Chinese National Oil Companies PDF

OVERSEAS INVESTMENTS
BY CHINESE NATIONAL OIL COMPANIES

Assessing the drivers and impacts
INFORMATION PAPER
Julie Jiang and Jonathan Sinton
2011
February
OVERSEAS INVESTMENTS
BY CHINESE NATIONAL OIL COMPANIES
Assessing the drivers and impacts
INFORMATION PAPER
Julie Jiang and Jonathan Sinton
This information paper was prepared for the Standing Group for Global Energy Dialogue of the International Energy Agency
(IEA) in September 2010. It was drafted by Julie Jiang and Jonathan Sinton, Division for Asia, Latin America and sub-Saharan
Africa (DALSA), IEA. This paper reflects the views of the IEA Secretariat, but does not necessarily reflect those of individual
IEA member countries. For further information, please contact Ms. Jiang at: julie.jiang@iea.org
2011
February
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OECD/IEA2011
OverseasInvestmentsbyChinasNationalOilCompanies
TableofContents
Acknowledgements..........................................................................................................................5
1. Summary....................................................................................................................................7 Page|3
2. Background................................................................................................................................9
OriginofChinasNOCs...............................................................................................................9
Interests:WhyareChinasNOCsgoingabroad?.....................................................................10
Chinasoilandgasproductiondemandandsupply...........................................................10
Motivationsandstrategiesforoverseasinvestments.......................................................12
NOCsoverseasequityshares.............................................................................................17
ServicecontractsintheMiddleEast..................................................................................20
Longtermloanforoilandloanforgasdeals...................................................................22
OtherChineseinvestors.....................................................................................................23
3. ChineseNOCs:Stateinvested,notstaterun..........................................................................25
4. InvestinginTransnationalPipelines........................................................................................29
FromtheNorth........................................................................................................................29
FromtheWest.........................................................................................................................31
FromtheSouth........................................................................................................................34
DependenceontheMalaccaStrait.........................................................................................35
5. Conclusions..............................................................................................................................37
6. Annexes...................................................................................................................................39
1.Chineseforeignoilandgasacquisitiondealssince2002....................................................39
2.ChinasloansforlongtermoilandgassupplysignedsinceJanuary2009.........................41
3.Recentagreementsrequiringsubstantialfutureinvestmentin
theMiddleEastsince2008......................................................................................................42
4.ChinaslongtermLNGcontracts.........................................................................................43
AbbreviationsandAcronyms.........................................................................................................45
References......................................................................................................................................47
Listoffigures
Figure1:Chinascontributiontooildemandgrowth,201015,kb/d............................................11
Figure2:LongtermoutlookforChinasoilproductionandimports.............................................11
Figure3:Chinascrudeimportbyregion,2009andfirsthalfof2010...........................................12
Figure4:EstimatedChineseshareofoverseasequityinoilexportingcountries,Q12010...........18
Figure5:CentralAsiaoilnetwork...................................................................................................19
OECD/IEA2011
Figure6:Incrementalchangeincrudeproductioncapacity,2009to2015...................................21
Figure7:SinoRussianloanforoildealstructure...........................................................................22
Figure8:RelationsbetweenstateownedenterprisesandgovernmentinChina.........................25
Figure9:CurrentandfutureroutesforChinasoilandnaturalgasimports..................................30
Page|4
Figure10:CentralAsiagasnetwork................................................................................................33
Listoftables
Table1:ChinasNOCsinnumbers....................................................................................................9
Table2:NOCsmotivationsandstrategies......................................................................................13
Table3:Downstreamcooperationwithcompaniesfromresourcerichcountries......................15
OECD/IEA2011
Acknowledgements
TheauthorswouldliketothanktheircolleaguesattheIEAforadvice,contributions,andreviews
throughoutthepreparationofthispaper.DavidFyfewasinstrumentalindesigningtheresearch
questions and approach, and his team, particularly Julius Walker and Diane Munro, provided Page|5
essential data and technical support. AnneSophie Corbeau provided technical support on gas.
Support and direction was generously given throughout by Richard Jones, Ulrich Benterbusch,
Didier Houssin, Osamu Yamanaka, Doug Cooke, and Ann Eggington. Other colleagues whose
contributionswereessentialincludeTorilBosoni,AndrewWilson,EduardoLopez,EstherHa,Ian
Cronshaw, Akihiro Tonai, Brett Jacobs, Tim Gould, Isabel Murray, Christopher Segar, Ghislaine
Kieffer, SunJoo Ahn, Sally Wilkinson, Daniela Niethammer, William Alleix, Dennis Best, Julie
Calvert,MichaelChen,JohnCorbenandPawelOlejarnik.RebeccaGaghenandherteamhelped
design, edit and publish this paper: Bertrand Sadin and Corinne Hayworth, who designed the
mapsandthecoverpage,MarilynSmith,MurielCustodio,AnneMayne,DelphineGrandrieuxand
MadeleineBarry.
WearealsogratefultonumerouscolleaguesoutsidetheIEAwhocontributedtheirvaluabletime
and input, including Xu Xiaojie (Chinese Academy of Social Sciences); Jiang Xuefeng and other
staff of the CNPC Economics and Technology Research Institute; Han Wenke, Liu Xiaoli, Gao
Shixian, Yang Yufeng and Jiang Xiaoqiang (Energy Research Institute); Erica Downs (Brookings
Institution);TrevorHouser(RhodiumGroup);AkhanMukhanov;JohnSeaman(IFRI);LiuLi(State
Information Center); David Kirsch and Claire Wong (PFC Energy); Shahriar Fesharaki, Wu Kang,
WangLijuan,ZhangLiutongandJeffBrown(FACTSGlobalEnergy);LaurentChevalierandMaXin
(TOTAL), Xavier Chen (BP China); Tom Miles and Chen Aizhu (Thomson Reuters, Beijing); Zhang
Xin(ChinaCouncilforthePromotionofInternationalTrade);AndrewShaw(USEmbassy,China);
Tommy Flakk (Norwegian Embassy, Beijing); Norman Valentine, Tom Ellacott and Sophie Lee
CamaxofWoodMackenzieCorporateService;andothercolleagueswishtoremainanonymous.
Whilethispaperwouldnotbepossiblewithoutthesecolleagues,theviewsexpressedhereinand
responsibilityforallerrorsoffactbelongtotheauthors.
OECD/IEA2011
1. Summary
MuchcommentaryregardingtheoverseasactivityofChinasnationaloilcompanies(NOCs)has
presumedthatthefirmsareactingunderinstructionsandinclosecoordinationwiththeChinese
government.SomeexpertshavealsoexpressedconcernsthattheactivitiesofNOCscouldresult
inreducedandmoreexpensivesuppliestootheroilimportingnations.TheIEAhascarriedout Page|7
an assessment based on original research and secondary sources which finds the relationship
betweentheChinesegovernmentandtheNOCsiscomplexwithoftendivergentinterests.While
Chinas NOCs are majorityowned by the government (domestic and overseas private
shareholdersownminoritystakesforpubliclylistedsubsidiaries),theyarenotgovernmentrun.
Their observed behaviour is the result of a complex interplay between individuals and groups
associated with the firms, and whose interests are not always aligned, and where commercial
incentiveisthemaindriver.
Despitesomeinstancesofcoordination,thereseemstobeahighdegreeofindependenceofthe
NOCsfromgovernment,andsometimesofsubsidiariesoftheNOCsfromtheirheadquarters.Our
analysisindicatesthat,notwithstandingthetendencyoftheNOCs,indomesticcommunications,
tocasttheiroverseasactivitiesintermsofsupportfornationalenergysecurityobjectives,their
actions appear mainly to be driven by commercial incentives to take advantage of available
opportunities in the global marketplace. This independent, commercially driven behaviour is
particularly pronounced in upstream investments and operations, while policy drivers seem to
playalargerroleinsome,thoughnotall,transport(pipeline)projects.Theirinvestmentshave,
for the most part, helped to increase global supplies of oil and gas via the same international
marketthatotherimportersrelyon.
Inrecentyears,thethreemajorChineseNOCsChinaNationalPetroleumCorporation(CNPC),
ChinaPetroleum&ChemicalCorporation(Sinopec)andChinaNationalOffshoreOilCorporation
(CNOOC)havebeenlearningagreatdealaboutdoingbusinessabroad,andhaveemergedas
significant players in global mergers and acquisitions in upstream oil and natural gas. The
USD18.2 billion spent on merger and acquisition (M&A) deals by Chinese companies in 2009
accounted for 13% of total global oil and gas acquisitions (USD 144 billion), and for 61% of all
acquisitions bynationaloilcompanies (USD30billion;CNPCResearchInstituteofEconomics&
Technology,2010).In2010,ChinesecompaniesspentUSD29.39billionapproximatelyagainwith
morethanhalfinvestedinLatinAmerican(USD15.74billion)(seeAnnexes,1.Chineseforeignoil
andgasacquisitiondealssince2002).Suchalevelofactivityshouldnotbesurprising;in2009,
when world oil demand fell 1.24 million barrels per day (mb/d), Chinas rose by 0.7mb/d.
Similarly,whileworldgasdemandfellby2%,Chinasgasdemandincreasedby11%.Asdomestic
productionisatornearitspeak,virtuallyeveryincrementalbarrelorcubic meterofoil orgas
consumedmustbeimported.
According to IEA data, successful acquisitions allowed Chinas NOCs to expand their overseas
equitysharesfrom1.1mb/din2009to1.36mb/dinthefirstquarterof2010;forcomparison,
Chinasdomesticproductionin2009was4.0mb/d.Chineseoilcompaniesarenowoperatingin
31countriesandhaveequityproductionin20ofthesecountries,thoughtheirequitysharesare
mostly located in four countries: Kazakhstan, Sudan, Venezuela and Angola. No evidence
suggests that the Chinese government currently imposes a quota on the NOCs regarding the
amountoftheirequityoilthattheymustshiptoChina.Decisionsaboutthemarketingofequity
oilwheretheChinesecompanyhascontroloverthedispositionofitsshareofproduction
are mainly based on commercial considerations, in some cases, carried out by marketing
subsidiarieslocatedoutsidetheheadquartersoftheNOCs.
