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Jiangsu Oilfield Co., a unit of China's No. 2 oil and gas producer, China Petrochemical Corp. (Sinopec), announced April 14 that it signed a pact with Yemen's Energy Ministry to explore an area of about 770 square miles in eastern Yemen for crude oil. The $10 million project will have two phases extending over three years each, Reuters reported.
The Yemen announcement is the latest in a string of aggressive oil and natural gas acquisitions led by Chinese companies China National Petroleum Corp. (CNPC) and China National Offshore Oil Co. Many of these acquisitions, such as Sinopec's in Yemen, are in riskier markets -- either from a security or political perspective. One of the primary reasons is that it is easier and cheaper for Chinese companies to break into these markets.
That will continue to be the case as Chinese companies strive to join the big leagues. In fact, two interrelated principles will characterize continued Chinese expansion: a lower-than-average aversion to risk, and acquisitions that further Beijing's foreign policy priorities and extend its global influence vis-à-vis the United States.
Thirsty for Oil
At its core, commercial necessities are driving China's foreign expansion. China already is the world's third-largest oil consumer, and its domestic oil demand is projected to double by 2020. On the other hand, many of China's domestic oil fields are in sharp decline. As a result, the U.S. Energy Information Administration estimates Chinese oil imports will jump from 2 million bpd now to more than 8 million bpd in 2015, and Beijing expects the overall share of imports to rise to 84 percent of total consumption by 2030. Foreign acquisition is the quickest way to meet China's needs, as domestic exploration will take years to bear fruit.
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Chinese national security is intimately tied to its ability to fuel economic growth and keep social tensions from erupting. As a result, energy security is a particularly sensitive issue for China, which currently counts on the Middle East for 60 percent of its imports. The buildup to war in Iraq -- and fears of a potential disruption in Persian Gulf crude -- demonstrated to Beijing the danger of that dependence. As China faces the prospect of having to quadruple its oil imports in the next decade, and surveys the potential for disruption in the volatile Middle East, it badly wants to gain more direct control over its imports while diversifying the sources of its crude oil.
The tools for that expansion and diversification are China's three main oil companies, CNPC, CNOOC and Sinopec. Though Chinese companies are the new kids on the block, they can use the size of their home markets for leverage in securing projects. For instance, CNOOC was able to secure natural gas imports from Australia's North West Shelf project for 15 percent less than South Korea and Japan, mainly because the Chinese market for natural gas is so promising.
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