Wednesday, 27 November 2013

Chinese Control of Global Oil Assets

China's thirst for oil has been a point of interest on this blog. The incredibly low levels of per capita consumption, the incredibly poor but growing populace, and the sheer magnitude of the market create a situation where any convergence to global norms would have huge implications.

Hattip to Rockman over at, and The Oil Drum previously, for emphasizing the potential impact of Chinese E&P and Refinery joint ventures, and loans for oil deals that would give 'China' the right of first refusal on oil from the ground and/or finished product.

I was initially pretty dismissive of the potential implications. They are selling into the same world markets, it's a hedge, who cares? But the refinery story in europe and with capacity build outs seeming to outpace demand, having control of where feedstock can go might have material impacts on refiners and potentially even the end users of finished products (particularly when those refiners have been market controlled).

This Special Report from Reuters: How China took control of an OPEC country's oil. Takes a look at how these dynamics are playing out in Ecuador.
Shunned by most lenders since a US$3.2-billion debt default in 2008, Ecuador now relies heavily on Chinese funds, which are expected to cover 61% of the government’s US$6.2-billion in financing needs this year. In return, China can claim as much as 90% of Ecuador’s oil shipments in coming years, a rare feat in today’s diversified oil market.
China has the capital and needs the resources. Ecuador has the resources and needs the capital. It's a logic match. At 'just' 520,000 BOPD of production, this shouldn't be too alarming. And besides, China is just selling into the global market anyway. But here's where things get interesting:
Beijing’s growing thirst for natural resources has led Chinese oil firms to offer at least US$100-billion in oil-related financing around the world. They already control growing volumes of oil from Venezuela, where China has negotiated at least US$43-billion in loans; from Russia, where the tab may exceed US$55-billion; and Brazil, with at least US$10-billion. In Angola, the deals total around US$13-billion.
And why not? For oil exporters, they can lock in a buyer while also gaining access to capital. Theoretically, this could be a win win scenario (depending on how these fund are used) for both parties involved.
China’s cash advances to Ecuador cover only a slice of the near US$13-billion a year Ecuador can earn from oil sales. But since 2009 PetroEcuador has agreed to sell Chinese firms several hundred million barrels of oil, valued far higher than the loans themselves, according to a Reuters analysis of seven different contracts. With those supplies locked up, other buyers now get few chances to purchase crude from PetroEcuador in competitive tenders.
Chinese lending on favorable terms gets their companies in the door, and further concessions can be gained. Extrapolating the Ecuador story to the other numbers mentioned above and you can see that China has potentially locked up some serious quota that previously hit the open market.

Since the use for raw product is basically limited to refineries and those refineries have been highly concentrated in the developed world where most of the final product consumption occurs. If Chinese control of raw product simply results in them selling into the same historical market then the win-win scenario I described is possible. But if the refinery capacity moves away from developed countries, and the market alone is not allocating resources, things get complicated.

Funneling feedstock and essentially controlling the flow of finished product might prove useful in a supply constrained world. Would China use it maliciously? We've seen no reason to expect that. But their extremely low per capita consumption levels and their aggregate consumption growth (in the face of historically high price levels) suggest that their is a significantly higher price level  that developing countries would pay for product.

Removing the end control of product flow from developed world refineries may in fact pose serious risks for our current economic system by limiting their ability to mitigate increasing product prices. So there it is, the potential for a win, win, lose scenario where the developing world gains at our developed world's expense. You'd have to buy into the possibility of the Peak Oil Dynamic as I've defined it.

To me China's acquisition strategy might be interpreted as forward thinking mitigation strategy. Or it could just be confirmation bias on my part.

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