OECD/IEA2011
TheChineseNOCssubstantialinvestmentsandpursuitofservicecontractsandloanstoresource
rich countries have contributed and will continue to contribute to global upstream investment
and global oil supply. For instance, Chinas NOCs are working together with international oil
companies (IOCs) and NOCs from other countries to increase crude production in Iraq. Their
investments are also contributing to development of oil and gas fields in Russia, Central Asia,
Page|8 LatinAmericaandAfrica.
In addition to the upstream supply activity, Chinese NOCs are investing in transnational oil
pipelines in North, Central and Southeast Asia, adding new dimensions to the market and
political dynamics of these regions while enhancing economic development. While these
pipelineswillhelptodiversifysupplies,ChinawillcontinuetorelyontheStraitofMalaccaforthe
majority of its energy imports from Africa and the Middle East; 77% of total Chinas total oil
importscurrentlyarebroughtinviathisshippinglane,andthatcoulddropto54%,evenasthe
volumeshippedthroughtheStraitcontinuestorise.Chinaisalsoinvestingingaspipelinesfrom
Central Asia (Turkmenistan) and Myanmar, and is envisaging gas pipelines from Russia.
Meanwhile,ChineseNOCshavebeentryingtosecurenewliquefiednaturalgas(LNG)supplies.
LNGimportsfromQatarwillalsobetransitedthroughtheStrait,butnotthosefromAustralia.
Based on IEA research, this report examines the Chinese NOCs to assess their motivations and
the strategies applied to expand overseas, and the fragmented, decentralised, and evolving
relationshipbetweentheNOCsandtheChinesegovernment.Itprovidesdetailedinformationon
NOCsoverseasacquisitionsandlongtermserviceandsupplycontracts,focusingondealssince
thebeginningof2009.ThepaperassessestherelationshipbetweenNOCsandotherplayersin
theChinesepoliticalsystem.ThepaperthentakesuptheregionalimpactofNOCsinvestmentsin
transnational pipelines and explores whether these investments could reduce Chinas
dependencyonimportsthroughtheStraitofMalacca.
There are many questions concerning the behaviour of Chinas NOCs, but data availability and
resourcelimitationsconfinethepresentanalysistoasubsetofthem.Topicsnotcoveredinclude,
for instance, degree of transparency of NOCs overseas deals, and the impact on governance in
nationsthatreceivetheinvestments.Despitetheserestrictions,everyefforthasbeenmadeto
provideabalancedandobjectiveperspectiveonthesubject.
OECD/IEA2011
2. Background
OriginofChinasNOCs
ChinasNOCsareamongtheworldslargestcompanies(Table1).In2009,atatimewhenmost Page|9
international oil companies cut back on their investment spending, Chinese NOCs, along with
otherChinesecompanies,investedin10overseasacquisitionsforatotalofUSD18.2billon.In
thesameyear,Chinaimportedjustunderfourmillionbarrelsperday(mb/d)ofcrudeoil,up14%
from2008,andthefirstyearthatChinaimportedmorethanhalf(51.3%accordingtoIEAdata)of
its crude oil consumption. China started to import LNG only in 2006, and began importing
pipeline gas in early 2010. To many Chinese policy makers and scholars, this dependence on
importedenergyisaharshrealitytheymustface,andaspurtoaction.
Table1:ChinasNOCsinnumbers
Country
Global
ranking
CNPC
Revenue 2009
(USD million)
Profits 2009
(USD million)
Assets
(USD million)
Number of
employees
10
165 496
10 272
325 384
1 649 992
Sinopec
187 518
5 756
188 793
633 383
CNOOC
252
30 680
3 634
41 943
65 800
Sinochem
203
35 577
659
25 136
44 256
Sources:2010FortuneGlobal500ranking;companyannualreports.
TounderstandtheoverseasinvestmentstrategiesoftheChineseNOCs,onemustunderstandthe
originsoftheseenterprises.Infact,CNPC,SinopecandCNOOCshareacommonsetofparents:the
formerMinistryofPetroleumIndustryandtheformerMinistryofChemicalIndustry.Intheearly
1980s, the initial years of Chinas economic system reforms, the Chinese government decided to
converttheproductiveassetsoftheseandotherministriesintostateownedenterprises(SOEs).The
objectives were to introduce competition, promote economic efficiency and a wider share of
ownership,subjectSOEstomarketdiscipline,developanationalcapitalmarket,raisetaxrevenues
tothestateandreducegovernmentoutlays(Lewis,2007;Naughton,1996).
TheChinaNationalOilandNaturalGasCorporationwasformedoutoftheonshoreupstreamoil
and gas production assets. In 1998, it was incorporated as CNPC, the largest Chinese NOC, the
fifthlargest oil company in the world according to Petroleum Intelligence Weekly in 2009, and
rankedtenthinthe2010GlobalFortune500listing(Table1).Sinopec,thesecondlargestNOC,
wasgivenresponsibilityforalloilrefining,marketingandpetrochemicalmanufacturingcapacity,
andnowdominatesChinasdownstreammarket.Today,SinopecisthelargestChinesecompany
intermsofrevenue.Bycomparison,CNOOCisrelativelysmall,reflectingthecountryssmallassets
offshore,anewareaofactivityforChinathen.However,CNOOCsoonbecamethemostprofitable
oftheNOCs,inpartbecauseofitsfocusoncrudeoilandlackofexposuretothehighlycontrolled
domesticmarketforrefinedproducts.Itachievedanoperatingprofitmarginof34%in2008.
The three major NOCs were also geographically divided, with CNPC controlling northern China,
SinopectheSouth,andCNOOCdominatingoffshoreproduction.Theseboundarieshavegradually
blurredasmarketreformshavegiventhemthefreedomtomovebeyondtheirinitialfunctionaland
geographical areas. Nevertheless, CNPC still dominates pipeline construction and operation,
SinopecisbyfarthelargestrefinerandCNOOCstillspecialisesinoffshoreupstreamproduction.
OECD/IEA2011
From 2000 to 2001,all three NOCs created subsidiaries listed on Hong Kongsstock exchange, with
PetroChina (CNPCs listed company) raising USD 2.9 billion, Sinopec raising USD 3.5billion, and
CNOOCraising1.3billion.Today,theyarealsolistedontheNewYorkandShanghaistockexchanges.1
CNPC was the first of the Chinese NOCs to expand its operations overseas. In the early 1990s,
CNPC started to invest in Sudan, Peru and Kazakhstan despite the governments focus at that
Page|10 timeonselfrelianceandincreasingdomesticoiloutput.Theirpresenceinproducercountrieshas
beenmatchedbytheopeningofofficesdevotedtotrading,financeandothermarketactivityin
London,NewYorkandelsewhere.
Since the beginning of 2009, CNPC, Sinopec and CNOOC, along with other Chinese players, have
ramped up their overseas investment activities. From January 2009 to December 2010, these
companies,alongwithothersmallercompaniesfromChina,spentatleastUSD47.59billiontoacquire
oilandgasassetsaroundtheworld.ThetotalamountspentonM&AdealsbyChinesecompaniesin
2009wasUSD18.2billion,accountingfor13%oftotalglobalacquisitions(USD144billion),and61%of
allacquisitionsbynationaloilcompanies(USD30billion).In2010,ChinesecompaniesspentUSD29.39
billion approximately again with more than half invested in Latin American (USD 15.74 billion) (see
Annexes,1.Chineseforeignoilandgasacquisitiondealssince2002).2Sinopecwastheleaderamong
the three NOCs in 2010. It spent USD 7.1 billion to purchase 40% stake of Brazilian subsidiary of
SpanishoilcompanyRepsolandalsospentUSD4.7billiontopurchasea9.03%shareintheCanadian
oil sands company Syncrude; CNPCs publicly listed arm, PetroChina, joined with Shell to acquire a
100%stakeofAustraliancoalbedmethaneproducerArrowEnergy;andCNOOCbought50%ofthe
Argentineoilcompany,Bridas.CNPCalsopurchaseda35%stakeinShellssubsidiaryinSyriaforan
undisclosed amount. Sinochem and the sovereign wealth fund, the China Investment Corporation
(CIC),alsomadepurchases(seeAnnexes,1.Chineseforeignoilandgasacquisitiondealssince2002).
Inaddition,fromthebeginningof2009toDecember2010,CNPCandSinopecwereinvolvedin12loan
foroil dealswith nine countries worth estimated USD 77 billion (see Annexes, 2. Chinas loans for
longterm oil and gas supply signed since January 2009).Furthermore,theNOCshaveconcluded
contractsthatcommitthemtoinvestatleastUSD18billioninfutureexplorationanddevelopmentin
the Middle East, mostly in Iraq and Iran, from 2008 to mid2010 (see Annexes, 3. Recent
agreementsrequiringsubstantialfutureinvestmentintheMiddleEastsince2008).
Interests:WhyareChinasNOCsgoingabroad?
Chinasoilandgasproductiondemandandsupply
Chineseoilfieldsareaging,theirreservestoproductionratios(R/Pratio)arelow,anddomestic
oil production is nearing its peak. As a result, the country is almost entirely dependent on the
international oil market to meet incremental oil demand. China became a net oil importer in
1993. For the past 17 years, China has experienced strong economic growth, and recently
becamethesecondlargesteconomyintheworld.Evenduringtherecentfinancialandeconomic
crisis,Chinamanagedtoachieve8.7%GDPgrowthin2009,and10.3%in2010.
ItrequiresagreatamountofenergyintensiverawmaterialsandinfrastructuretosatisfyChinas
expanding consumer demand, as well as the rest of the worlds demand for Chinese
manufactured goods. This has stimulated output from heavy industry, which also received a
boostfromChinasrecentstimulusspendingonenergyintensiveinfrastructureandbuildings.
1
CNOOCisnotlistedontheShanghaistockexchange.
2
AccordingWoodMackenzie(2010),theM&AdealsofthethreeNOCsaccountedfornearly20%ofglobaldealsinthefirstquarterof2010.
