Trends in Asian National Oil Company Investment Abroad: an Update

Trends in Asian National Oil Company Investment Abroad: An update

A Working Paper by Glada Lahn

November 2007

Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

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Glada Lahn is Junior Research Fellow at the Energy, Environment and Development Programme at Chatham House. She specialises in issues of oil sector governance and related development in oil and gas producing countries.

The author is grateful to Juliet Kerr for her research assistance and to colleagues and associates involved in the Asian National Oil Company Investments Abroad project.

2 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Table of contents

Introduction...... 5

Part I: Investment developments ...... 6

Investment hot spots...... 6

Central Asia ...... 6

Myanmar ...... 7

Acquiring private companies ...... 8

Asian investor – host producer relations...... 9

Assertive producers ...... 9 Vulnerability to local conflict...... 9 Workers welfare and company practice ...... 10 Corporate responsibility schemes ...... 11 NOC-NOC cooperation...... 11 Opportunities for western companies in China...... 12

Western producers ...... 12

Part II: International approaches to Asian demand and investment and Asian

Responses...... 13

International responses to Asian energy needs ...... 13

Energy cooperation...... 13 Ethical concerns ...... 14

Iran sanctions ...... 14 Darfur campaigns ...... 14 Chinese engagement...... 14 International reconciliation ...... 15 Appendix 1: ANOC data updated ...... 17 a) Company Financials 2005-2006 ...... 17 b) ANOC’s Oil and Natural Gas Production and Reserve Values 2006...... 18 Appendix 2: Recent ANOC investments abroad...... 19

3 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Note

This working paper is the result of desk based research conducted as part of a major Chatham House project on Asian National Oil Company Investments Abroad: Industry trends and impacts on development .

The author has tried to provide accurate data but would be grateful for corrections of errors and omissions

4 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Introduction In March, we published a study on the drivers for Asian national oil company (ANOC) global expansion and emerging investment trends. 1 This paper provides a short update on the major acquisitions and company and political developments that have taken place in the interim.

Gaining direct access to oil and gas resources abroad features - to varying degrees of priority - in the energy policies of China, India, Japan, Malaysia and South Korea. It is also part of an international surge to expand trade and diplomatic links in developing markets and, particularly in the cases of China and India, to increase international political leverage. This agenda has entailed strong government support for NOC activities abroad. In the West, seemingly extravagant bids for oil and gas acreage have provoked fears of unfair competition and concerns that established standards of corporate governance will be threatened. At best, the media have portrayed this trend as an opportunity for developing producer countries to break their dependence on the West, at worst, as a resource grab presaging a new era of Eastern imperialism and energy mercantilism. 2 Our project seeks to monitor the trends, involve Asian expertise and provide an analytical assessment of their current and potential impact on development, competition and geopolitical relations.

Our initial study concluded that some fears were groundless. In terms of foreign equity oil production, ANOC’s effect on the world oil market is minimal (about 2% of world production in 2005-6) and unlikely to challenge supplies to other consuming countries in the foreseeable future. There have been few significant producing assets won in competition with private oil companies to date (although the future production from exploratory acreage and the acquisition of producing company assets could change this) and high bids reflect the premium for latecomers. Above all, our paper highlighted the increasingly corporate drive behind the investment strategies of these NOCs and thus the need to better understand company development in relation to international and host country responses, as well as political direction from shareholder governments.

The first part of this update covers looks at areas that have dominated investment news and where several Asian oil companies are active, and then at ANOC relations with host countries and other oil companies. The second part considers the ongoing dialogue between the international community and the Asian consumer countries regarding energy demand and investment choices.

1 See the Chatham House Briefing Paper: ‘Oil for Asia’ and the Working Paper: ‘Trends in Asian national oil company investment abroad’, Chatham House, March, 2007. 2 With 90% of world oil reserves under the control of state-owned and not market driven companies, analysts often express concern that bilateral long-term supply contracts will undermine the market. See for example, S. Miller. ‘Will "Private" Oil Sink the NYMEX?’, an investment U White Paper Report, Crude Oil Forecast, May 22, 2007.

5 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Part I: Investment developments

Company news in brief * Chinese NOCs increased their activities on several fronts, most significantly in Turkmenistan and the Canadian oil sands. Negotiations over the Yadavaran oil field (Sinopec) and the South Pars gas field (CNPC) in Iran continued but with no conclusion to date. In early September 2007, PetroChina secured significant Australian LNG supply deals and CNOOC won an exploration contract in offshore Western Australia.

Indian NOCs won access to several offshore exploration blocks in Libya, Columbia and Myanmar (ONGC Videsh Ltd) and entered Turkmenistan for the first time (ONGC Mittal Energy Ltd (OMEL)). Indian private companies increased their assets abroad. These included Mittal Investments in Kazakhstan (Apr 07) and Essar in Nigeria (May 07).

Malaysian NOC, PETRONAS finalised a gas block development deal with the Ethiopian government. The company’s annual report recorded a marked increase in the share of total profits from international ventures for FY07.

In June, the Korean Ministry of Commerce, Industry and Energy announced a surge in investments on foreign oil and gas development over the coming year. Two months later, Korean National Oil Company (KNOC) made its first entry into Azerbaijan when Royal Dutch Shell agreed to sell it 20% of the BP-lead INAM oil exploration project in the Caspian Sea.

