China's Global Shopping Spree
In fact, the Chinese are already experiencing a sharp increase in the use of oil and other commodities. More than that, anticipating the kind of voracious resource consumption that goes with anticipated future growth, and worried about the availability of adequate supplies, giant Chinese energy and manufacturing firms--many of them state-owned--have been on a veritable spending binge when it comes to locking down resource supplies for the twenty-first century. They have acquired oil fields, natural gas reserves, mines, pipelines, refineries and other resource assets in a global buying spree of almost unprecedented proportions.
Like most other countries, China suffered some ill effects from the Great Recession of 2008. Its exports declined and previously explosive economic growth slowed from record levels. Thanks to a well-crafted $586 billion stimulus package, however, the worst effects proved remarkably short-lived and growth soon returned to its previous high-octane pace. Since the beginning of 2009, China has experienced significant jumps in car ownership and home construction--along with worries about the creation of a housing bubble--among signs of returning prosperity. This, in turn, has generated a rising demand for oil, steel, copper and other primary materials.
Take oil. In the United States, oil consumption actually declined by 9 percent over the past two years, from 20.7 million barrels per day in 2007 to 18.8 million in 2009. In contrast, China's oil consumption has risen in this same period, from 7.6 to 8.5 million barrels per day. According to the most recent projections from the US Department of Energy, this is no fluke. The Chinese demand for oil is expected to continue climbing throughout the rest of this year and 2011, even as American consumption remains nearly flat.
Like the United States, China obtains a certain amount of oil from domestic wells, but must acquire a growing share from overseas suppliers. In 2007, the country produced 3.9 million barrels per day and imported 3.7 million barrels, but that proportion is changing rapidly. By 2020, it is projected to produce only 3.3 million barrels, while importing 9.1 million barrels. This situation has "strategic vulnerability" written all over it, and so leaves Chinese leaders exceedingly uneasy. In response, like American officials in decades past, they have moved to gain control over foreign sources of energy--and similarly many other vital materials, including natural gas, iron, copper and uranium.
China Binging on Energy
Chinese energy companies initially started buying up foreign firms and drilling ventures (or, at least, shares in them) as the twenty-first century began. Three large state-owned oil companies--the China National Petroleum Corporation (CNPC), the China National Offshore Oil Corporporation (CNOOC), and the China Petroleum & Chemical Corporation (Sinopec)--took the lead. These firms, or their partially privatized subsidiaries--PetroChina in the case of CNPC, and CNOOC International Ltd. in the case of CNOOC--began gobbling up foreign energy assets in Angola, Iran, Kazakhstan, Nigeria, Sudan and Venezuela. On the whole, these acquisitions were still dwarfed by those being made by giant Western firms like ExxonMobil, Chevron, Royal Dutch Shell and BP. Nonetheless, they represented something new: a growing Chinese presence in a universe once dominated by the Western "majors."
Then along came the Great Recession. Since 2008, Western firms have, for the most part, been reluctant to make major investments in foreign oil ventures, fearing a prolonged downturn in global sales. The Chinese companies, however, only accelerated their buying efforts. They were urged on by senior government officials, who saw the moment as perfect for acquiring crucial valuable resources for a potentially energy-starved future at bargain-basement prices.
"The international financial crisis...is equally a challenge and an opportunity," insisted Zhang Guobao, head of the National Energy Administration, at the beginning of 2009. "The slowdown...has reduced the price of international energy resources and assets and favors our search for overseas resources."
As a policy matter, the Chinese government has worked hard to facilitate the accelerating rush to control foreign energy resources. Among other things, it has provided low-interest, long-term loans to major Chinese resource firms in the hunt for foreign properties, as well as to foreign governments willing to allow Chinese companies to participate in the exploitation of their natural resources. In 2009, for example, the China Development Bank (CDB) agreed to lend CNPC $30 billion over a five-year period to support its efforts to acquire assets abroad. Similarly, CBD has loaned $10 billion to Petrobras, Brazil's state-controlled oil company, to develop deep offshore fields in return for a promise to supply China with up to 160,000 barrels of Brazilian crude per day.
Prodded in this fashion and backed with endless streams of cash, CNPC and the other giant Chinese firms have gone on a global binge, acquiring resource assets of every imaginable type in staggering profusion in Central Asia, Africa, the Middle East, and Latin America. A very partial list of some of the more important recent deals would include:
§ In April 2009, CNPC formed a joint venture with Kazmunaigas, the state oil company of the energy-rich Central Asian state of Kazakhistan, to purchase a Kazakh energy firm, JSC Mangistaumunaigas (MMG), for $3.3 billion. This was just the latest of a series of deals giving China control over about one-quarter of Kazakhstan's growing oil output. A $5 billion loan-for-oil offer from China's Export-Import Bank made this latest deal possible.