OECD/IEA2011
Figure1:Chinascontributiontooildemandgrowth,201015,kb/d
2,000
60%
40%
20%
0%
-20%
-40%
-60%
-80%
-100%
1,500
1,000
500
(500)
(1,000)
(1,500)
Page|11
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Global Dem and Grow th
China
Source:IEAdataandanalysis.
The associated demand for fuel used to transport goods and to provide the growing fleets of
privatevehicles(Chinabecamethelargestautomarketintheworldin2009),aswellastherising
demand for petrochemical feedstocks, has kept upward pressure on oil consumption.3 Chinas
great hunger for energy, in particular its strong oil imports,4 contrasts with the recent fall in
demand exhibited by major industrialised countries, which were hit harder by the recession.
According to IEA research, almost half of global oil demand growth in the next five years will
come from China (Figure 1). Looking farther ahead, the scenarios in the IEAs World Energy
Outlook 2010 (IEA, 2010a) show China importing 79% of the oil it consumes by 2030, and
accountingforalargerincrementinoildemandthananyothercountry(Figure2).
Figure2:LongtermoutlookforChinasoilproductionandimports
Source:IEA(2010a).
Most of Chinas projected oil imports will continue to come from a small number of countries. In
2009,thetoptencrudeoilsupplierstoChina(inorderofimportvolumes)wereSaudiArabia,Angola,
Iran, Russia, Sudan, Oman, Iraq, Kuwait, Libya and Kazakhstan. As many other net oil importers,
3
Thiseffectcannotbeaccuratelyquantified,asanalystsmustrelyonestimatesofapparentdemandintheabsenceofcomprehensive
consumptionandinventorydata.
4
ArelativelysmallportionoftheincrementinoildemandwasduetofillingofthefirstphaseofChinasstrategicoilreserves.Lackof
publicdata,however,preventsallbutroughestimationofsuchflows.
OECD/IEA2011
especiallyinAsia,ChinareliesheavilyonsuppliersintheMiddleEastwith47%ofitstotalimports
in2009originatingfromthere(Figure3).Thathighdegreeofrelianceisunlikelytochange,even
though China has been diversifying supply to Africa, Central Asia, Latin America and Russia,
whereNOCsareseekingtoexpandtheirupstreamactivities.
Page|12
Figure3:Chinascrudeimportbyregion,2009andfirsthalfof2010
Source:XinhuaNewsAgency(2010).
According to the IEAs MediumTerm Oil and Gas Markets 2010 (MTOGM; IEA, 2010b), Chinas
gasmarketisoneofthefastestgrowingintheworld,withademandof87.5billioncubicmeters
(bcm) in 2009. It is expected to reach 200 bcm by 2015. China's natural gas production is
reportedtohavereached83bcmin2009.Inthefirsthalfof2010,Chinasgasdemandincreased
by 22% yearonyear, according to Chinas National Development and Reform Commission
(NDRC). The rest of the demand was satisfied through imports of LNG and the newly opened
Central Asian pipeline that will eventually bring around 40 bcm of gas5 from Turkmenistan and
possibly additional amounts from other countries. Reportedly, the draft Clean Energy
DevelopmentPlanbeingpreparedbytheNationalEnergyAdministration(NEA)callsfortheshare
of natural gas in Chinas energy mix to rise sharply, from 4% currently to 8.3 % by 2015. CNPC
estimatesthatgasdemandcouldreach230by2015,increasingto250bcmto340bcmby2020.
Even with vigorous exploitation of domestic onshore and offshore resources, including
unconventionalgas,muchofthedemandwillbemetbyimports.
Motivationsandstrategiesforoverseasinvestments
The NOCs most frequently cited objectives for investing internationally are to increase their oil
andgasreserves,toexpandproductionandtodiversifytheirsourcesofsupply.Thesegoalsare
nowsupportedatthehighestlevelsofgovernment;whentheStateCouncillevelNationalEnergy
Commission(NEC;authorisedin2008andformedinJanuary2010)metforthefirsttimeinApril
2010,securingenergysupplythroughinternationalcooperationwasdeclaredtobeoneofits
sixmajorareasoffocus.6ThisisthelatestexpressionoftheGoingAbroad(sometimesrendered
asGoingOut)policy.ThisconceptdominatesthenarrativeconcerningtheactionsoftheChinese
companies, which are seen by many as responding to a political concern with energy security,
despitethereformsthathavemadetheNOCsindependententities.
This section shows, however, commercial motives play a large, and perhaps the largest part.
Observers of the NOCs have identified key motives, suggesting that expanding control over
5ThecapacityoftheCentralAsiaChinaPipelineisscheduledtorisefromthecurrent10bcmtoaround40bcmby2012withthe
completionofasecondstringandadditionalcompression(IEA,2010b).
6Themeetingtookplaceon22April2010(XinhuaNewsAgency,2010).
OECD/IEA2011
resourcesandsuppliesisonlyoneofmanymotivations(Table2).Moreover,asthenextsection
shows,thenewacquisitionsdonottranslateneatlyorexclusivelyintosuppliesflowingtoChina.
Table2:NOCsmotivationsandstrategies
Motivations for investing abroad
Main strategies used to expand
Expand oil and gas reserves and production.
Diversify energy supply sources and take

advantage of new business opportunities.
Diversify energy supplies to avoid risks.
Target assets to add synergy to existing assets.
Become international NOC.
Partner with other NOCs and IOCs, build

relationships and diversify risk.
Develop an integrated supply chain.
Pursue market-for-resources deals that exchange

access to Chinas market for access to resources.
Gain technical know-how and streamline

managerial capacities.
Utilise strong financial resources and government

policy support.
Source:XUXiaojie(2007),PFCEnergy(2010),IEAresearch,FACTSGlobalEnergy(2009).
Some,thoughcertainlynotall,oftheeffortsbytheNOCstoacquireproducingassetsoverseas
have been notable successes. In June 2009, by acquiring Addax, Sinopec was able to add
producingassetsandreservesinWest AfricaandNorthernIraqsKurdishregion.7Sinopec paid
USD8.8billionforthisacquisition,makingitbyfarthelargestsuchdealclosedbyaChineseNOC.
The NOCs have also tried hard to gain a foothold in Iraq, hoping hereby to access the worlds
secondlargestprovenreserves,despitethelowservicefeesofferedforthesedeals.Since2009,
NOCshavewonthreecontractbidsandgainedrightstodeveloptheRumaila,HalfayaandMissan
oil fields with international partners such as BP, TOTAL Turkish Petroleum and Petronas (see
Annexes,3.RecentagreementsrequiringsubstantialfutureinvestmentintheMiddle Eastsince
2008).CNPC,meanwhile,hadalsoin2008successfullyrevivedacontractfordevelopingtheAl
Ahdaboilfield,whichithadnegotiatedundertheprewarSaddamHusseinregime.CNPCisthe
only NOC or IOC to achieve this type of renegotiation (see Annexes, 3. Recent agreements
requiringsubstantialfutureinvestmentintheMiddleEastsince2008).
TheNOCsalsoexpandedtheirinvestmentsintoBolivia,Brazil,Ecuador,KazakhstanTurkmenistan
andVenezuela,securinglongtermoilandgassuppliesthroughloanforoilorloanforgasdeals.
These investments diversified NOCs supply sources outside of the Middle East and Africa (see
Annexes, 2. Chinas loans for longterm oil and gas supply signed since January 2009). Chinese
banks provided financial support, and in some cases (such as in Kazakhstan and Russia), the
Chinese government was involved in finalising the deals. (This case is discussed in Section 4,
Investingintransnationalpipelineinvestments,FromtheWest).
TheGoingAbroadpolicyisactuallytheratificationbygovernmentofNOCsearlyeffortstoinvest
abroad. When CNPC first sought to invest overseas, in 1992 in Peru and in 1996 in Sudan and
Venezuela,itdidnotobtaingovernmentapproval.Infact,governmentplannerstooklittlenotice
and did not envision overseas upstream investments as a sound strategy to meet the growing
Chinesedemand(Xu,2007).AfterChinajoinedtheWorldTradeOrganisation(WTO),theideaof
creating national enterprises that could be competitive internationally gained ground. This
coincidedwithgrowingconcernaboutrisingoilimports,andresultedinanexpressionofsupport
forwhattheNOCswerealreadyengagedin.
7
SinopecsnewacquisitioninNorthernIraqwaspronouncedillegalbytheIraqigovernment,andthecompanywasprohibitedfrom
participatinginbiddingforservicecontractsinIraq.SinopecisstillworkingwiththeIraqigovernmentonthisissue.WhileSinopecwas
barredfrombiddinginthe2009licensingrounds,thatdidnotaffectthepositionofCNPCorCNOOC.
Page|13
OECD/IEA2011
The NOCs ambition to expand internationally is reflected in personnel choices as well as in

strategic goals for investment and operations. This goal is also championed by government
officials, who have long spoken of turning Chinas key stateinvested enterprises into globally
competitive firms. CNPC has promoted professional managers with extensive international
operationalexperiencetoseniorpositionsanditspubliclistedsubsidiary,PetroChina,issaidto
Page|14 belookingtoinvestUSD60billionininternationalexpansionsoverthenexttenyears.In2009,
CNPCproduced69.6millionmetrictons(Mt)ofcrudeoiland8.2bcmofnaturalgasoutsideof
China,andSinopecproducednearly12.9Mt.
TheNOCsaretargetingassetstocomplementtheirexistingportfoliosandtointegratetheirsupply
chains. For example, CNPC wanted to build up its global downstream presence to derive greater
benefit from its growing global upstream production. PetroChina acquired Singapore Petroleum
Company, which has strong downstream assets in the AsiaPacific region. This deal will deepen
CNPCsinternationaloiltradingpositionwithrefiningcapacity,productstorage,pipelinesandother
logisticassetsinSingapore(PFCEnergy,2010),amajoroiltradinghubinAsiaPacific.
