China's Quest for Resources: Intrepid Explorers

CHINA'S QUEST FOR RESOURCES

Intrepid explorers

Mar 13th 2008
From The Economist print edition

China's mining and oil firms pop up everywhere

DO CHINA'S state-owned mining and oil firms have an unfair advantage over their Western rivals? They certainly have deep pockets: in 2006, for example, Sinopec, one of China's three big state-owned oil firms, raised eyebrows when it offered a record price—over $2 billion—for the right to explore for oil in three parcels of Angola's territorial waters. In 2005 one of the others, CNOOC, lined up billions of dollars in cheap loans from state-owned banks to fund its ill-fated takeover bid for Unocal, an American oil firm.

That hints at the official backing China's big resources firms seem to enjoy. Since 2002 the government has exhorted them to seek their fortunes overseas. The National Development and Reform Commission, a planning ministry of sorts, keeps a list of countries where it encourages Chinese investment with special incentives. Chinese aid to Africa seems to be concentrated in countries where Chinese resources firms are also investing heavily, such as Sudan and Angola.

All this has stirred fears that Chinese firms, in cahoots with their shareholders in government, are squeezing out Western competition and locking up supplies of natural resources for the future. But, points out Erica Downs of the Brookings Institution, a think-tank, Chinese oil firms usually invest overseas in partnership with Western firms or other national oil companies (NOCs). Moreover, they tend to be passive shareholders, not operators that exercise day-to-day control over the investment. And they mostly sell their share of the oil produced on the open market, rather than spirit it back to China.

Wood Mackenzie, a consultancy, has examined the prices paid by Chinese oil firms for acquisitions and exploration rights and calculated that most of them are likely to earn a very respectable rate of return of 15-20%. “The contention that ‘win at all costs’ tactics are being pursued by the Asian NOCs in asset acquisitions is simply not substantiated,” Wood Mackenzie concluded.

Chinese firms do have access to countries that many Western ones do not, such as Sudan and Iran—but if they are exploiting oil that would otherwise go undeveloped, they are increasing the global supply and so reducing the price. They also seem to have access to cheaper capital, and are not being required to pay onerous dividends to the state. But again, that means Chinese banks and taxpayers are subsidising oil production, reducing the price the rest of the world has to pay.

Besides, Chinese firms are not as invincible as they are made out to be. After all, Chevron, an American oil firm, managed to snatch UNOCAL from CNOOC's jaws. And Chinalco is struggling to prevent BHP Billiton's proposed takeover of Rio Tinto.