PetroVietnam gained exploration and development assets in Cuba and Venezuela and Pertamina took part in a consortium with CNPC, winning rights to an offshore block in Sudan.

Some ANOCs developed strategic alliances with producer countries. These included a cooperation MOU between Russia’s state oil and gas mammoth, Gazprom and PETRONAS, an oil block swap agreed between ONGC and Petrobras and Iran-China trade and energy talks. Companies from several Asian countries also demonstrated their long-term interest in Myanmar and Indonesia, promising large investment packages. 1

*See Appendix 1 for an update of ANOC annual report data and Appendix 2 for a table of recent oil and gas deals.

Investment hot spots

In the March study, we identified regions where several Asian national oil companies (ANOCs) were involved in large-scale projects and there was potential for competition between them. These include countries in which, for a variety of reasons, promising acreage is still available to foreign investors. In the last six months, two such areas have been prominent in the news: Central Asia and Myanmar. These are particularly significant for Asian investors, as oil and gas rich areas which border or present potential access routes to the Asian consumer countries. They also have unique political conditions that influence the nature of investment.

Central Asia In August, CNPC signed agreements in Kazakhstan for the extension of the Atasu- Alashankou oil pipeline, to connect China with Kazakhstan's Kenkiyak and Kumkol oil fields. CNPC also made progress on plans for a Central Asia Gas Pipeline (CAGP) that would provide an alternative to other supply routes via Russia. CNPC has been preparing for this pipeline since 2000 and a careful courting game with each of the transit/producing countries (Turkmenistan, Uzbekistan, Kazakhstan) appears to be

6 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007. paying off. This has involved offering a range of infrastructure and oil and gas field development agreements. For example, CNPC has cooperated with Turkmenistan on oil well restoration and drilling projects and offered soft loans in contrast to Western majors, who usually demand equity in gas fields before committing funds to pipelines. In July, CNPC became the first foreign company to be awarded rights to develop Turkmenistan's onshore gas fields from which it will also be allowed to purchase gas. Under the related contracts, China will receive 30 billion cubic metres (bcm) of Turkmen gas annually from 2009 for 30 years through the planned CAGP.

In doing business with Central Asia, ANOCs have to contend with Russia's strong national interests and Russian NOC influence. Russia needs Central Asian gas to meet its European supply commitments so is also pursuing a diplomatic offensive with the region's leaders. Meanwhile, within Russia, Gazprom is creating a monopoly over gas exports. For example, Gazprom, has become increasingly critical of private companies developing Russia’s gas reserves. The company took over Shell’s Sakhalin-2 project last year owing to an alleged breach of environmental licences, refused permission for a BP-TNK joint venture to build a gas pipeline to China from the Kovykta gas field and is currently trying to prevent the ExxonMobil-led group that operates Sakhalin 1 from selling gas to China. 3 If Gazprom is successful in its actions, it will have total control over Russian gas supplies to China, hence China’s anxiousness to secure alternative sources and delivery routes from Central Asia.

Asian companies and states have chosen a combination of strategies in response to this including partnering Russian companies, becoming strong competitors and/or aiding the governments of Central Asian states.

The gas strategy of Chinese companies, as we saw above, has been to develop new reserves where possible and to invest in and build their own pipelines from fields that they have helped develop, to China. In spite of India’s desire for an influential economic and political role in Central Asia, its state oil companies had no acquisitions there until early October 2007 when joint venture, ONGC Mittal Energy Limited (OMEL), won an offshore exploration and production farm-in deal with Maersk in Turkmenistan. Earlier in the year, it seemed that OMEL might be able to enter Kazakhstan by acquiring Lukoil's 50 per cent stake in Caspian Investments Resources (CIR). But, in April 2007, Mittal Investments did the deal alone for $980 million. 4

Myanmar Competition over Myanmar's gas resources intensified last spring. China, India, Thailand, South Korea and Japan all want to secure supplies from the giant offshore Shwe fields. The gas project is likely to become the country's largest single foreign exchange earner. Press reports in both India and South Korea claim that Burmese generals have decided to sell the bulk, if not all, of the gas to China, and will allow PetroChina to build a pipeline through Myanmar from the port of Sittwe to Kunming, capital of Yunnan Province. 5

3 Exxon wanted to sell up to 8bcm of Sakhalin 1 gas to China but Gazprom thinks this would damage its negotiations over gas supply to China. "The priority [for Sakhalin 1] is to supply the local market" said Alexander Medvendev, Gazprom deputy chairman, quoted in 'China's LNG deals 'good' for Gazprom discussions', Financial Times, 10 September, 2007. 4 It is unclear as to whether Lukoil opposed ONGC participation or that the non-resident Indian steel magnate, Lakshmi Mittal, seized an opportunity from under OMEL's nose. Mittal has announced his plans to transfer the assets to OMEL. 5 The Indian government had hoped for a pipeline route going from Myanmar's Arakan state to India's Mizoram and Assam provinces to West Bengal and offered US$20 million in "soft

7 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

In Myanmar, the nature of the regime shapes investment approaches. It is characterized by unpredictability in political/economic decisions and a lack of favour with the international community. The latter has meant that Myanmar has presented, on the one hand, more opportunities to Asian investors due to the lack of competing majors but on the other, a risk to investments via potential instability (in terms of both contractual decisions and wider societal unrest) and external pressure on investors to urge change in the Myanmar regime.