AlthoughupstreaminvestmentisthemainfocusoftheNOCsinvestmentsabroad,theyrecognise
that building refineries or pipelines can help them to quickly respond to local markets. At the
same time, it shows their commitment to host countries, thus gaining credibility and
strengthening relationships. In November 2009, for instance, CNPC and Petronas signed a
memorandumofunderstanding(MOU)withSudantoexpandtheKhartoumrefinerycapacityby
50kb/dby2013.Inexchange,CNPCwillgaingreateraccesstoupstreamprojectsinthecountry,
inadditiontothesevenupstreamprojectsitalreadyoperatesthere(IEA,2010b).Sudanwasone
ofthefirstcountriestheNOCsinvestedin,andovertheyearsCNPChasremainedcommittedto
Sudan despite international criticism of the Sudanese governments record in Darfur. China
imported52%ofthe465kb/dofcrudeoilthatSudanproducedin2009.
TheChineseinvestmentsintheAfricandownstreamsectorcouldreachtomorethan1.3mb/dof
refiningcapacity.InadditiontoSudan,CNPCisalsoinvestingindownstreaminChad,Nigerand
potentially Egypt, Nigeria and Uganda. According to the MTOGM (IEA, 2010b), however, it is
unlikelyalltheprojectswillmaterialise.
ChineseNOCsarefindingthatsuccessfulexpansionabroadrequiresthemtooperatedifferently,and
they are evolving and learning from their early overseas experiences. When competing overseas,
withouttheoligopolystatustheyhaveinChina,theymustoperatemorelikeIOCs.Backingfromthe
Chinesegovernmentisnotauniversalsolutiontotheproblemsofinvestinginothercountries.Co
operationwithotherNOCsorIOCshasproventobecrucialforNOCstoenterintomanyunfamiliar
hostcountriesandtoreducerisksintheirinvestments.Thiswasparticularlythecasein2009when
Chinese NOCs joined with other partners to participate in bidding rounds in Iraq. Bidding in
partnershipdiversifiedtheriskforeachcompanyinahighlyriskyandpoliticallyunstablecountry.
Insteadofworkingalone,asintheirearlydaysinAfrica,ChineseNOCsarenowkeentoestablish
strategic partnerships with other NOCs and IOCs. NOCs can gain technical knowhow and
streamlinetheirmanagerialcapacitybyformingalliances.Currently,ChineseNOCslacktechnical
expertiseindeepwaterexploration,so,forinstance,CNOOCisworkingwithTOTALinNigerias
Akpoand Eginadeepwaterfieldsto gainthis knowledge inpreparationforexploringdomestic
deepwater reserves. Chinas NOCs are also trying to gain experience in LNG projects to enable
them to better satisfy the rapidly growing gas demand in China (see Annexes, 4. Chinas long
termLNGcontracts).TheyhaveacquiredstakesinliquefactionprojectsinIndonesiaandAustralia
togainexpertiseacrosstheLNGsupplychain.
OECD/IEA2011
The NOCs are interested in unconventional resources such as coalbed methane (CBM), shale gas
and oil sands projects, both in China and elsewhere. CNPC has announced plans to increase
production from CBM, fuel ethanol and oil sands from 1.25 Mt/y (25mb/d) in 2010 to 6 Mt/y
(120mb/d)in2015(PFCEnergy,2010).Duetotheirlackofexperienceinshalegas,ChineseNOCs
are keen to invest abroad in the form of partnership and jointventure. TOTAL is bringing in its
experience to develop a Chinese tight gas project at Sulige in cooperation with PetroChina. This Page|15
wasthemaindrivingforceforPetroChinaspartnershipwithShelltoacquireArrowEnergyinMarch
2010. In April 2010, Sinopec and TOTAL jointly bought 9.03% of the Canadian oil sands company,
Syncrude,fromConocoPhillips.CNPC/PetroChinaalsopurchased60%ofAthabascaOilSandsCorps
MackayRiverandDoveroilsandsprojectsinAlbertaCanada.SinopecsacquisitionsintheCanadian
oil sands are also examples of attempts to buy the technical experience they lack. CNPC and
CanadianEncanaagreedinJune2010toformajointventuretodevelopEncanasshalegasassetsin
BritishColumbia.On11October,2010,CNOOCannouncedthatitswhollyownedsubsidiarieswould
acquire33.3%ofChesapeakeEnergysEagleFordshalegasassetwithUSD2.16billion.
By partnering with other NOCs and IOCs in overseas ventures, the Chinese companies can also
reduce the risks posed by working in unfamiliar cultures. This type of partnership could help
NOCs to avoid political risks at a time of rising resource nationalism in some countries and
accusationsofChineseNOCsblockingresourcestoothers.NOCshavebecomemoreawareofthe
politicalsensitivitiesastheyhavegainedexperiencesindifferentcountries(PFCEnergy,2010).By
partnering with Shell, for instance, CNPC gains direct benefits from technical cooperation.
Similarly,CNPC,throughtheacquisitionofArrowEnergyinAustralia,andjoiningShellssharein
Syria,isnowinapositiontotakeadvantageofShellsestablishedlocalconnections,insteadof
havingtobuilditsownnetworkfromscratch.Atthesametime,thetieupprovidesCNPCaway
tomitigatenegativeinternationalattention,andattenuatedemandsforgreatertransparency.
AnotherkeybenefitofthesepartnershipsisthatNOCsareabletoleverageIOCscrosscultural
knowledge in international operations, which NOCs lack and would need years to build up.
Successfulacquisitionsdonotautomaticallytranslateintosuccessfuloperations.NOCsbeganto
cultivatecrossculturalawarenessamongtheirworkforces,andevenbegantohirenonChinese
employeestofacilitatethis.
Table3:Downstreamcooperationwithcompaniesfromresourcerichcountries
NOCs from resource-rich
countries
Chinese
partners
Saudi Aramco/ExxonMobil
Sinopec
750
Fujian
Rosneft
CNPC
300-500
Northeast (location tbd)
Investors from resourcerich countries
Chinese
partners
Saudi Aramco/ ExxonMobil
Sinopec
SABIC (Saudi Arabia)
Sinopec
Rosneft
CNPC
Kuwait National Petroleum
Number of filling stations planned
Refinery product types

and crude processing capacity (Mt/y)
crude: 12
Location
ethylene: 0.8
polyethylene: 0.8
Quanzhou, Fujian
ethylene: 1
polyethylene: 0.6
glycol: 0.4
Tianjin
crude: 15
polystyrene
Tianjin
Sinopec
crude: 15
ethylene: 0.1
Zhanjiang, Guangdong
Venezuela PDVSA
CNPC
crude: 20
Qatar Petroleum /Shell
CNPC
crude: 20
Source:CNPCEconomicandTechnicalResearchInstitute,(2010).
Location
Jieyang, Guangdong
ethylene: 0.12
Taizhou, Zhejiang
OECD/IEA2011
TheIOCsandotherNOCshave,fortheirpart,beenkeentoworkwithChineseNOCsbecause,as
industryinsidershavepointedout,thewindisblowingtowardstheEast.NOCsarefullyaware
ofthisadvantage.Onestrategytheyhaveusedtoexpandoverseaspartnershipisthemarket
forresourceapproach(Table2),bywhichlimitedaccesstoChinasvastmarketisgrantedtothe
resource holder in exchange for imports of that resource to China. The enormous domestic
Page|16 market in China is perhaps the biggest attraction for other NOCs and IOCs to conclude
partnerships with Chinese NOCs. BP, Shell, SK and TOTAL are working together with NOCs to
build fuel filling stations in China. ExxonMobil, BP, Shell, TOTAL and BASF have all invested in
refineries in China. The participation of NOCs from resourcerich countries is adding to the co
operation picture (Table 3). Saudi Aramco, for instance, is working with Sinopec on a crude
stockpilefacilityinHainanandonrefineryfacilitiesinFujian.
The marketforresource strategy is particularly useful for building relationships with NOCs from
resourcerich countries. By offering a piece of the Chinese domestic market, NOCs leverage the
relationshipsandtrusttheyhavebuilt,gainpreferentialtreatmentforcooperationinthesecountries,
or simply expand their opportunities to purchase more oil. Following the loanforoil agreement in
February2009betweenRosneftandCNPCconcerningtheoilpipelinetoChina(detailedinthesection
below on Longterm loanforoil and loanforgas deals), both sides signed a memorandum of
agreementinOctober2009tobuildrefineriesinChinasTianjin.Rosneftagreedtosupply200kb/dto
300kb/d(inadditiontoamountagreedundertheloanforoildeal),tobeusedmostlybytherefinery
project.Thisprojectisexpectedtogointoserviceassoonas2012.CNOOCuseditspositionasChinas
original LNG coordinator and partnered with Australias Northwest Shelf for the Guangdong LNG
project,takinga25%share.CNOOCcommittedtopurchaseLNGfromtheNorthwestShelffrom2006,
andinreturnwasabletoacquire5.3%oftheproduction,leaseandexplorationlicences(Xu,2007).
The recent global financial crisis has presented numerous opportunities for Chinas prosperous
NOCstopurchasequalityassetsabroadfromstrickencompaniesandtosecurelongtermsupply
deals by extending loans to resourcerich countries in need of capital. According to the IEAs Oil
Market Report (OMR) dated 13 April 2010), upstream capital cost had fallen by about 12% and
upstream spending was around 15% lower in 2009 than in 2010, making it cheaper for Chinas
NOCs to invest in upstream projects even as they encountered less competition from other
investors in 2009. Appreciation of Chinas currency in recent years has also made buying assets
abroad cheaper for the NOCs. Moreover, Chinese NOCs also enjoyed a competitive advantage
throughtheiraccesstothecountrysUSD2.45trillionreserves(attheendofJune2010).
Chinesebanksarewillingpartners.TheChinaDevelopmentBank(CDB)andtheChinaExportImport
Bank(CEIB)arethetwomainbanksthatprovidedfundingforChinaslongtermloansforoilorgas
deals.Thesetwobanksareexperiencedinoverseasinvestments.InSeptember2010,bothCNPCand
SinopecformedstrategicallianceswithCDB.Forexample,CDBagreedtoprovideUSD30billionloans
toCNPCatlowratesoverthenextfiveyearstosupportCNPCsexpansionabroad.CDBhadalready
providedatleastUSD44billioninloanstoresourcerichcountriesin2009.ChinasNOCswerethe
indirectbeneficiariesoftheseloans,astheyreceivedlongtermoilandgassuppliesatthesametime
(seeAnnexes,2.ChinasloansforlongtermoilandgassupplysignedsinceJanuary2009).
