Investing In Oil

Investing in Oil: More Oil For The Lamps of China 

The title above is a play on an old advertising slogan of the Standard Oil Trust, first used in the 1890s. The business logic a century ago was "What if we could sell our oil to every person in China?" 

Today we wonder…what if they bought it? What prompts the question is a recent slew of articles in reputable publications about China's quest to secure oil supplies from a worldwide production base. Chinese internal demand for oil outstripped its own domestic production in 1993. China has been a net importer ever since. Chinese demand for oil is growing at double-digit annual rates. China is the world's second-largest oil-consuming nation, after the United States.

In the past decade, Chinese oil companies have established themselves in Sudan, producing over 400,000 barrels per day for export back to China. This despite Sudan's ongoing civil war and well-publicized human rights abuses. China has asserted historical claims to the South China Sea and its significant petroleum potential, to the point of claiming essentially all of the continental shelf beneath those waters based on long-ago Chinese explorations of remote islands. Chinese territorial claims bump up against the territorial claims of neighboring nations such as Vietnam, Brunei and the Philippines.

Chinese companies have made deals for oil concessions in and around Indonesia and Malaysia. Chinese companies have made deals with Russia for development in Siberia. China is on the verge of inking a deal with Canadian interests for access to the oil sands of Athabasca.

Chinese firms have recently signed contracts with Venezuelan interests to invest in that country's oil regions. Chinese concerns are prowling the coastlines of Argentina and Brazil and the backwoods of Peru and Colombia seeking to join consortia to produce oil and ship it home.

Not long ago, China's Sinopec, a major oil company, even expressed an interest in acquiring Unocal, a U.S.-based international explorer and producer. Unocal's portfolio includes a wide variety of oil-producing properties in the United States, as well as significant interests overseas, most notably in Indonesia. In addition, back in the 1970s and 1980s, Unocal was a leader in developing technology related to extracting oil from oil shales.

According to a recent article in The New York Times, Chinese oil companies are aggressively seeking potential deals. Chinese firms are attempting to outmuscle big international oil companies, which is not all that difficult, because Western firms tend to be beholden to Wall Street demands for short-term growth in certain key index numbers. Chinese companies, however, can count on substantial government financial assistance. The Chinese government, through its state-owned banks, can dispense government aid to secure development deals, as well as offer the chance to take advantage of generally lower costs for oil-related development technology from firms in China.

The Times quoted an expert witness who testified to the U.S. Senate Energy Committee that Chinese companies "tend to make uneconomic bids, use Chinese state bilateral loans and financing, and spend wildly." And why shouldn't they? China is accumulating a vast treasure chest of U.S. dollars based on its $150 billion annual trade surplus with America. The funds have to go somewhere. The witness continued, "Chinese investors pursue market and strategic objectives, rather than commercial ones."

"Rather than commercial," that is, by Western ways of measurement. Perhaps the Chinese are not so much interested in the Western concept of "return on investment," taught in every business school and used as the measure of the merit for almost all projects under modern economic theory. Perhaps the Chinese are simply interested in securing access to petroleum because they see it as being in their long-term national interest. There is a difference. For additional information on the The History of Investing In Oil .