Asian governments appear to be encouraging the regime's strategic and economic dependency upon them, competing with one another in offering credit and infrastructure packages.

The pipeline deal with PetroChina came with an $84 million soft loan for the Burmese regime. There is also a strong historical trade and defence relationship. The Chinese government has been supplying arms and military training to the regime since 1989 6 and is currently training and modernizing Myanmar's navy and naval bases. 7 It still offers Myanmar strong support within ASEAN and the UN, although recent internal turmoil has provoked concern (see p15).

Having lost out to China for access to Shwe gas, which GAIL and ONGC had helped to develop, the Indian government is pursuing several tracks to open up trading routes to the Bay or Bengal and secure a gas pipeline to take Burmese gas into Northeast India. India recently agreed to fund large scale infrastructure upgrade at Myanmar's Sittwe Port. The formal agreement came not long after the Indian Petroleum minister visited the country in September to sign a deal by which ONGC VL will explore for oil in three deepwater blocks. Transfers of military equipment have also increased significantly in the last two years between India and Myanmar.

India's policy could backfire. Small arms that India supplied to the Burmese military to improve relations in 2006 are said to have added to supplies on the Burmese black market which fuels militancy in bordering Manipur, in India's troubled North Eastern region. 8 The 'arms for energy tactic' is not confined to states. Some 14 officials from the South Korean private energy company, Daewoo International, including its President, were indicted last year for contravening South Korean law by selling arms technology to Myanmar. Interestingly, in its first hearing, Daewoo was reported to have claimed that it had acted in the interests of Korea. 9

Acquiring private companies In the March study, we mentioned that Indian and Chinese companies were interested in buying small to medium sized producing oil companies; not only to avoid risk but also to avoid the political ire provoked when bidding for large companies (re CNOOC’s failed bid for Unocal in 2005) and possibly to circumvent some of the commercial prejudice associated with the big Asian names. Kazakhstan has been a focus for this approach, first with the takeover of Canadian-run PetroKazakhstan in 2005, then Citic Group's $1.91 billion pay out for the Kazakh assets of Canadian

credit" and a power plant to help secure the deal. See 'Pipeline Politics: India and Myanmar', Power and Interest News Report, 10 September 2007 6 See http://www.asiapacificms.com/articles/myanmar_chinese_connection/ 7 “Myanmar's Chinese Connection”, International Defence Review, November 1994. 8 'Manipur militancy blame on Myanmar - Officer points to flow of arms & drugs', Telegraph (Calcutta), 1 June 2007; 'Burma is Key to India's 'Look East' Economic Strategy, World Politics Review, 19 July 2007. 9 'KOREA: Daewoo-Burma arms trade targeted', Bangkok Post, 26 March, 2007.

8 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007. energy firm, Nations Energy Co a year later. According to reports, China's private Zhenhua Oil and CNOOC expressed interest in bidding for the small US oil company, Transmeridian Exploration Inc earlier this year.10 By July, ONGC VL had also shown an interest in the company. 11 Transmeridian is loss-making but its 100% interest in CaspiNeft is a strategically valuable asset to some ANOCs. Caspineft holds the license to the $970 million South Alibek field in western Kazakhstan with proven reserves of 67.2 million barrels of oil.

Asian investor – host producer relations

Assertive producers Several recent events have indicated a change in the relationships between Asian investors and host countries as increasingly assertive producing governments want to ensure that their own NOCs benefit from takeovers and that contract terms appear in the national interest.

For example, when CNPC took over PetroKazakhstan in 2005, the Kazakh government moved swiftly to change the law to allow it to intervene in any mineral- related transfer and sale of assets, giving state oil company KazMunayGaz the right to buy up to 51% of any deal executed in the onshore sector. 12 Subsequently, CNPC agreed to sell KazmunayGaz 33% of its new acquisition. The company's new owner was also plunged into an ongoing legal battle over assets with Russian company, Lukoil. This could result in CNPC owning significantly less than the original company it had bid for. Mirroring the Russian approach, the Khazakh government has also warned a western-led consortium (including Japanese company, Inpex Holdings) with development rights to the huge Kashagan oilfield, that Kazmunaigas should take a larger share and co-operatorship in the project. 13

In Angola, the honeymoon period starting in 2004 (when China started announcing big loans to Angola) is evolving into a more normal bilateral relationship. Warm exchanges continue, but there are divergences of national interest to overcome too. The most obvious sign of this change came when in May negotiations ceased between Angolan state oil company, Sonangol, and Sinopec, over the construction of a US$3.7bn, 200,000b/d refinery at Lobito in southwestern Angola. The disagreements were essentially technical: Sinopec wanted a refinery whose output would be geared to the Chinese market; Sonangol wanted a more sophisticated refinery that would allow it more easily to switch its output mix in response to changing seasonal demand, particularly from the western hemisphere. Sonangol CEO Manuel Vicente was quoted in an Angolan newspaper as saying that "we cannot build a refinery just to make products for China." 14

Vulnerability to local conflict In April 2006, a rebel group in the Somali region of Ethiopia attacked facilities of the Zhongyuan Petroleum Exploration Bureau (ZPEB), a subsidiary of Sinopec. Gunmen

10 'Why Chinese Firms Are Circling Tiny Transmeridian Small Deals Viewed As a Way to Avoid Political Firestorm', Wall Street Journal, 15 August, 2007 11 ‘ONGC VL eyes Transmeridian’s oilfield in Kazakhstan’, The Hindu Business Line, 24 July 2007. 12 'New kid on the block', Petroleum Economist, July 2007. 13 ‘Kazakhstan demands leading role in vast Kashagan field’, AFP, 6 September 2007. See also 'China pays dearly for oil and goodwill in Kazakhstan', Petroleum Review, 17 July 2006. 14 Chinese Sinopec Failed a Deal with Sonangol to Build a Refinery in Angola, Angola News, 12 March, 2007. For more examples of Chinese companies coming to terms with African political realities, see 'China in Africa: A Mixed Blessing?', Alex Vines, Current History, May 2007.

