China’s oil juggernaut

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LONDON, United Kingdom — In 2005, China's state-run CNOOC oil company triggered a storm of protest in the United States by trying to purchase America's now-defunct Unocal Corporation. That $18.5 billion deal collapsed over U.S. security concerns.

Undeterred, CNOOC returned to the U.S. this year and, with relatively little fuss, made a $1.1 billion offer for a stake in 600,000 acres of southern Texas oil and gas fields.

The Texas acquisition is part of China’s staggering global fossil fuel investment spree this year, which has also seen it snap up concessions in Argentina, Canada and Africa. Just this week, Beijing-based Sinopec, Asia's biggest refiner, agreed to buy all of Occidental Petroleum's oil and gas assets in Argentina for $2.45 billion, bringing Chinese bids for overseas energy assets to a record $38.8 billion this year.

The amount of money spent and the communist country's quiet tenacity in seeking out new supplies, often in the face of local hostility, are a firm reminder that China is thirsty for oil, and getting thirstier by the day.

Thanks to a booming economy, China is now the planet's leading consumer of energy. The 2.25 billion tons of oil it guzzled last year easily surpassed America's 2.17 billion tons.

The Texas deal, seen as a possible precursor to further investment in the U.S., has yet to be approved. First, the Committee on Foreign Investment will decide whether CNOOC's investments in Iran contravene U.S. sanctions laws.

Reports, however, say the investment is unlikely to meet opposition.

To allay concerns, the state-run China Daily recently quoted Zhang Fan, an American studies researcher, saying the deal will "benefit both sides and should not be viewed as a threat to U.S. oil security."

But at a time of uncertainty over conflicts in the South China Sea and Korean peninsula, does China’s aggressive acquisition of the world's dwindling oil reserves pose a security threat to the United States and its allies?

“It is hard to overstate the growing importance of China in global energy," said Nobuo Tanaka, the executive director of the International Energy Agency, a key international oil security organization that China has refused to join.

"How [China] responds to the threats to global energy security and climate posed by rising fossil-fuel use will have far-reaching consequences for the rest of the world."

Chinese President Hu Jintao last year pledged to curb his country's fossil fuel consumption by seeking renewable energy and nuclear alternatives. That said, China still consumes far less oil per person than the United States.

Still, to fuel an economic expansion that stood at 10.3 percent in the last quarter, it must continue to secure new supplies. That means potentially siphoning off oil that otherwise would have been bound for the West.

Such demand is a double-edged sword, said Gal Luft, executive director of the Institute for the Analysis of Global Security, a Washington-based think tank.

"The growth of China has major implications for not only oil, but [for] coal, natural gas and many, many other resources," Luft said.

As far as supply is concerned, "These are not necessarily always negative implications: the Chinese are sometimes willing to invest in places that international oil companies otherwise would not be willing to invest in because of risk. So while they are a major driver in demand, they are also a major driver in supply, particularly in high risk areas."

China has certainly not shied away from oil fields in Nigeria, Sudan, Iraq and Angola — areas where the twin shadows of corruption and conflict have proved major headaches to international oil companies.

Even its foray into the United States is a gamble. Gas and oil locked in the shale of southern Texas is plentiful, but tricky to extract. Some analysts believe China's main interest in Texas is gaining expertise in this field.

Yet, said Luft, aside from the Texas venture, China's typical modus operandi in the oil world — buying whole operations rather than part-investing in joint ventures — points to a desire to control supply.

And, he said, as demand inevitably increases, this could manifest as ruthless economic policy in blithe contempt of regulatory bodies such as the World Trade Organization.

"If [the Chinese] need energy to grow, they will do anything they can to get this energy, whether it is in violation of WTO provisions — whatever it takes to get their energy. They are fully committed to economic growth."

John Mitchell, an energy expert at the U.K.'s Chatham House think tank, said any move by China to corner the oil market would only take place under extreme circumstances, such as major conflict.

Until then, he said, China's energy companies would likely play the same role on the global oil market as international majors Shell, BP or ExxonMobil, being ultimately beholden to the countries in which they are operating.

He said under normal circumstances, oil would "go where the market pays most."

"In the case of Chinese production in Angola and Sudan, it doesn't all go to China. They sell it where they can get the best price and import where they can get the cheapest price," Mitchell said.

When the going gets tough, said Mitchell, it will simply come down to politics, and China will have to maintain good relations with the countries it operates in to keep the oil on tap.

"The government of the producing country is sovereign, it has control over the industry, it can decide at the last resort where it wants it all to go and that's that."

And, he said, China's desire to get the best price possible should ensure that a scenario that defies free-market principles will remain a last-ditch option.

"Economics has a way of coming out. If [the Chinese] can meet their demand more cheaply by buying oil from Iraq for example and selling ... their own oil in the United States then I'm sure that's what they will do. They're not fools."