§ In October 2009, a consortium led by CNPC and the oil heavyweight BP won a contract to develop the Rumaila oil field in Iraq, potentially one of the world's biggest oil reservoirs in a country with the third-largest reserves on the planet. Under this agreement, the consortium will invest $15 billion to boost Rumaila's daily yield from 1.1 to 2.8 million barrels, doubling Iraq's net output. CNPC holds a 37 percent share in the consortium; BP, 38 percent; and the Iraqi government, the remaining 25 percent. If the consortium succeeds, China will have access to one of the world's most promising future sources of petroleum and a base for further participation in Iraq's underdeveloped oil industry.
§ In November 2009, Sinopec teamed up with Ecuador's state-owned Petroecuador in a 40:60 joint venture (with Petroecuador holding the larger share) to develop two oil fields in Ecuador's eastern Pastaza Province. Sinopec is already a major producer in Ecuador, having joined with CNPC to acquire the Ecuadorian energy assets of Canada's EnCana Corporation in 2005 for $1.4 billion.
§ In December 2009, CNPC acquired a share of the Boyaca 3 oil block in the Orinoco Belt, a large deposit of extra-heavy oil in eastern Venezuela. In that month, CNOOC formed a joint venture with the state-owned company Petróleos de Venezuela SA to develop the Junin 8 block in the same region. These moves are seen as part of a strategic effort by Venezuelan President Hugo Chávez to increase his country's oil exports to China and reduce its reliance on sales to the US market.
§ That same December, CNPC signed an agreement with the government of Myanmar (Burma) to build and operate an oil pipeline that will run from Maday Island in the western part of that country to Ruili, in the southwestern Chinese province of Yunnan. The 460-mile pipeline will permit China-bound tankers from Africa and the Middle East to unload their cargo in Myanmar on the Indian Ocean, thereby avoiding the long voyage to China's eastern coast via the Strait of Malacca and the South China Sea, areas significantly dominated by the US Navy.
§ In March 2010, CNOOC International announced plans to buy 50 percent of Bridas Corp., a private Argentinean energy firm with oil and gas operations in Argentina, Bolivia, and Chile. CNOOC will pay $3.1 billion for its share of Bridas, which is owned by the family of Argentinean magnate Carlos Bulgheroni.
§ In March, PetroChina joined oil major Shell to acquire Arrow Energy, a major Australian supplier of natural gas derived from coal-bed methane. The two companies are paying about $1.6 billion each and will form a 50:50 joint venture to operate Arrow's holdings.
And that's only in the energy field. Chinese mining and metals firms have been scouring the world for promising reserves of iron, copper, bauxite and other key industrial minerals. In March, for example, Aluminum Corporation of China, or Chinalco, acquired a 44.65 percent stake in the Simandou iron-ore project in the African country of Guinea. Chinalco will pay Anglo-Australian mining giant Rio Tinto Ltd. $1.35 billion for this share. Keep in mind that Chinalco already owns a 9.3 percent stake in Rio Tinto, and has been prevented from acquiring a larger share mainly thanks to Australian fears that China is absorbing too much of the country's energy and minerals industries.
Shifting the World's Resource Balance
Chinese companies like CNPC, Sinopec and Chinalco are hardly alone in seeking control of valuable foreign resource assets. Major Western firms as well as state-owned companies in India, Russia, Brazil and other countries have also been shopping for such properties. Few, however, have been as determined or single-minded as Chinese firms in taking advantage of the relatively low prices that followed the global recession, and few have the sort of deep pockets available to such companies, thanks to the willingness of the China Development Bank and other government agencies to offer munificent financial backing.
When the United States and other Western nations finally recover from the Great Recession, therefore, they will discover that the global resource chessboard has been tilted strongly in China's favor. Energy and mineral producers that once directed their production--and often their political allegiance--to the United States, Japan, and Western Europe now view China as a major customer and patron. In one eye-catching sign of this shift, Saudi Arabia announced recently that it had sold more oil to China last year than to the United States, previously its largest and most pampered customer. "We believe this is a long-term transition," said Khalid A. al-Falih, president and chief executive of Saudi Aramco, the state-owned oil giant. "Demographic and economic trends are making it clear--the writing is on the wall. China is the growth market for petroleum."
For now, Chinese leaders are avoiding any hint that their recent foreign resource acquisitions entail political or military commitments that could produce friction with the United States or other Western powers. These are just commercial transactions, they insist. There is, however, no escaping the fact that growing Chinese resource ties with countries like Angola, Australia, Brazil, Iran, Kazakhstan, Saudi Arabia, Sudan and Venezuela have geopolitical implications that are unlikely to be ignored in Washington, London, Paris and Tokyo. Perhaps more than any other recent developments, China's global shopping spree reveals how the world's balance of power is shifting from West to East.