9 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007. from the Ogaden National Liberation Front (ONLF) killed 65 Ethiopians and 9 Chinese workers and kidnapped seven Chinese who were later released after negotiations involving the Chinese and Ethiopian governments.

ZPEB is contracted to PETRONAS to work on the Ogaden and Gambella exploration blocks. This region has been subject to a long running insurgency by the ONLF which seeks greater autonomy for the region. Afterwards, an ONLF spokesman told the BBC "We have warned the Chinese government and the Ethiopian government that... they don't have a right to drill there". 15 However, it has also been suggested that factional differences between the ONLF leaders and some of those guarding the ZPEB facilities could have sparked the attack. In either case, it is an example of the vulnerability of Asian oil and gas companies to embroilment in local conflicts as has variously been the case for western companies abroad. This vulnerability was emphasized again in October when a Chinese-run oil field in the Kordofan region of Sudan was attacked by a Darfur rebel group who kidnapped two foreign oil workers. The group claimed that they were sending a message to "Chinese companies in particular".16

Ethiopia offers some of the rare significant exploration and development acreage left for new investors. While its uncertain prospects and political problems have deterred western companies, China, India and Malaysia are all demonstrating long term commitment in their investments there. China was reportedly Ethiopia’s largest trading partner in 2006 and Chinese firms have invested more than $70 million in the country. In July 2007, India and Ethiopia signed five pacts to intensify their relations during the 4 day visit of India's External Affairs Minister. Addis Ababa reiterated its strong support of India's bid for a permanent seat in the UN Security Council. In August, PETRONAS went through with a major deal it had been negotiating for over a year with the Ethiopian authorities. It acquired development rights and a PSC for a gas field in the Ogaden, close to the two exploration blocks that it already holds. PETRONAS also plans to build a gas processing plant and to construct a gas pipeline that stretches from the gas fields to a seaport - most likely in Djibouti.

Workers welfare and company practice The Ogaden tragedy is likely to strike a chord in China. With roughly 675,000 Chinese working overseas at the end of last year and several cases of Chinese workers being mistreated or coming into conflict with the local population, the Chinese Governments are showing growing concern for their welfare. 17 In 2006, the Chinese Ministry of Commerce passed new regulations to protect the rights of overseas Chinese workers and defining better practice for companies and their employees 'in the national interest'. "Regulations urge companies to practice "localization" such as hiring local workers, respecting local customs, and adhering to African and international safety standards". 18

15 'Scores die in Ethiopia oil attack', BBC, 24 April 2007. See also 'Ethiopia signs Ogaden gas deal with PETRONAS', Reuters, 13 Aug 2007. 16 'Darfur Rebels Attack Oil Field, Warn Chinese to Leave Sudan', Associated Press, 26 October 2007 17 'Government vows to protect citizens overseas’, China Daily, 1 September 2007. 18 Quoted from 'The Tenuous Hold of China Inc. in Africa', Bates Gill and James Reilly, The Washington Quarterly, Summer 2007 which draws on two sources in Chinese: "Zhongguo qiye jingwai shangwu touxi fuwu zanxing banfa” [Provisional measures for Chinese overseas commercial enterprises invested in service sector], Regulation no. 16, 2006 (August 24, 2006). For the reasons behind the new regulations, see 'Policy Explanations', April 4, 2006, http://hzs.mofcom.gov.cn/aarticle/bk/200605/20060502146224. html.

10 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Corporate responsibility schemes There has been an increase in the attention given to corporate responsibility schemes in ANOC web pages and annual reports this year. In Feb 2007, CNPC reached an accord to support social services in Sudan with a $1m donation and an additional $900,000 for professional training in the petroleum sector. The CNPC website claims that the Chinese NOCs have, since their first investment in Sudan in 1996, paid for social projects totalling $30m. 19 According to the US DoE, this includes "schools, hospitals, bridges and other social/economic infrastructure…". 20 In June 2007, ONGC filed its communication on progress on the Global Compact although there is little detail and the major initiatives listed make no mention of specific projects for overseas communities. In November, India hosted a high-level conference on India-Africa hydrocarbons cooperation in which ministers emphasized India's commitment to helping build industry capacity in host countries. 21 PETRONAS Group released its first sustainability report in 2007, which also mentions several international community programmes including a socio-economic programme carried out with Save the Children USA in Myanmar and various educational and skills training initiatives in Egypt, Indonesia, Pakistan, Sudan and Turkmenistan 22

NOC-NOC cooperation Having acquired 1.1 bn worth of Rosneft stock last summer, PETRONAS strengthened its ties with Russia's other major national oil company, Gazprom, with whom it is already partnered in Iran's South Pars field. Gazprom's deputy CEO visited Kuala Lumpur in June where he signed an MOU with the Malaysian NOC to cooperate on projects worldwide. The agreement focuses on gas infrastructure and the development of scientific and technical interaction in gas prospecting, production, transportation, delivery, and storage. 23 In September, CNPC reached a similar MOU with Lukoil, based on cooperation on oil and gas production abroad and supply of hydrocarbons to China. CNPC-Rosneft cooperation in the form of joint venture company, Vostok Energy Ltd, paid off in August, when the company won licenses to explore for oil and gas in two blocks in eastern Siberia.

