Drive to tap into China demand spurs partnerships

CNOOC’s tie-up with Bridas of Argentina has an intriguing side-effect – it makes the Chinese group a partner of BP of the UK.

They will both have stakes in Pan American Energy, the Argentinian joint venture owned 60/40 by BP and Bridas.

The deal is the latest to set western companies working alongside China’s state-controlled oil groups.

Royal Dutch Shell has teamed up with PetroChina for a joint bid for Arrow Energy, the Australian gas company; Total of France is expected to work with CNOOC to develop Tullow Oil’s assets in Uganda; and BP has formed a partnership with China National Petroleum Corp to develop the giant Rumaila oil field in Iraq.

The circumstances of each deal are different. In Iraq, for example, where the projects are technically straightforward but have political and security risks, having a Chinese partner provides important benefits to BP. Samuel Ciszuk of IHS Global Insight says CNPC brings political clout because it is state owned, as well as a “skilled, cheap workforce and a willingness to invest in a low-margin project”.

Yet while these partnerships have a variety of motives, there is often a common ambition behind them – western companies hope to build on their respective relationships to secure greater access to the Chinese market.

The big international oil groups such as BP and Shell, Total, and Exxon-Mobil and Chevron of the US, face a fundamental problem: their core markets are in decline.

The International Energy Agency, the think-tank backed by developed countries, estimates that even without any new policy measures to raise fuel efficiency or encourage biofuels, US oil demand will fall by an average of 0.7 per cent per year between now and 2030.

In the rich countries of Europe, the expected decline is 0.4 per cent per year; in Japan it is 1.8 per cent per year.

Meanwhile, the latest IEA figures for monthly oil demand are a sharp reminder of the vigour of the Chinese market, showing an “astonishing” 28 per cent increase in apparent demand in January, pushing the US crude price over $82 per barrel for a time last Friday. The IEA expects China’s oil consumption to grow by an annual average of 3.3 per cent per year, assuming unchanged policies.

Faced by that outlook, western companies have few options. They are building up their businesses producing and delivering natural gas, for which developed country demand is still likely to grow.

They could concentrate on the “upstream” exploration and production side of their operations, already the largest and most profitable, and increasingly operate as suppliers to refiners and distributors in China and other emerging economies. However, their business model has for more than a century been based on integration: controlling the whole of the value chain from finding the oil to delivering the refined fuel to consumers.

Moving away from that risks exposing them to greater volatility in their earnings by making them even more dependent on the prices of oil and gas.

The big problem for western companies is working out what they have that China needs, given that it already has three successful and ambitious large oil groups of its own, in CNPC/PetroChina, Sinopec and CNOOC.

One possibility is technology, such as the skills to exploit China’s reserves of “unconventional” gas, which needs special techniques to be commercially viable. Another is access to oil and gas production.

The Chinese companies, in return, want to build up their oil and gas reserves; assets western companies can still offer. If western companies are to get more access to China, it is likely to be only in return for access to future production for the Chinese.