CDBandCEIBarealsostateownedenterprises(SOEs)liketheNOCs.Themotivationtoinvestin
NOCs overseas activities, however, is not purely driven by the Chinese governments Going
Abroadpolicy.TraditionallyclassifiedasChinesepolicybanks,CDBandCEIBtodayarelikeother
commercial banks in that they need to make money and to be profitable. Chinese scholar Xu
Xiaojiehassaidthatthebankstodayfollowbusinesses.InvestingintheNOCsquestformoreoil
supplyseemstobeasoundcoursegivenChinassoaringoildemand,and,astheNOCsachieve
greater success in their deals abroad, banks seem more willing to form strategic alliances with
the NOCs. While the banks are able to offer credit to the NOCs at good rates (some have
OECD/IEA2011
suggestedthatthisis,inpart,becausetheythemselvesarestateowned),thoselendingdecisions
arebasedoncommercialinterests,notongovernmentguidance.
NOCshavecertainlyutilisedtheresourcesthatChinasstrongfinancialcapacityoffer,andthey
have also taken advantage of the Chinese governments Going Abroad policy. This policy has
enabledthecompaniestogainsupportfromthecentralgovernmentinsigninglongtermsupply
deals, building transnational pipelines and establishing the necessary political backup for their Page|17
investmentsinriskycountriesinAfrica,theMiddleEastandelsewhere.
SomeobservershavesuggestedthatChinasNOCs,flushwithcash,havebeenpayingapremiumfor
assets,freezingotherbiddersout.Onereport,forinstance,concludedthatin2009,thetotalpremium
paid by the Chinese companies increased to 40% above the base case valuation of acquired assets
(WoodMackenzie,2010).Othershavepointedoutthatintermediarieswhofacilitatedthesedealsfor
NOCs drove up the premium. However, interviews with industry insiders uncovered no evidence
that there is systematic or intentional overpayment. Further, indepth investigation of this topic
wouldbeneededtoformawellfoundedviewonwhetherandunderwhatcircumstancestheNOCs
havepaidoverareasonablerangeofmarketvaluationsforacquiringassets.
Despite their recent successes, the road to secure more foreign oil production assets has not
beensmoothfortheNOCs.In2009alone,theNOCsfailedintheirattemptstoacquireassetsin
LibyaandAngolawhentheLibyaNationalOilCorporationandAngolasSonangolexercisedtheir
preemptionrightstoblocktheoffers.TheenthusiasmofNOCsfornewacquisitionshasalsoled
totheirexploitationbyproducerstates(Grieder,2010).InNigeria,CNOOCsinteresttoacquire
assetswasleakedinordertobeusedasatokeninnegotiationswithIOCs.Intheearlyyearsof
their overseas purchasing efforts, NOCs lack of experience with public relations and political
lobbyingledtosomedisappointments.Forinstance,CNOOCsattemptandsubsequentfailureto
acquire Unocal in the United States in 2005, generating lasting negative feelings in both
countries,isthemostwidelyknowncase.NOCsarefacingrisingnationalismamongresourcerich
countriesastheworldemergesfromthecurrenteconomicslump.
NOCsoverseasequityshares
AccordingtoIEAdata,successfulacquisitionsallowedChinasNOCstoexpandtheiroverseasequity
shares from 1.1mb/d in 2009 to 1.36mb/d in the first quarter of 2010; for comparison, Chinas
domestic production in the first half of 2010 was 4.1mb/d. Chinese oil companies are now
operatingin31countriesandhaveequityproductionin20,thoughtheirequitysharesaremostly
locatedinfourcountries:Kazakhstan,Sudan,VenezuelaandAngola(Figure4).Theincreasedequity
oillevelisduetothenewacquisitionsandhigherlevelsofproductioninKazakhstaninearly2010.
In 2009, the equity oil share of the NOCs is about 50% of its total foreign production. In 2009,
CNPCsoverseascrudeoilproductionwas69.6Mt(approximately1.4mb/d).FACTSGlobalEnergy
projectedthatChineseNOCsoverseasequityoilproductioncouldtop2mb/dby2020.
According to available data, Chinese NOCs equity production overseas in Q1 of 2010 was
equivalentto36%ofthelevelofChinascrudeimports(whichwere3.8mb/d)inthefirsthalfof
2010. Only a portion, however, was actually shipped to China. Data on such movements are
scattered and difficult to access, and where they are even possible to obtain at all (a problem
hardly unique to Chinas NOCs), available evidence suggested that much of this equity oil was
soldtolocalorinternationalmarketsinstead.8
8EquityoilfromKazakhstansAktobe,forinstance,wassoldlocallybecausepriorto2009,thefieldwasnotlinkedtotheKazakhstanChinaOil
Pipeline.PipelinefromKenkiyaktoAtyrauisstillgoingwestwardtotheCaspianSea.Similarly,equityoilfromVenezuelawasalsosoldmostlylocally
duetoexpensiveshippingcostandChineserefineriesinabilitytoprocessVenezuelaoil,accordingtoFACTSGlobalEnergyandothersources.
OECD/IEA2011
No evidence brought to light in researching this paper suggests that the Chinese government
currentlyimposesaquotaontheNOCsregardingtheamountoftheirequityoilthattheymust
ship to China. Decisions about the marketing of equity oil, where the Chinese companies have
control over the disposition of its share of production, appear to be dominated by market
considerations.Forinstance,almostalltheequityproductionChineseNOCshaveintheAmericas
Page|18 wassoldlocallyinsteadofbeingshippedbacktoChina(FACTSGlobalEnergy,2010).Considering
geographicaldistances,itismorecostlytoshipthatoiltoChina.Additionally,Venezuelanheavy
crudeisnotcompatiblewithexistingChineserefiningcapacities.Thelatterbarrierwillsoonbe
removed;PetroChinaformedajointventurewiththeVenezuelanstobuildarefinerytoprocess
this type of crude oil in Southern China. The planned capacity of this refinery is 200kb/d. The
currentequityshareNOCshaveinVenezuelais202kb/d.ChinesecrudeimportsfromVenezuela
rangedfrom155kb/dto400kb/dforthefirstsevenmonthsof2010.VenezuelanPresidentHugo
Chavezstatedthatheplannedtoexport1mb/dtoChinaby2011or2012.
Figure4:EstimatedChineseshareofoverseasequityinoilexportingcountries,Q12010
Sources:IEAresearch;FACTSGlobalEnergy
Inanevenmoresignificantexamplerelatedbyaconfidentialindustrysource,CNPCsequityoil
from Kazakhstan is not all shipped back via the new pipeline from Kazakhstan to China, which
nowdelivers200kb/d.TwoCNPCsubsidiariesdecidehowtheCNPCshareofproductionfromits
holdingsinKazakhstanaremarketed.CNPCInternational,theexplorationandproduction(E&P)
arm for CNPCs overseas production, determines if it would be profitable to sell the oil it
producestotheCNPCtradingcompany,ChinaNationalUnitedOilCorporation(Chinaoil;ajoint
venture between CNPC and Sinochem). In some cases, selling to other players can be more
profitable.Chinaoilalsoevaluateswhetherbuyingcrudeoillocallyclosetothepipelinestarting
point(Atasu,priorto2009)ismoreeconomicalthanbuyingcrudeproducedatAktobebyCNPCs
E&P subsidiary and transporting it to Atasu. Prior to completion of the KazakhstanChina Oil
Pipelinein2009,theChineseequityoilfromtheAktobefieldwasknowntobetransportedvia
the pipeline to Atyrau to be sold on the international market. That part of the pipeline is still
operatesonlywestwardstotheCaspianSea(Figures5and8).
OECD/IEA2011
Figure5:CentralAsiaoilnetwork
Page|19
Theboundariesandnamesshownandthedesignationsusedonmapsincludedinthispublicationdonotimplyofficialendorsement
oracceptancebytheIEA.
OECD/IEA2011
RepresentativesfromPetroChinaconfirmedthisfindingonNOCsforeignequityoil,statingthat
decisions on whether to ship the equity oil to China or to sell locally were purely based on
prevailingmarketprices(PetroChinaMarketingCompany,2010).Iftherewereashortageinthe
Chinesemarketresulting fromequity beingsoldtotheinternationalmarket, PetroChinawould
purchaseoilfromMiddleEastsupplierstofillthegapofsupplyinChina.
Page|20
ItisverydifficulttodeterminewhatshareoftheirequityoilproductioninAngolaandSudanthe
NOCs may have shipped to China. Certainly the imports into China from both countries are
substantial,butagreatdealofinformation,mostofitconfidentialtothecompanies,wouldbe
requiredtomakeanaccurateassessment.WhilesomeoilmaybeshippedtoChina,someisalso
soldintotheinternationalmarket.Dependingonthetermsofaparticularinvestment,theNOCs
maynotevenhavemarketingcontrolovertheirequitysharesinsomefields.WheretheNOCsdo
have control, the share of the equity oil shipped to China may differ each year due to market
conditions,internationaloilprices,andChinesedomesticproductprices.Sincethebeginningof
2009(toSeptember2010),duetothenewdomesticoilpriceschemeinChina,domesticproduct
price has been adjusted nine times to reflect the international oil price.9 The NOCs have been
lobbyinghardforfurtherreforms.UntilthedomesticmarketofferstheNOCsgreaterincentives
that is, retail product prices that more closely reflect changes in world oil prices Chinese
equityoilisunlikelytoallcomebacktoChina.
ServicecontractsintheMiddleEast
EquitysharesareonlyoneroutebywhichChinasNOCshaveexpandedupstreamglobally.Some
resourcerich countries, particularly in the Middle East, only offer service contracts to foreign
companies.Iraq,whichholdstheworldssecondlargestprovenoilreserves,startedtoopenits
oilsfieldstoforeigncompaniesintheformofservicecontractsin2009.Todate,ChineseNOCs
havewonthreecontractsincollaborationwithIOCsandotherNOCs.CNPCjointlybidwithBPto
enter a service contract of 20 years in Iraq to develop its largest oil field, Rumaila, and with
TOTALandPetronastodeveloptheHalfayaoilfield.IraqiSouthOilholdsa25%shareinbothof
these bids. CNOOC recently won the contract with Turkish Petroleum (TPAO) to develop Iraqs
Missanoilfield.IraqDrillingCompanyistheIraqipartnerandholdsa25%share(seeAnnexes,3.