China continues to develop mutual investment ties with producer NOCs. Following last February's deal between Sinopec, Saudi Aramco and ExxonMobil to develop the Fujian Refining and Ethylene Project, Saudi Aramco looks set to gain a 25% share in the 200,000 barrels per day (b/d) Qingdao refinery. As with the Fujian project, the Qingdao refinery agreement is likely to specify Saudi Aramco as the main crude supplier.

Sinopec has a new chairman, Su Shulin, a 45 year-old former vice president of PetroChina. 24 This seems to have kick started a push into bigger projects in China

19 'CNPC donates US$1.9 million to Sudan', CNPC website, 2 February 2007. Available at: http://www.cnpc.com.cn/eng/press/newsreleases/CSR/eb993619-1d1d-47e2-bda2- 01f2dac32099.htm (checked 14/08/07). 20 U.S. Department of Energy, 'Energy Policy Act 2005, Section 1837: National Security Review of International Energy Requirements (China)', February 2006, no. 34. As referred to in National Oil Companies and Corporate Citizenship: A survey of transnational policy and practice", Matthew E. Chen, James A. Baker III Institute for Public Policy, Rice University, March 2007. 21 'India turns its energies on Africa', Asia Times Online, November 10 2007 22 http://www.petronas.com.my/internet/corp/centralrep2.nsf/f0d5fd0d9c25fbdd48256ae90025 ee04/5d68e07aaf04ba814825731e00041b8c/$FILE/Sustainability%20-%202007-8.pdf 23 'Gazprom, PETRONAS to develop joint projects', New Europe, 14 June 2007 - Issue: 734. 24 Su Shulin’s CV, Sinopec website ( http://english.sinopec.com/en-company/en- board/4858.shtml ). See also ‘Sinopec Shareholders Elect Su to Hasten Oil Search’, Bloomberg, 10 August 2007.

11 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007. and there are rumours the new chair will increase Sinopec's development in the upstream business.

Opportunities for western companies in China China is offering more opportunities to majors who can offer share technical expertise with national companies on difficult areas. One such transaction took place in August with Chevron which will cooperate with PetroChina on the Luojiazhai gas field. This is the third natural gas development project for PetroChina with foreign partners and follows on from last year’s deal with Total to explore the Sulige gas field in Inner Mongolia. Commercial production from PetroChina’s joint development with Shell of the Changbei gas field also in this area began in March 2007.

In the same month, Houston’s Newfield Exploration Co. signed oil production sharing contracts with CNOOC to explore two blocks in the South China Sea. This showed the eagerness to invest in China in spite of apparently unfavourable terms. Both agreements call for foreign partners to pay all exploration costs while CNOOC will receive up to a 51% stake in any future commercial discoveries and China recently introduced a 5% tax on crude oil exports by foreign companies 25

Further investment opportunities for western oil majors have been created by private Chinese downstream and distribution companies’ inability to compete with their state- owned rivals. Without being able to secure reliable supplies of oil and gas from state oil majors, their number has declined dramatically from 3,440 in 1998 to 300 in 2006. With as much as 80 percent of private fuel storage facilities now being empty, the Chinese Government this month began considering a request from these private oil companies to guarantee to supply them with between 10 and 20 million tons of fuel annually. In addition, representatives from 90 private companies have reportedly regrouped their assets as, in an attempt to sell them to foreign oil companies. 26

Western oil majors may be confined to these smaller acquisitions after a recent attachment to new anti-monopoly laws was passed in August declaring that foreign investments affecting China’s national security will undergo a state security review. This appears to come in retaliation to the US's defensive position on Chinese foreign investment.

Western producers In Canada and Australia, governments are encouraging Chinese investment by engaging directly with the Chinese government and NOCs. In both countries, national private companies clinched deals with Chinese NOCs following high-level governmental meetings. In June, following two years of talks with the Canadian government and local companies, CNPC became the first Chinese firm to take a controlling stake in a Canadian oil sands project. It secured exploration rights to 11 sections of Alberta’s oil sands which may eventually yield 220,000b/d of crude oil.27 Despite the high extraction costs, CNPC reportedly believes the venture is viable as long as crude prices are above $30 per barrel.

25 'CNOOC parent signs production sharing deals with Newfield over China oil blocks', Forbes, 14 August 2007 and “CNOOC, Newfield sign partnership to explore South China Sea”, Resource Investor, 16 August 2007. 26 'China’s private oil companies sell “packaged assets” to foreign buyers', Xinhua News Agency, 20 June 2007. 27 An un-named CNPC official quoted in ‘CNPC wins oil sands rights in Canada’, Shanghai Daily, 30 June 2007.

