.

It has outpaced Japan lately to become the second largest economy after the US. It is well aware of the shortage in its energy resources despite the abundance of some non-conventional resources that are not guaranteed economically and environmentally.

Growing demand
China is the largest energy consumer in the world and the second largest oil importer after the US.

According to the US Energy Information Administration (EIA), China imported 5.5 million barrels of oil in 2011. This accelerated consumption has made China a major player in world energy markets.
China was merely an oil exporter until the 1990s.

But with the growing demand for energy, it became the second largest consumer and importer of oil in 2009.

In 2011, Chinese demand for oil reached almost half that of the world.
But coal remains the biggest source of energy in China, making up 70 percent of its total consumption of energy, followed by oil, 19 percent, and hydroelectric power and natural gas, 10 percent.

China consumes 10 million barrels a day. It produces 45 percent of this consumption and imports the rest to meet 20 percent of its energy needs. Chinese demand is one of the most factors weighing on world oil prices. It is expected to grow to 60 percent, and gas to 35 percent by 2013. This will increase China's dependence on overseas oil and gas, thus enhancing the process of exploiting the enormous liquidity it has to buy more from oil and gas companies.

Resources shortage

China has been adopting various strategies to overcome the problem of oil shortage.

These included its increased reliance on renewable energy sources such as hydroelectric and nuclear power.

But the increased risks of nuclear energy that has become a universal feature, has led to reduce dependence on it by many major countries such as Japan and Germany, where they shut down most of their nuclear reactors.

This means that the nuclear option is a difficult choice and a risky one. The other option remains that China depends on vast resources of non-conventional energy such as shale gas.

But there are other factors that prevent the maximum and fast use of this source, which is the existence of rocks (shale gas) in areas not equipped with infrastructure, such as pipelines to transport gas, and the lack of large quantities of water.

But the biggest obstacle is the lack of Chinese technological expertise. This led PetroChina to sign a contract with Shell recently to extract shale gas from Sichuan Province. China is also striving to exploit its shale gas resources by forging investment partnerships with foreign and local companies.

Chinese oil firms
The Chinese government owns most of the national companies of oil production and refining, as well as petrochemicals. In the forefront of these companies are three giant entities China National Petroleum Corporation (CNPC - PetroChina), China Petroleum & Chemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC). PetroChina remains the biggest player in the oil sector. It specializes in oil and gas exploration and production. Sinopec dominates the refining and petrochemical industries. CNOOC was set up to focus on deep sea exploration. CNOOC has been competing with Sinopec and PetroChina in recent times. But it seems that the operations of oil and gas companies in China, in addition to petrochemical industries, are organized and streamlined to prevent concerns of monopoly, which may complicate the country's growth and prosperity.

Acquisitions of energy firms
With utmost cleverness, China is taking advantage of the current global economic situation and poor performance at some energy companies to meet its energy needs - targeting new technologies and direct oil purchases.

Cash reserves in China exceed 3 trillion. These resources could be allocated for foreign investments and preferential loans. Since 2009, Chinese oil companies managed to buy assets of several companies in the Middle East, Asia, Europe, Africa and South America. In 2011, these companies invested 18 billion to buy assets in oil and gas outside China. The
investment share in non-conventional and liquefied gas was 12 billion, 67 percent of its total investments in 2011. This confirms China's aims to acquire all technologies required to extract gas, liquefy it, and sell it.

China's production of oil through its outside investments was more than 140,000 bpd in 2000 compared to 1.5 million b/d in 2011.

It will increase its share of outside production of oil and gas from 20 percent to 30 percent by 2015 of the total production.

These figures clearly indicate the depths of the Chinese strategic planning, and the accurate development of each stage and phase.

China is badly in need of Western technologies and new energy resources worldwide. That is why it is stepping up its purchases of latest technologies for refining, shale gas extraction and oil exploration.

In this context, a deal was announced recently by CNOOC to buy the Canadian energy company, Nexen, for 15.1 billion - the biggest in the history of China.

The deal comes after 7 years of failed attempts by the Chinese company to buy US Unocal for 18.5 billion. The US government scuttled the deal at that time in the name of protecting its national interests. As a result, Unocal merged with Chevron. Sinopec bought earlier this year a share in US Devon in Oklahoma for 2.5 billion, while CNOOC bought a share in Chesapeake, a major company in the US for extracting shale gas.

In Canada, the Chinese are active in buying energy companies, or some of their assets. In 2011, Sinopec bought DayLight for 2.2 billion, while it bought in 2010 a share in giant Syncrude for 4.65 billion. Last year, CNOOC bought a company, OPTI, with the aim of extracting more of unconventional oil from sands.

It seems that the deal with Nexen, the oil company, claimed to be the largest in Canada, has changed the direction of China's investments, from American, Venezuelan and Brazilian assets to buying oil production companies. Nexen produces 85,000 bpd from the North Sea and is expected to increase by more than 26,000 bpd in 2014.

China's focus on Canada should be taken seriously, as most of the later production is sold in the US, despite the reports pointing to the abundance of US production of oil and gas in the future.

In Australia, PetroChina is active in buying assets related to liquefied natural gas (LNG) projects. In 2010, PetroChina and Shell acquired Arrow company for a potential LNG export venture. Recently, PetroChina agreed to pay 1.6 billion for a 10 per cent stake in a major offshore Australian LNG project from BHP Billiton.

Observers are expecting that China might buy assets in BG in Britain to benefit from its expertise in natural gas production. Other Chinese companies forged partnerships with Tullow Oil, which is active in oil and gas development projects in Africa. There are plans to buy more assets from the British company.

Lastly, personally I think that China is targeting reliable energy sources in stable countries, economically and politically, with the aim of sustaining its investment strategy.

Most countries with surpluses in liquidity take advantage of this by buying companies or big assets to protect their future generations in a volatile world.
China is complying with the Arabic wisdom "Saving your cash for a rainy day."

- Sulaiman Saleh Al-Khattaf is professor at King Fahd University of Petroleum and Minerals (KFUPM).


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