Recent agreements requiring substantial future investment in the Middle East since 2008). The
contractfeesfortheIraqiservicescontractsareverylowandsomecommentatorsaredoubtful
whether doing business in Iraq will be profitable in the long term. However, for the existing
fields, the geological risk is small and the upfront capital spending is relatively modest before
revenuestartstoflow.Sodespitetheconcerns,IOCsandNOCsarestillparticipatinginthebidding
rounds.IOCsarekeentopartnerwithChineseNOCsinIraqtolowerthecostofoperationsandto
diversify risk. One IOC has mentioned off the record that the prospect of access to Chinese
domesticmarketsisinfactakeyconsideration.Allparticipantshopethatcommitmenttodevelop
existingfieldswillleavethemwellplacedtoundertakefurtherfielddevelopmentlateron.
Chinese NOCs, likeother oil companies,considerIraqas a key strategic countryin which to gain a
footholdbecauseofthelackofotherinvestablegoodqualityassetsglobally.NOCshaveproventobe
willingtocutprofitsandtobearthepoliticalrisks.AccordingtotheMTOGM2010,thehighestnet
increaseincrudeproductioncapacityfrom2010to2015(fromOPECcountries)willlikelycomefrom
Iraq(1.0mb/d)(Figure6).Inthefirsthalfof2010,ChinascrudeimportsfromIraqshoweda148%
increase over the same period in 2009 (Xinhua, 2010). In the first half of 2009, China imported
161kb/dofcrudeoilfromIraq.
9
Since January 2009, domestic prices are adjusted if the rolling average price of a basket of international crudes (including Brent,
DubaiandCinta)fluctuatesbymorethan4%formorethan22consecutiveworkingdays.
OECD/IEA2011
Theuncertainsecurityoutlook,however,presentsapotentialrisktoNOCsinvestmentsinIraq.
After the parliamentary election held in Iraq on 7 March 2010, a new government was not
formed until 11 November. In the absence of new government, violence had returned,
particularly in and around Baghdad. President Obamas confirmation of plans to withdraw US
troops from Iraq by the end of 2011 raised more security concerns. Whether the investments
madebyChineseandothercompaniesinIraqturnintomoresupplytotheinternationalmarket Page|21
willdependontheIraqigovernmentsabilitytoprovideanattractiveandsafebusinessclimate
forforeigninvestors.
ChineseNOCsalsomadesubstantialinvestmentsinIranin2009andhaveasignificantpresence
inthecountry.CNPCsignedaUSD4.7billionagreementtodevelopPhase11oftheSouthPars
field.Inaddition,CNPCandSinopechavethreeothercontractstodevelopIransoilandgasfields
(see Annexes, 3. Recent agreements requiring substantial future investment in the Middle East
since2008).AccordingtoReuters,CNOOCisintalkstofinaliseaUSD16billiondealtodevelop
theNorthParsgasfieldandtobuildanLNGplant.CNPCisintalkswithIranforaUSD3.6billion
deal to buy LNG from Phase 14 of South Pars project. CNPC is also in dialog to explore and
developenergyreservesinIransCaspianregion.
Chinese NOCs are the major investors in Irans oil and gas industry. The MTOGM 2010 (IEA,
2010b)concludedthatIranrisksseeingasignificantfallinproductivecapacityfrom2009to2015
(Figure6).Declineratesremainsevereinsomeoftheirmajorfieldsandinternationalsanctions
continue to make it difficult for Irans oil and gas industry to access the latest industry
technology.Iranhastheworldsfourthlargestoilreservesandsecondlargestgasreserves.Buta
further round of UN sanctions in May 2010 has been supplemented by bilateral sanctions
imposedbytheUnitedStatesandtheEuropeanUnioninJulyandbyJapaninAugust.Theeffect
onIransenergyandfinancialsectorsislikelytobemoreseverethanhitherto.Tosomeextent,
the NOCs benefited from the vacuum left by western companies that have been scaling down
their presence in Iran over the past four years (Reuters, 2010). However, some of the key
technologiesinthegasindustryarebeyondChineseNOCscorecapacity.TheChinesegovernment
opposesadditionalsanctionsandiscallingforcontinuingdiplomaticefforts.Iranisalsobecoming
moredependentonChineseinvestment,andonthetechnologiesandtheequipmentNOCsbring.
WhatwillhappentothelargeinvestmentNOCshavecommittedremainsunclear.
Figure6:Incrementalchangeincrudeproductioncapacity,2009to2015
Iraq
S. Arabia
Angola
UAE
Libya
Venezuela
Qatar
Algeria
Kuwait
Ecuador
Nigeria
Iran
mb/d
Source:IEA(2010b).
-1.00
-0.50
0.00
0.50
1.00
OECD/IEA2011
Entering into service contracts has become a dominant form of cooperation in resourcerich
countries that are reluctant to sell assets. NOCs recognise the trend and are willing to bid for
these contracts with or without IOCs. Moreover, they are willing to bear high political risks for
theprovenresourcespresentincountriessuchasIranandIraq.
Longtermloanforoilandloanforgasdeals
Theconclusionof12loanforoilandloanforgasdealssinceJanuary2009hasbeenasignificant
development in NOCs efforts to secure more supplies both in crude oil and natural gas. On
17February2009,after15yearsofnegotiation,itwasannouncedthattheChinaDevelopment
BankwouldlendRussiasRosneftandTransneftUSD15billionandUSD10billion,respectively.
Fivedayslater,ChinaandVenezuelaenteredanagreementforaUSD4billionjointdevelopment
fund. By the end of 2010, the total loans that China had extended to these resourcerich
countrieshadreachedapproximatelyUSD77billion.
Usingloanforoilandloanforgasdealstosecurelongtermsuppliesisnotnewandwasusedby
ChineseNOCsbefore,butnotatthisscaleandinsuchquantity.Itseemsapparentthattheglobal
financial crisis played an important role, particularly in 2009, because resourcerich countries
weremoreeagertofindmoneybutreluctanttosellassets.TheChinesegovernmentalsoplayeda
moreactiveroleinfacilitatingthesedealsthantheyhadforNOCsacquisitiondeals.ChinasNOCs
have signed loanforoil and loanforgas deals in nine countries: Angola, Bolivia, Brazil, Ecuador,
Ghana,Kazakhstan,Russia,TurkmenistanandVenezuela(inalphabeticorder).Eachdealisunique,
depending on the particular situation in each resourcerich country, but one example, of such a
packagedealwithRussia,sufficestosketchoutthetypicalplayersandtheirroles(Figure7).
Figure7:SinoRussianloanforoildealstructure
USD 15billion
300kb/dfor
20 years
20year,5.69%loan
payments
collected
ChinaDevelopment
Bank
providesloan
account
established
Page|22
Designated CDB
account
oil payments
CNPC pays
marketprice
Sources:IEAResearch;FACTSGlobalEnergy;Interfax.
AccordingtointerviewswithChineseexpertsandnewsreportsfromChina,Rosnefthaddebtof
USD13billionthatithadtopaybackbythesummerof2009.AstheRussiangovernmentalso
suffered from the financial crisis, it too was looking for new revenues. Funds were needed to
OECD/IEA2011
develop the Eastern Siberian oil and gas fields in order to supply the Asian market. Russian
government and Rosneft approached the Chinese government. CNPC, which had been
negotiatingwiththeRussiansfor15years,benefitedandgotthepipelineithadlongdesiredinto
ChinasNortheast(detailedinsection4,Investingintransnationalpipelines,Fromthenorth).
TheresultwasthattheChinaDevelopmentBankagreedtoprovidethefinancingRussianeeded.
According to Interfax, the interest rate was 5.69%, a very favourable rate given that few Page|23
commercial banks were lending at that time. As this was a bundled package deal, CNPC would
gaintherighttobuy300kb/dofcrudeoilatmarketpricefor20years.CNPCwoulddepositthe
payment for oil into a designated account at CBD so that CBD could be guaranteed to receive
paymentsfromRosneft.TheUSD10billiondealwithTransneftworksthesameway.Thepipeline
fromRussiawillconnecttheEastSiberiaPacificPipelineSystem(ESPO)atSkovorodinotoChinas
Daqingrefinery.
This is not the first such loan extended by a Chinese bank to a Russian company according to
Erica Downs, a US scholar who describes the SinoRussian energy relations as an uncertain
courtship(Downs,2010a).In2004,CNPCloanedRosneftUSD6billionasanadvancepayment
foroilsuppliesthrough2010.RosneftneededfinancialresourcetopurchaseYuganskneftegazof
Yukos. In 2006, CNPC bought USD 500 million worth of Rosneft shares during Rosnefts initial
public offering. Later, CNPC financed a feasibility study of the ESPOs spur to China for USD 37
million(Downs,2010a).
Despite the success in this case and others, loanforoil deals are not the preferred method by
theNOCstogainforeignsupplies.Therearerisksinvolved;forexample,incaseofachangeof
government, contracts could be voided, or the resourcerich countries may not supply the
quantitytheypromised.Asqualityassetsarerarelyforsalethesedays,however,loanforoiland
gasdealsserveasanimportantalternativeandawaytodiversifysupplysotheChineseNOCs
areinlinewiththeChinesegovernmentsenergypolicy.
Thesuccessfulnegotiationoftheseloanforoilandgasdealsin2009demonstratedtheabilityof
allplayers(NOCs,ChinesegovernmentandChinesefinancialinstitutions)toquicklyrespondto
the opportunities presented by the global financial crisis, and to coordinate to design such
bundledpackagedeals.