12 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Australian and Chinese companies signed several mineral deals in Sydney ahead of the Asia-Pacific Economic Cooperation (APEC) meeting in September 2007. PetroChina signed a 15-20 year potential gas-supply deal with Australia's Woodside Petroleum Ltd which is set to begin 2013-15 and has an estimated value of between $28-37 billion. Australia's Prime Minister John Howard and China's President Hu Jintao were both present as Woodside CEO and CNPC Vice President, on behalf of PetroChina, signed the contract. CNOOC, which already imports 3.3 million tonnes of LNG a year from the North West Shelf, is expected to finalise a further gas agreement with Australia's Gorgon LNG to import fuel from the largest known gas field in Australia. CNOOC also won a bid to drill 5 exploratory oil wells off Australia's North coast in August.

Part II: International approaches to Asian demand and investment and Asian Responses

International responses to Asian energy needs

Energy cooperation Like the Asian consumers, Western governments are seeking ways to alleviate or forestall the strategic vulnerability and constraints on foreign policy that dependency on foreign oil brings. Naturally, their worries are compounded by the rise of Asian demand. 28 One way to address this is to assuage the insecurity of Asian consumer countries by including them in multilateral energy security dialogue. For example, the stated priority of the new Executive Director of the International Energy Agency (IEA), Nobuo Tanaka, is to bring in China and India. As China's imports alone are predicted to exceed those of all OECD countries put together by 2015, he believes the institution will become irrelevant without them. 29

Bilateral initiatives to moderate demand are also being pursued. One is increased cooperation with Asian consumer governments such as the US-China Strategic Economic Dialogue. This encompasses US assistance in developing coal bed methane resources, the joint development of non-grain bio fuels and an MOU on energy efficiency product endorsement labelling. A further Joint Economic Study plans to evaluate policy options for controlling emissions from the Chinese and US power sectors.

The US continues to cooperate with China and India on nuclear energy. In the last couple of years, it has agreed a civilian nuclear cooperation pact with India, which aims to give it access to U.S. fuel and reactors and has supported the sale of nuclear power reactors to China. Since then, China has expressed interest in fully participating in the U.S. Global Nuclear Energy Partnership (GNEP) including joining the International forum for the development of Generation IV (GIF) nuclear reactors that would be more efficient and less waste-intensive than existing models.

There are also promising signs of EU-China energy cooperation particularly with regard to improved energy efficiency. Following the Joint Declaration on Climate Change between China and the EU, a memorandum of understanding was signed in

28 For example, see: ’US-China Relations: An Affirmative Agenda, A Responsible Course’ Report of an Independent Task Force. Council on Foreign Relations. 2007 and National Security, Consequences of US Oil Dependency’ Council on Foreign Relations. Independent task force report no 58. 29 'IEA must do more to engage China, India, says next chief', Agence France Press, 5 January 2007.

13 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

February 2006 for cooperating on carbon capture and storage technologies. Chinese policy makers are equally keen to learn from the experience of western countries in reducing oil and gas consumption and have recently sent teams of researchers to study the impact of various policies. Chatham House is currently working with Chinese and European research institutions and EU government advisers to lever the combined market power of China and the EU to help meet bilateral (and global) energy and climate security goals in the next quarter century. 30

Ethical concerns

Iran sanctions Washington has continued to call for a stronger international stance over Tehran’s nuclear program and is currently trying to strengthen its own sanctions. If passed, the new Iran Counter-Proliferation Bill would be much tougher than the current one on European energy companies investing in Iran.

Inspired by the success of the Sudan-Darfur divestment campaign (see below), the American Israel Public Affairs Committee (AIPAC), has begun an Iran divestment campaign of its own, lobbying for specific legislation in US states where public employee pension funds hold stock in firms with ties to Iran.

The EU does not have a coherent policy. While the French Foreign Ministry wants Europe to take a harder line on Iran, this has not yet been replicated by fellow EU members. French foreign minister Bernard Kouchner has sent a strong message to energy companies, Total and Gaz de France, asking them not to bid for Iranian projects. Austria, the UK, Italy and Spain however, appear to support current and proposed investments by OMV, Royal Dutch Shell, ENI and Repsol. Should key EU countries agree to sanctions against Iran, Asian companies may benefit by snapping up the increased opportunities. 31 On the other hand, this could cause increasing problems for Asian NOC investments in Europe.

Darfur campaigns Over the last few months, several NGO movements have tried to link the 2008 Beijing Olympic Games and the Darfur humanitarian crisis. Some are calling for a boycott of the Games while others are using the international exposure that the Games gives China to ask the government to exert more influence on the government of Sudan, both directly and through the UN. The publicly traded subsidiaries of Chinese NOCs are also in the firing line. A divestment campaign is targeting American investment funds which invest in companies doing business with Sudan. This includes CNPC’s 10% publicly traded arm, PetroChina although it is the wholly government owned parent company, CNPC, which officially holds the Sudan operations.

We should note, however, the difference in logic between these initiatives. The one that wants companies to withdraw their investments from Sudan is at odds with those who want the Chinese to exert influence over the government of Sudan for China has influence precisely because of its large investments there.

Chinese engagement The Chinese government responded to international concern about the situation in Darfur in several unexpected ways over the summer. In addition to international

30 For more details, see 'EU-China Interdependencies on Energy and Climate Security', http://www.chathamhouse.org.uk/research/eedp/current_projects/eu-china/ 31 'EU partners fail to back France on Iran investment', Reuters, 21 September 2007.

