The fallacy of 'China's foreign oil production'

By Dr Pierre Noël, Sultan Hassanal Bolkiah Senior Fellow for Economic and Energy Security

‘China is on track to produce enough crude oil outside its borders to rival OPEC members such as Kuwait and the United Arab Emirates,’ a report  in the Financial Times suggested last week. The contention was based on the International Energy Agency’s tally of the impact of recent overseas investments by Chinese state-owned oil firms. These have spent $92 billion buying up rivals since 2009, $35bn of that last year. With these acquisitions, the IEA calculates, China will produce 3 million barrels a day of crude oil abroad in 2015, double its 2011 output of 1.5mbd.

True, the growth of Chinese oil and gas companies’ foreign investments is impressive; they are not only bidding for exploration and production licences in more countries and regions, offshore and onshore, they are also devoting large capital expenditures to buying already discovered reserves and even entire groups such as Canada’s Nexen.

However, it makes little sense to aggregate Chinese oil companies’ international production and interpret it as ‘China’s production abroad’ like this.

Firstly, the growing production of Chinese oil companies abroad does not have any energy security value for China. The oil is sold by Chinese companies on the spot or term market (including to their own downstream affiliates) at prevailing world prices. Oil produced in Africa, Canada, Central Asia or Latin America ends up consumed where its market value is maximised, which may not be China. If it is consumed in China, as it is in some cases, it travels under the exact same conditions as any other crude oil, exposed to the same transport security risks. Chinese oil companies’ foreign production does not create any short-term supply flexibility that might alleviate the impact on China of any global supply disruption.

Moreover, however large Chinese companies’ production is – and 1.5mbd is only 1.6% of global output – it does not give China any degree of control over global oil production or the price of trade flows. When they operate in non-OPEC countries, oil companies (Chinese or otherwise) simply maximise production under the technical constraints of the fields. In OPEC countries, foreign upstream projects are ultimately governed by a quota system. The growth of Chinese companies’ international activities does not confer upon Beijing any degree of control over this, and it is pointless to suggest otherwise by noting that ‘China’s foreign oil output’ will soon equal that of Kuwait or the UAE.

Finally, aggregating Chinese companies’ foreign production distracts from much more important, qualitative questions. How do the business models and practices of Chinese companies evolve as they increase their international activities? What type of alliances and partnerships do they sign with Western oil companies, with what industrial logic? Where do they invest and in what type of assets? In short, are Chinese oil companies becoming ‘normal’ or do they constitute a sort of parallel industry, with specific norms and practices, operating in places where everybody else is frightened or forbidden to go?

I believe that there is a clear trend towards normalisation. If that is true, then talk of ‘China’s foreign oil output’ was never accurate and never will be so – even if it comes from the IEA.

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