OtherChineseinvestors
China has many smaller investors in addition to the big three. The largest in this group is
Sinochem (ranked 203 in the 2010 Global Fortune 500 Ranking; Table 1), a stateowned
petrochemicalcompanythatheldamonopolyonChinasoilimportsandexportsbeforeCNPCand
Sinopecbranchedintothisarena.Since2001,Sinochemhasconductedoverseasupstreamoiland
gasexplorationandproduction.AlthoughSinochemsoverseasinvestmentsaresmallcomparedto
thoseofthebigthree,its2009and2010investmentswerestillmuchhigherthaninpreviousyears
(see Annexes, 1. Chinese foreign oil and gas acquisition deals since 2002). In 2010, Sinochems
purchase of Statoils 40% stake in Brazils Peregrino oilfield with USD 3.07billon highlights the
companysgrowingfinancialabilityandstatusasanewlyemergingglobalM&Aplayer.
Anumberofsmallerplayersareactive,asfollows.
ZhenhuaOilCompanyisasubsidiaryoftheChinaNorthIndustriesCorporations(Norinco).A
manufacturerofoilfieldequipment,construction,civilandmilitaryweapons,ithaspartnered
withCNPCinSyriaandIraq.
OECD/IEA2011
Shaanxi Yanchang Petroleum Company is a small energy company from Shaanxi Province.
Although most of its activities are in Shaanxi, it signed production sharing contracts in
ThailandandCameroon.
XinjiangGuanghuiIndustryisinvolvedinthedistributionandtransportationofLNG,commodities
wholesalingandretailing,aswellasmining.InSeptember2009,itpurchased49%ofKazakhstans
Page|24
TarbagatayMunay(TBM)tojointlydeveloptheZaysanblockinEasternKazakhstan.
CITICEnergyislinkedtotheCITICGroup,astateownedinvestmentgiant.Itownsoilassetsin
KazakhstanandIndonesia.
The State Administration of Foreign Exchange is a sovereign wealth fund that had acquired
1.3%ofTOTALby2008withestimatedUSD2.3billion.Thefundhadalsobuiltupa1%stake
inBPatacostofseveralbillionUSDbyApril2008(FACTS,2009).
CIC is another sovereign wealth fund, with USD 290 billion, that has started to invest
aggressively in energy and commodities. Since 2009, it has invested in Russias Nobel Oil,
KazakhstansKazmunaigasandbitumenassetsinCanada.
OECD/IEA2011
3. ChineseNOCs:Stateinvested,notstaterun
MisconceptionsarewidespreadabouttherelationshipbetweentheChinesegovernmentandthe
NOCs. The preceding discussion has already explored the diversity of motivations that drive
NOCs,theirdegreeofindependence,andallianceswithbanks.Thissectionfocusesmainlyonthe
web of businessgovernmentParty ties that involves NOCs and SOEs. It depicts outward Page|25
appearancesofunanimityagainstacomplexsystemofhiddendivisionsanddecentralisation.
Contrary to one popular view, the NOCs are not mere puppets of the Chinese government
(Downs,2010b).Theyareowned(mainly)bythestate,butnotrunbythestate.Infact,theyhave
a great deal of power visvis government, thanks to their historical association with former
ministries,thehighrankoftheNOCstopleaderswithintheCommunistPartyofChina(CPC),and
the sheer size of their organisations and capacities compared to the government agencies that
overseethem.ChineseNOCssharesimilaritieswithotherAsianNOCs,butasaresultofChinas
economicsystemreformsofthepastthreedecades,theyarealsoauniquegroupofenterprises.
Figure8:RelationsbetweenstateownedenterprisesandgovernmentinChina
Organisation
Department,
Communist
Party of China
State Council
SASAC
MOF
MOFA
NEC
NDRC
CBRC
Pay
dividends
NEA
chairmen
and
CEOs
Chinese
banks
state-owned
enterprises
Tremendous economic
and political influence
Largest profits among
Chinas SOEs
Leanest, most
aggressive of NOCs
Notes: NEC = National Energy Commission; SASAC = State Assets Supervision and Administration Commission; MOF = Ministry of
Finance; MOFA = Ministry of Foreign Affairs; NDRC = National Development and Reform Commission; NEA = National Energy
Administration;CBRC=ChinaBankingRegulatoryCommission;SOE=stateownedenterprise.
Sources:IEAresearch;Naughton(2008),FACTSGlobalEnergy.
Formally, the owner of Chinas nationallevel stateinvested firms, including the NOCs, is the
StateAssetsSupervisionandAdministrationCommission(SASAC;Figure8).SASACwasformedin
2003, seven years after the incorporation of CNPC and soon after the three NOCs first public
OECD/IEA2011
listings.SASACsmandateistosuperviseandmanagethestateownedenterprisesandenhance
themanagementofthestateownedassetsthatfallunder123largeSOEs.However,thepower
of SASAC to control the behaviour of SOEs and how much it actually exercises the rights of
ownershipareopentodebate.
Page|26
For example, from 1994 to 2008, other than paying ordinary corporate taxes, none of the
SOEs/NOCs paid any of their revenues to SASAC or any other ministry of the Chinese
government.ThisisachangefromChinasownpast(inthe1980s,averylargeportionofstate
revenues came from CNPC), and very different from NOCs in other countries. For example,
MalaysiasPETRONASpays50%ofitsprofitstotheMalaysiangovernment(PFCEnergy,2010a).
AfterastrongpushbySASACaimingtoprovidemoreoversightoverstateassets,NOCspay10%
oftheiraftertaxearningstoSASACthroughtheMinistryofFinancestartingfrom2008.However,
thisextracostwasoffsetbya10%decreaseincorporateincometaxthesameyear.Intheend,
theSASACsefforttogainmorecontrolovertheNOCs(andotherSOEs)didnotaffectthebalance
sheetsoftheNOCs.Unlikemanyoilrichcountriesgovernments,theChinesegovernmentsfiscal
budgetdoesnotdependonlyontaxrevenuefromNOCs(PFCEnergy,2010b).
As Chinas energy consumption has soared over the past decade, so has the financial and
economic might of the NOCs, which hold oligopolistic power over the oil and gas industry in
China(Table1).Likeanywhereelse,thispowercanbeconvertedintotremendouseconomicand
politicalpower,whichenablesNOCstolobbyformoreinfluence.
IntheChinesegovernmentsbureaucraticrankingsystem,bothCNPCandSinopecareatministry
level,thesameasSASAC.However,SASACdoesnotappointtheverytopleadersoftheseNOCs;
itonlyappointsotherhighlevelmanagers.Instead,itistheOrganisationDepartmentoftheCPC
thatdirectlyappointsthetopleadersofNOCswhoholdviceministerialrank.TheheadsofCNPC
and Sinopec are also alternate members of the 17th CPC Central Committee, which consists of
the 371 most politically powerful people in China (Downs, 2010b). The top executives of the
NOCs are deeply connected to the top leadership of the government and the CPC; they must
weartwohats,asleadersofmajorcommercialenterprisesandastopPartyoperatives.Itisinthe
interestsofboththegovernmentandthePartythattheNOCsarecommerciallysuccessful,and
thattheysecureadequateoilandgassupplies.Leadershaveagreatdealoffreedominhowthey
achievetheseaims,andthosewhofulfilthemhaveleverageinbargainingforfuturepromotions.
Thelongseriesofeconomicsystemreformsinitiatedintheearly1980shasgraduallyliberalised
and decentralised Chinese industry. While energy has remained a strategic sector and has
remainedmuchmorewithinthecontrolofthecentralgovernmentthanothersectors,therehas
still been a great shift of power, resources, personnel and knowledge from government to the
NOCs. The NDRC and the NEA retain powers of approval over investment projects (including
foreigninvestmentprojects),andoveroilandgasprices.Theseagencies,andtheothersthatthe
NOCs answer to in various spheres, are understaffed and, in many respects, politically weaker
thantheNOCs(Downs,2010b).TheNOCstypicallytaketheleadinoverseasdeals,andNEAdoes
notnecessarilygetinvolvedinnegotiationsunlessitisaskedbytheNOCstoassist.WhileCNPCs
investment in Kazakhstan was arranged in part by intensive negotiations involving the Chinese
government, the Turkmen gas deal was largely a commercial transaction that was given the
governmentsblessingonlyafterwards.
CultivatingandmaintaininggoodrelationshipswithNDRCandNEAisbeneficialtotheNOCs,as
the latter sets domestic oil and gas prices (NDRC has pricesetting power, and NEA and other
agencies have advisory roles). Since the beginning of 2009, China implemented a new, more
responsive, more marketbased retail oil price system that immediately improved the NOCs
profitability. The NOCs have been lobbying for further progress in this direction on oil price
OECD/IEA2011
setting. Government activity in other arenas also has important impacts on business. For
instance, NEAs current plan to increase gas use to 8.3% of the total energy mix by 2015 has
certainlyinfluenced the NOCsbusinessstrategyindeveloping moregasbusinessbothathome
and abroad. Such targets are typically set after consultations with an array of experts and
stakeholders,includingtheNOCs.
Attemptstoaligncommercialinterestsoverseaswithgovernmentpolicyfordiplomacyandtrade Page|27
arehardlynew,andhardlyrestrictedtoChina.Chineseleadersoftenemphasisetheimportance
of political stability at home, and are keen to foster similarly stable political environments in
which Chinese companies have strategically significant overseas investments. The Chinese
government also has initiated a broad range of activities that, while in unrelated areas of
endeavour,creategoodwillandindirectlybenefitcommercialinvestmentactivity.Ithasformany
yearssoughttocultivaterelationshipswithexportersofoilandotherkeyresources.Forexample,
theChinesegovernmenthasbeenprovidingdevelopmentaidtoAfricasincethe1950s.Insome
cases,NOCshaverequesteddiplomaticsupporttoaidininitiatingandconcludingdeals.Astheir
foreignportfoliocontinuestogrow,NOCswilllikelytolobbyformorediplomaticsupportfrom
theMinistryofForeignAffairsanditsofficesaroundtheworld.
The power of the NOCs (and other energy companies) with respect to government has been
amply demonstrated by their successful lobbying in recent years to prevent formation of a
ministrylevelenergyagency.Thisleavesthegovernmentwitharelativelyweakhandinpursuing
strategicenergyobjectives,withthevariousagenciesconcernedwithregulatingdifferentaspects
of the NOCs activities often working at cross purposes. The newly formed National Energy
Commission (NEC) might provide part of the answer to this fragmented and decentralised
situation.TheNEChasrepresentativesof20ministriesandagencies,andisheadedbyPremier
Wen Jiabao. All interests groups, including the NOCs, are anxious to see what NEC will do to
satisfytheChineseenergysupplyneedandtheneedsofvariousgroups.