14 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007. diplomatic engagement, China appointed a Special Representative of the Chinese Government on Darfur and African issues ( Liu Guijin) in May and government officials met with lobby groups such as Save Darfur. 32 Of the results so far, Chinese diplomacy was instrumental in persuading the Sudanese Government to accept July's UN Security Council resolution 1769 to authorize a 26,000-member military and hybrid civilian peacekeeping operation. China already has troops on the U.N. peacekeeping mission in southern Sudan and plans to send more to the Darfur hybrid operation and continue to provide practical humanitarian assistance and development aid to Darfur. 33

International reconciliation Noting the impact of Asian investment in recalcitrant states, Western governments are reassessing the impact of economic sanctions and considering engagement. One such alternative is to seek the collaboration of key investors as mediators. China in particular is being called upon to exercise its influence. China's interest in having stable trading partners and harmony between its workers and local communities in host countries could dovetail with the West's push for better domestic governance. Indeed there have been several recent attempts to engage China as a conduit to regimes over whom the rest of the world has scant influence or communication. This role not only offers China the chance to ameliorate relations with Washington, but also to increase its weight on the international scene.

North Korea's moves towards disarmament came as a result of Chinese diplomacy and the US is clearly hoping that China will also be the middleman in bringing about reform in Myanmar. US President George Bush met with his Chinese counterpart, Hu Jintao, during the recent APEC summit in Sydney and listed Iran, North Korea and Sudan's Darfur region amongst the subjects they had discussed. Bush also used public opportunities to convey a message to China and the other Asian states investing in Myanmar in the wake of the junta's repression of peaceful demonstrators. In response to this, Chinese foreign ministry spokesman, Liu Jianchao, told reporters "China is willing to strengthen its communication and dialogue with all the relevant sides, including the United States". 34 Other states who form part of the Association of South East Asian Nations (ASEAN), are also trying to enlist the help of China on what they view as their problem member.

The desire for stability in Myanmar was evident in June, when China hosted an unusual low-key meeting between senior US State Department officials and Burmese ministers in Beijing. Following an emergency meeting in which the Burmese Foreign Minister discussed the recent rioting with the Chinese State Councillor in September, Xinhua reported the Councillor as saying: “China whole-heartedly hopes that Myanmar will push forward a democracy process that is appropriate for the country.” 35

32 ‘Beijing lobbies on Games’, The Hill, 7 May 2007. 33 'Press conference on Darfur by China', United Nations Department of Public Information (DPI), 11 September 2007. Accessed 20/09/07 http://www.reliefweb.int/rw/RWB.NSF/db900SID/EKOI-76Y33Z?OpenDocument 34 'APEC: Bush and Putin Seek to Engage Asia', Associated Press, 7 September 2007. 35 'China urges Myanmar to pursue "democracy process"', Reuters, 14 September 2007. For an interesting discussion of the differing policies of China and India towards Myanmar, see 'Burma: On the Brink of Implosion', Kerry Brown and Gareth Price, The World Today (Chatham House), Volume 63, Number 1, November 2007.

15 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

16 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Appendix 1: ANOC data updated a) Company Financials 2005-2006

Annual Revenues (US$m) Net Profit (US$m) % change on % change on Company 2006 2005/6 2006 2005/6 CNPC 500.71 14.91 264.26 -46.58 CNOOC 11,407.17 32.49 3,966.27 26.35 Sinopec Corp. 138,044.66 33.74 6,497.47 32.50 PetroChina 88,358.94 29.08 19,159.62 10.68 PETRONAS 50,984.00 14.8 14,446.00 13.60 ONGC * 13,595.04 22.71 3,601.00 11.35 ONGC Videsh * 659.18 242.30 Oil India Limited * 1,382.99 2.23 377.53 -0.31 IOC * 48,611.53 23.89 1,882.89 64.23 GAIL * 3,953.89 14.82 581.34 7.03 JOGMEC 1,691.79 5.85 INPEX 898.42 JAPEX 176.16 2.71 KNOC 976.86 4.21 197.05 -28.04 * Year ended March 2007. All other data is quoted for year ended December 2006.

17 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

b) ANOC’s Oil and Natural Gas Production and Reserve Values 2006

Production values for 2006 Proven Reserves for 2006 Crude Oil Natural Gas Natural Gas Company (mb/d) (mboe/d) Crude Oil (mb) (mboe) CNOOC 0.37 0.09 1489.80 1121.69 CNPC 183.70 15.66 INPEX 0.18 0.14 JAPEX 0.02 0.02 Oil India Limited* 0.06 0.04 227.98 0.22 ONGC (Consolidated)* 0.56 0.43 PETRONAS* 0.75 0.96 7907.40 18582.70 PetroChina 2.28 0.68 11618.00 9624.46 Sinopec Corp. 0.78 0.13 3295.00 514.21 * Year ended March 2007. All other data is quoted for year ended December 2006.

