Energy: China turns tables on U.S.

Chinaseems to have taken a page from Warren Buffett’s book of investing. Buffett says that only four things really count when making aninvestment, "a business you understand, favourable long-term economics, able and trustworthy management, and a sensible price tag". It doesn’t seem like he American government followed this advice in therecent financial bailout packages handed out; we still don’t understandexactly how what happened occurred nor do we trust the management thatcaused the problems.

China, on the other hand, seems to befollowing Buffett’s advice to the ‘T’. While the entire Western worldremains cash-strapped, cash-rich China has been buying oil and naturalgas assets around the world while expanding its coal production andinvesting in renewable technologies; in short, they are investingheavily in energy.  It is a turn of the tables that seems to fly in theface of established thought in the West that American democracy andcaptialism has always and will always be the best way of running asociety and doing business.  Perhaps, the 21st century will belong toChina.

China has already thrown down $13.4 billion dollars onpurchasing distressed oil companies around the globe this year; this isafter throwing down $13.1 billion last year.  (See WSJ article)

The number of locations and the dollar amounts are staggering:

  • IRAQ(Aug.’09): Sinopec, Asia’s largest refiner, agreed to purchase Addax’sdevelopment of the Taq Taq oilfield in its northern Kurdish regioninJune for 7.2 billion dollars in China’s largest-ever overseasacquisition. (AFP)
  • RUSSIA(Feb.’09): China reached a long-term deal to lend $25 billion to twoRussian energy companies in exchange for an expanded supply of Russianoil. (WSJ)
  • VENEZUELA(Aug.’09): Venezuela has promised to send China almost all its fuel oiloutput for three years in return for an upfront payment of $8 billionas part of China’s global push to ensure future supplies of key naturalresources. (Reuters)
  • CANADA(Sept.’09): PetroChina has agreed to pay $1.7 billion for a stake in aCanadian oil sands project in its biggest North American acquisition,widening the search for energy resources overseas. (Bloomberg)
  • ANGOLA(Jul.’09): CNOOC and SINOPEC will acquire an undivided 20%participating interest in the production sharing contract and jointoperating agreement in block 32 offshore located in Angola. Thetransaction is valued at $1.3 billion. (AllBusiness)
  • ARGENTINA(ongoing): China National Petroleum Corp. and CNOOC have proposedpaying at least $17 billion for all of Repsol YPF SA’s stake in YPF,its Argentine unit, two people close to the talks said.  The potentialdeal, which could be the biggest overseas investment by China,highlights the country’s growing thirst for energy resources globallyand its willingness to offer big money for access. It also underlinesthe ambition of CNPC to build its presence in South America andelsewhere. (WSJ)
  • BRAZIL(Aug’09): Petrobras has signed three different contracts with China.One with the Chinese Development Bank for $10 billion. The second wouldoffer SINOPEC up to 200,000 barrels of crude oil per day that they willpay for according to the international market price. The thirdagreement was also signed with SINOPEC and it involves the possibilityof joint ventures and evaluation of different opportunities inexploration in blocks in the northern part of Brazil; blocks outside ofBrazil; and with possibilities in petrochemicals, refining, andlogistics. (CIGI)
  • ECUADOR(Aug’09): Ecuador has reached out to China to ease its liquiditycrisis, signing a deal to supply the energy-hungry nation with 69mbarrels of oil over the next two years in return for a $1bn advancepayment. (FT)
  • IRAN(Aug’09): Chinese company ZPMC earlier signed a $2.2 billion agreementon building 10 offshore and seven onshore oil rigs with the IranianEngineering and Building Sea Installations Company.  ZPMC received acredit line of 10 billion dollars from China Development Bank lastmonth to finance the offshore section of the project. (IRNA)
  • KAZAKHSTAN(Aug.’09): Kazakh and Chinese state oil firms’ joint $3.3 billionacquisition of a Kazakh private upstream company has been delayed. Theterms of closing the deal have been extended by the parties’ mutualagreemen. Several issues are being resolved. (Reuters)
  • SINGAPORE(May’09): PetroChina’s $2.2 billion bid to buy half a refinery inSingapore may look like yet another China deal for energy security, butreally it says far more about Beijing’s desire to flex its pricingmuscle on world markets.  Singapore Petroleum Company owns a 30year-old, 285,000 barrel per day refinery.  PetroChina adds the finalpiece of its trading arsenal: a major source of fuel supply in thetrading hub where most of Asia’s oil prices are determined. (GlobalNews)

China’s thirst for fossil fuels is not just limited to oil; take a look at some of their natural gas deals:

  • AUSTRALIA(aug.’09): PetroChina has agreed to buy $50 billion worth of liquefiednatural gas – 2.25 million tonnes a year over the next two decades,from the yet-to-be developed Gorgon field off the coast of WesternAustralia. (ABC)
  • BURMA(Aug.’09): China is to boost its economic ties to the Burmese militaryGovernment with a $5.6 billion gas project in the Bay of Bengal, to bebuilt by a South Korean and Indian consortium. (LondonTimes)

China sits on vast coal reserves, and is increasing coal production and buying foreign stashes.

  • ChinaShenhua Energy, the world’s second-largest coal miner, has said it willinvest $39.5 billion over the next four years to hugely increase itsproduction. (Telegraph)
  • China’s Yanzhou Coal Mining Co. agreed to buy Australian coal miner Felix Resources for $2.9 billion. (Reuters)

Ata time when the U.S. Congress wrestles with an energy and climate billthat will severely impact the oil, natural gas, and coal industries,China seems to be kicking sand in the face of any internationalagreement later this year in Copenhagen.  Maybe, China has assessedthat America is not ready to sign on to any binding agreement itselfand is securing its fossil fuel-dependent future.

China also has a lock on the electric vehicle market.  Reuters reported last week of a coming shortage of rare earth metals needed to make both electric motors and batteries.  The Australian reports that the "globalsupply of the rare-earth metals, which are vital to the mechanisms ofhybrid cars, wind turbines, iPods, lasers, super-efficient light bulbsand radar systems, is 95% controlled by China". Their solar and wind markets are stronger than their U.S. counterparts.

Here is another article from Reuters on major resource deals made by China this year.

What is fueling China’s buying spree?  "Chinais sitting on the world’s largest pile of cash, more than $2.3 trillionby some estimates. With an estimated 70% of that, or about $1.61trillion, in U.S. dollars, there is no question it’s a huge source offinancial firepower strength at a time when global markets areuncertain, if not downright weak."

Our domestic markets areexactly the opposite of the Chinese.  Americans are strapped with debt,paralyzed and frozen in place.  We had to borrow more money in order tokeep our entire economic system from collapsing.  Sure, saving thebanks kept our economy afloat, but handing over nearly a trilliondollars to wealthy bankers who took too much risk knowing that theircompanies were ‘too big to fail’ put our country in a position whereother, better managed economies could position themselves better forfuture success.

When the next generation of Americans asks ushow China became the dominant world power in 2050, we will have toexplain the financial meltdown of 2008 as the catalyst.  Additionally,we will have to explain how China chose to invest in energy (bothrenewable and non-renewable sources) while Americans chose to invest inbanks that ultimately refused to lend the money for renewable andnon-renewable energy projects alike.

While China continues to grow, America remains stagnant.  Will we wake from our gluttonous slumber in time?

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