China’s Resource Deals

Came across this across this China Daily article, “Britain’s BP, Chinese oil firm win Iraq deals“, recently and read with interest as Iraq held its first auction of its oil fields since the US-led invasion. The sale is the first chance for major foreign companies to gain a hold on the world’s third largest oil reserves since Iraq nationalised its oil industry in 1972. MSNBC also reports that at this point, “Iraq needs the expertise of internationals that can develop its dilapidated oil and gas industry. The country lacks the oil revenues needed for reconstruction following [the] U.S.-led war… that tipped the country into chaos.”

Major oil companies such as Exxon Mobil, Shell, BP and CNPC were asked to put up a total of $2.6 billion in ’soft loans’ in return for access to Iraq’s main oil fields, which could net the companies a total of $16 billion. These oil fields hold 43 billion barrels of reserves and are responsible for 2 million out of Iraq’s 2.4 million barrels per day in output, MSNBC reports.

Given the unprecedented access to Iraq’s oil fields, the most surprising part of the article is that out of the 8 fields on offer, only one field – the largest 17-million barrel Rumaila oil field – was successfully auctioned off, to the BP/CNPC alliance. However, closer reading revealed that the failed auctions were due to Iraq’s low offered fee for each extra barrel produced. For example, while Shell wanted to be paid $7.89 per extra barrel of oil produced, Iraq only offered $2. Similary, the BP/CNPC alliance wanted $3.99 per extra barrel produced, but had to accept $2.

This incident is but one in a string of resource deals completed by China in its shrewd use of the current crisis to its advantage. While countries and companies are reeling from the financial carnage, China has been making use of its superior economic status to advance its position and quench its  hunger for energy.

In February this year, Russia and China signed a $25B deal that will see Beijing supplied with oil from Siberian fields in exchange for loans to Russian firms. China Development Bank will lend $15B to Russian state oil firm Rosneft, and $10B to pipeline firm Transneft. In return, Russia will supply 15 million tons – 300,000 barrels a day – of oil annually for 20 years, BBC reports.

More recent resource deals completed or to be completed by China:

Jul 10, 2009
PetroChina gets nod to buy Nippon Oil, Japan’s largest refiner. PetroChina will gain a 49% stake in the venture. The two companies agreed in May to establish a joint venture to operate the refinery with a capacity of 115,000 barrels a day.

Jul 6, 2009
China National Petroleum Corp., along with France’s Total, plans to bid for 2 heavy-oil blocks in Venezuela.

Jun 25, 2009
Sinopec, China’s second largest oil company, agreed to buy Addax Petroleum Corp, a Geneva-based oil and gas producer for $7.3 billion.

Jun 22, 2009
PetroChina (recently named one of world’s 10 most profitable companies) completes acquisition of 45.51% stake in refiner Singapore Petroleum.

There are many more, such as CNPC’s purchase of Kazakh oil company MMG, and in April, and CNPC’s purchase of Canadian oil firm Verenex to access Libyan oil. In June this year, ExxonMobil has also agreed to sell 2 million metric tons of LNG a year to PetroChina. 70% of China’s energy demand is still derived from coal, and China is already the world’s 2nd largest oil importer after the US.  Also note China steel giant Ansteel’s increased stake in Australian iron ore explorer Gindalbie Metals (iron is the world’s most widely used metal) to 36.28%, making it its largest shareholder at the end of June this year. And many many more.

Just as the Baltic Dry Index is a great leading economic indicator because it deals with the precursors to production, China’s rapid acquisition of resources is also an indicator of its imminent dominance on the world stage. Fund managers everywhere are exhorting ‘buy China’, and indeed China’s rise presents great investment opportunities for us.

19th Asia Business Conference Keynote

The theme of the 19th Asia Business Conference held at the Ross School of Business was Asia: Globalization and Transformation. Keynote speaker Dr. Surin Pitsuwan, Secretary-General of ASEAN, delivered a good speech, which I shall summarize here.

Strength of Asia and ASEAN as a region

Together, the Asian countries account for 25% of world GDP. While IMF has pared down growth estimates for the US to -2%, Asia’s average growth rate remains high at 5%, making it the fastest growing region in the world.

Hong Kong and China have experienced positive FDI growth despite the financial turmoil.

As a region, ASEAN trades voluminously amongst itself. 25% of ASEAN’s trade is with the ASEAN+3 nations (Asean, China, Japan and South Korea) and 50% of ASEAN’s trade is among the ASEAN+6 (Asean+3, India, Australia and NZ).

The importance of continued economic integration and international engagement

Contrary to the tendencies of nations to implement protectionist policies during times of crisis, we must instead become aim to more economically integrated so that demand in other countries can fuel production in our own. We must create demand and trade.

An example of how ASEAN is achieving this is through its goal to create a completely integrated one ASEAN economy by 2015. Another example would be its soon-to-be concluded FTA with India, a country with 1.1 B in population size. This gives ASEAN access to the purchasing power which India’s emerging middle class will soon wield.

China is creating demand by investing heavily in infrastructure, building roads and various transport systems to facilitate movement and trade. It is especially focusing on developing transport infrastructure around the  Mekong river, which runs through China, Myanmar, Laos, Cambodia, Thailand and Vietnam.

Countries must also strive to lower the cost of doing business by reducing bureaucratic red tape.

Financial regulation

Dr. Pitsuwan recommends greater transparency and governance with respect to our financial institutions. Financial sitmuli among countries must also be coordinated. For example, if Singapore guarantees bank deposits, Malaysia must follow suit because the two economies are so integrated that they are practically one.

ASEAN+3 countries have also agreed to expand an existing bilateral foreign currency swap framework that had been set up to assist to any of them that may experience liquidity problems, amid the spreading global financial crisis. This is known as the Chiang Mai initiative, nicknamed the ‘Asian Monetary Fund’ by Pitsuwan.

The Message

Nations are now looking to China to lead the world out of the financial crisis. According to Dr. Pitsuwan, “the world has changed”. China is now a global economic leader.

At the same time, the fates of nations have never been more intertwined. What is good for the US is good for East Asia, and vice versa. We must step out of this crisis together.

———————————

My thoughts

I was struck by how relevant all my research at MTI was to whatever Dr. Pitsuwan was saying. Economic integration? That is exactly what the trade division at MTI strives for, day after day, year after year. Countries must invest in infrastructure? It was at MTI where I learnt how much inadequate infrastructure and excessive legislation affects the attractiveness of a country’s investment climate. Singapore has been ranked #1 for ease of doing business for the last 2 years. One ASEAN? That is exactly how I marketed Singapore to the Mercosur when I created the presentation to convince them to sign an FTA with us.

At the beginning of his speech, Dr. Pitsuwan told us how he decided to turn down 2 other invitations to speak at other locations in order to be here for the ABC. He said that it was due to the countless emails from Professor Lim. “Such is the persuasive power of Dr.  Linda Lim.”

Sitting in the beautiful Blau Auditorium listening to Dr. Pitsuwan, Secretary-General of ASEAN, address students and faculty of UM, I must say I have never been more proud to be a member of the Ross community, and a citizen of Singapore.