18 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Appendix 2: Recent ANOC investments abroad

Country Company Aquisition Investment/ additional information Partners Date Australia CNOOC Offshore exploration of the CNOOC will initially invest AU$81.3m to conduct 3-D Aug- Bonaparte Basin of seismic survey and drill five wells. CNOOC also submitted 07 Western Australia. a tender for Phase II exploration on the oil field, with a projected investment of AU$80.8m. PetroChina LNG supply contract from 15-20yr accord starting 2013 and worth AU$35-45bn will Australia’s Woodside Aug- (CNPC) Browse project in Western supply China with 3 million metric tons Petroleum Ltd. and 07 Australia PetroChina PetroChina Purchase agreement for PetroChina paid AU$15bn for 1 million tons a year of LNG PetroChina and Royal Sept- (CNPC) Gorgon’s LNG in Western over 20 years. Dutch Shell 07 Australia Azerbaijan KNOC Shell's 20% of the INAM oil Estimated to hold about 2 billion barrels of probable oil State Oil Company of the Aug- exploration project reserves Azerbaijan Republic 07 (SOCAR) (50%), BP (25%), Shell (5%) Canada CNPC Exploration rights to Exploration rights to 11 sections for an area expected to Jun-07 Alberta oil sands yield 220,000 b/d. Chad CNPC Series of cooperative CNPC will construct the refinery to its design CNPC and Chadian Oil Sept- agreements on a refinery specifications and manufacturing standards. As part of Refinery 07 joint venture. the agreements China will provide a $257 million economic package that includes $92 million to build a cement factory, $24 million to finance a telecommunications project, $30 million to build a road network in the capital and $1.1 million to create an electronic records system for government. China will also provide humanitarian aid and anti-malarial medicines and build an anti-malaria centre. Colombia ONGC VL Exploration contracts for 3 ONGC VL will be the operator in deepwater Blocks RC- 8 Block RC – 9 and RC – Sept- offshore blocks and RC-10. 10: ONGC VL (50%); 07 Ecopetrol (50%) Block RC -8: ONGC VL (40%); Ecopetrol (40%); Petrobras (20%)

19 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Ethiopia PETRONA Kalub and Hilala, Ogaden US 80 million, following an international tender put up in PETRONAS (100%) July 07 S Basin, Somali Regional April 2006. PETRONAS reportedly plans to invest US 1.9 State (Gas development & billion on the entire gas project, including the processing PSA) plant and pipeline to the Djibouti or Somali coast.36 Kazakhstan CNPC Kenkiyak-Kumkol Pipeline Kaztransoil will issue $1bn of eurobonds to finance the CNDOC in partnership Aug- agreement project. The complete Atyrau-Kenkiyak-Kumkol-Atasu- with Kaztransoil. 07 Alashankou line will allow Caspaian crude to be shipped to China. Transit through the Kenkiyak-Kumkol section will come from 120,000b/d that CNPC-Aktobemunaigaz produces from Aktobe fields; and possibly the nearby 14,000b/d North Buzachi field and 45,000b/d Karazhanbas field. Libya ONGC VL Exploration and Production For the Contract Area 43, ONGC VL is to acquire new ONGC VL (100%) Mar-07 Sharing Agreement (EPSA) seismic data and drill one exploratory well during the for 4 offshore blocks in exploration phase of five years. Contract Area 43 Myanmar ONGC VL Deepwater exploration ONGC VL (100%) Sept- ONGC VL plans to spend US$150 million over the next blocks AD-2, AD-3 and AD- 07 seven years. 9 Russia CNPC Exploration licenses to CNPC-Rosneft joint Jul-07 Vostok Energy paid $46.1 million. The fields' forecast oil explore for oil and gas in venture company, Vostok reserves are estimated at 30 million tonnes (220mb) and two blocks in eastern Energy Ltd. 50 million tonnes (367mb), respectively. Their gas Siberia reserves are preliminarily estimated at 15 billion cubic metres and 90 bcm. Sudan CNPC Six year exploration Initial exploration investment of $25 million in the first CNPC (40%); Pertamina June agreement for Block 13 in three years (unconfirmed source) (15%); Sudapet (15%); 07 the Red Sea Express (10%); Africa Energy (10%); Dindir Petroleum International (10%)

36 'PETRONAS Starts Drilling Oil Exploration Well', The Reporter (Addis Ababa), 10 March 2007.

20 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

Turkmenistan CNPC Exploration and production CNPC will receive US$151 million to perform 12 Government of May contract for the Gunorta exploration drills over three years. Turkmenistan; CNPC 07 Eloten field. CNPC Production sharing 1.7 trillion cubic meters of natural gas will be transported CNPC, The State Agency July- agreement and gas sales to China through the planned Central Asia Gas pipeline for Management and Use 07 and purchase agreement agreed to be built by China and Turkmenistan by 2009 of Hydrocarbon Resources for the Bagtyyarlyk territory (see below). and Turkmengas of the Amu Darya River right shore PetroChina Central Asia Gas Pipeline Pipeline is expected to transport 30 billion cubic meters of CNPC, The State Agency Aug- (CNPC) Transport Agreement gas per year for 30 years. Originating in Turkmenistan it for Management and Use 07 will pass through Uzbekistan, Kazakhstan, Erdos, Urumqi, of Hydrocarbon Resources Lanzhou, Xian, Shanghai and Guangzhou and Turkmengas OMEL 30% participating interest OMEL 30%; Wintershall Oct- (PI) in exploratory Block 34%; Maersk Oil 36% 07 11-12, offshore Caspian Sea

21 Trends in National Oil Company Investment Abroad: An update, Chatham House Working Paper: November 2007.

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