OECD/IEA2011
4. InvestinginTransnationalPipelines
The Chinese NOCs have invested heavily, both economically and politically, into building
transnational pipelines to diversify oil and gas supply routes. By the end of 2009, China had
securedagreementswithneighbouringcountriesto importoilandgasfromalldirections. From
theNorth,oilimportsfromRussiaweresettoexpandfromtherelativelysmallrailshipmentsviaa Page|29
newpipelineintoChinasnortheasternHeilongjiangProvince;gasimportswerestillinnegotiation
due to pricing issues, with signing hoped for in mid2011. From the West, there were an oil
pipelinefromKazakhstanandagaspipelinefromTurkmenistan,viaUzbekistanandKazakhstan,
intoChinaswesternautonomousregionofXinjiang.Finally,fromtheSouth,workhadbegunon
paralleloilandgaspipelinestoenableChinatoaccessMyanmarsgasreserves,andtotransship
oilfromAfricaandtheMiddleEast,avoidingapassagethroughtheMalaccachokepoint.
TheStraitofMalaccalinkstheIndianandPacificOceansviaalong,narrow(lessthan3kmatits
narrowestpoint)andextremelybusychannel.10ItisthemainrouteforoilandLNGshippedfrom
thePersianGulfandAfricatoEastAsianmarkets;in2006,anestimated15mb/dweretransported
throughthestrait.AllofChinasoilandLNGimportsfromAfricaandtheMiddleEast,whichin2009
were the source of 77% (3.1mb/d) of Chinas total crude oil imports, pass through the Strait of
Malacca(IEA,2007;USEIA,2008).Inadditiontothethreatofdisruptionfrompirateactivity,the
riskofoilspillsandevenblockageofthetransportlanesfromshippingaccidentsishigh.
There is increasing concern in China regarding the countrys rapidly growing reliance on the
vulnerable StraitofMalacca(Figure9) andonthesubstantialpresence maintainedthereby
theUSNavyandthecoordinatedpresenceofIndonesia,MalaysiaandSingaporetoprotectthe
strait from terrorism and piracy. Investments by NOCs in transnational pipelines could provide
alternativestodiminishtherelianceontheStraitofMalaccaanddiversifyitsimportsfromother
sources,suchasRussiaandCentralAsia,tobringoilandgasimportsfromnewroutesdescribed
inthissection.
FromtheNorth
TheNOCshaveaimedtoimportRussianoilsincetheearly1990s,whenitbecameclearthatChina
wouldbeunabletorelysolelyondomesticresources.Atthesametime,Russiahasalsobeenlooking
todiversifyitsoilandgasexportmarkets,andtoreduceitsdependenceontheEuropeanmarket.
Benefitingfrom the geographic proximity, EastSiberian oilwould beideal to support the growing
marketsinEastAsiaandthePacificRim.TheRussiannationalgovernmenthasbeenkeentosupport
andtocontrol exports,asoil isthe singlelargest contributor tothe nationalrevenuestream
(Rosner,2010).AdditionalbenefitstoRussiafrombuildinganoilandgaspipelinenetworkandthe
new port in Kozmino would be to promote economic development of the sparsely populated
RussianFarEast,throughtheprojectsthemselvesandtradewithEastAsiaandthePacificRim.
The negotiation process between the two countries was long and dogged by mistrust and
unfortunate pitfalls. In 1996, China and Russia signed energy cooperation agreements that
included an oil pipeline from East Siberia to Daqing. After several more years of negotiation,
CNPCandtheprivateRussianfirmYukossignedanagreementtojointlyconstructtheAngarsk
Daqing pipeline in 2003 (Seaman, 2010). The political battle between then Russian President
PutinandtheheadofYukos,MikhailKhodorkovsky,endedthatdeal.
10
Alternativeroutesexist,buttheyrequiremoretraveltime,aremorecostlyandenjoylessprotection.

UZBEKISTAN
Gas Pipeline
Oil Pipeline
Possible gas entry point pipeline
Planned oil pipeline
Sea shipping lanes
Existing LNG import terminal
LNG import terminal under const.
Planned LNG import terminal
Oil import/export ports
OMAN
m
Fro
NEPAL
Indian Ocean
Shwe
Gas
LAOS
Strait of Malacca
MALAYSIA
VIETNAM
Ningbo
Pacific Ocean
JAPAN
Kozmino
Khabarovsk
PHILIPPINES
I N D O N E S I A
Singapore
THAILAND
Kyauk Phyu
REP. OF
KOREA
Shanghai
Rudong
Qingdao
Dalian
RUSSIA
Blagoveshchensk
NORTH
KOREA
Daqing
Skovorodino
Dachan Bay
Hong Kong
Guangdong Dapeng
Zhuhai
Kunming
Fujian
Tangshan
Beijing
Chongqing
C H I N A
MONGOLIA
From east Siberian oil and gas fields
MYANMAR
BHUTAN
West-East pipeline II
Urumqi
Alashankou
Horgos
INDIA
a
fric
st A
We
PAKISTAN
AFGHANISTAN
South Yolotan gas field
KYRGYZ REP.
TAJIKISTAN
Shymkent
KAZAKHSTAN
TURKMENISTAN
IRAN
Atyrau
YEMEN
SAUDI
ARABIA
IRAQ
TURKEY
RUSSIA
Kenkiyak
Atasu
RUSSIA
Tayshet
Page|30
Aktobe
West Siberian oil and gas fields
OECD/IEA2011
Figure9:CurrentandfutureroutesforChinasoilandnaturalgasimports
The boundaries and names shown and the designations used on maps included in this Information Paper do not imply official
endorsementoracceptancebytheIEA.
Source:IEAresearch.
OECD/IEA2011
ItwasnotuntilFebruary2009thatChinaandRussiasignedalongtermoilsupplydealworthUSD
25billion(seeAnnexes,2.ChinasloansforlongtermoilandgassupplysignedsinceJanuary2009).
ThroughthisagreementCNPCnotonlysecureda300kb/dsupplyofRussianoilfor20years,italso
gained access to Eastern Siberian oil through a longdesired pipeline. The 1030 kmlong pipeline
that links the East SiberiaPacific Oil (ESPO) pipeline to the Daqing refinery complex via
Skovorodinowillhaveacapacityof300kb/d.11TransneftwillreceiveaUSD10billionloanfrom Page|31
Chinatobuildthe65kmlongsectionofthisbranchfromtheESPOpipelinethatwillbelocatedin
Russia.Mostofthelengthofthepipeline,965km,islocatedinsideChina.CNPCcompletedthat
sectioninsideofChinainJune2010,anditisreportedthatoilstartedtoflowon1January2011.
Sealing the oil pipeline deal after so many years of negotiation was partly the result of a high
degree of motivation by both the Russian and Chinese NOCs (Rosneft, Transneft and CNPC).
CNPC, for instance, needs the pipeline to offset declining production from the Daqing oilfields.
The Russian companies seek access to new markets to diversify their customer base. The deal
wassealedwhentheChinaDevelopmentBanksteppedinwithfinancing.
Evenbeforeapipelinedealcouldbereached,oilbegantomovebyrailandbyseafromRussiato
China. In 2009 and the first half of 2010, China imported 306kb/d and 297kb/d from Russia,
respectively.RussiaisoneofthetopfivecrudesupplierstoChinaandatfullcapacitytheESPO
spurcouldraisetotaldeliveriesfromRussiato600kb/d,makingRussiathethirdlargestsupplier
of crude to China, displacing Iran. By 2015, this pipeline could transport 9% of Chinas crude
import.Chinamayimportasmuchas6.4mb/dofcrudeoilin2015(IEA,2010b).
Atpresent,ChinaandRussiaarestillintalksabouttheproposedgaspipeline,withnegotiations
onpricestillongoing,andthesourcesofsupplyandpipelineroutesstilltobedetermined.Gas
fromRussiaisexpectedtobedeliveredviathreepossibleroutes,onefromWestSiberia,andthe
othersfromEastSiberiaandtheRussianFarEastregion.Theeasternroutewouldsupply38bcm
comparedto30bcmforthewesternroute(IEA,2010b).ItisexpectedthatEastSiberiangaswill
beginflowingtoChinasometimeafter2015.
FromtheWest
CentralAsiaoffersChinatheopportunitytosupplementtheoilimportsthatwillcontinuefrom
the Middle East, and to significantly expand supplies of natural gas. CNPC has been the main
player to date; the majority of Chinas equity oil (317kb/d) in Kazakhstan belongs to CNPC.
SinopecandCICssharesareminimalbycomparison.
Chinasfirsttransnationaloilpipelineisthe2200kmKazakhstanChinaOilPipelinethatconnects
Kazakhstans Caspian Shore to the Chinese border at Alashakou in the Xinjiang Uygur
AutonomousRegion.ThepipelinehasenabledChinatoimportoildirectlyfromitsCentralAsian
neighbourandRussiasWestSiberianregion;by2015,thislinecouldaccountfor6%ofChinas
totalcrudeimports.Thetwocountriesagreedonthispipelinein1997,andthe450km,120kb/d
first stage, from the Aktobe regions oil fields to Atyrau, was completed in 2003. The 990km,
200kb/d second stage, from Atasu to Alashankou, was completed in 2005 at a cost of USD
700million;itmaybeupgradedto400kb/din2011.The790kmStage3fromKenkiyaktoKumkol
was completed in 2009 (Figures 5 and 8). CNPC and the Kazakh oil company Kazmunaigas took
equalsharesinthepipeline,thoughsomereportssuggestthatCNPCpaidfor85%ofthetotalcost.
11
Thepipelinecapacitycanbedoubledto600kb/dinthenearfuture.
OECD/IEA2011
AnothercrudepipelineoperatedbyCNPCistheAlashankouDushanziCrudeOilPipeline,whichis
a246kmpipelineconnectingtheKazakhstanChinaoilpipelinewithDushanziDistrict.Thisline
has200kb/dcapacity.
Thefirstgaspipelinefromthisregion,theCentralAsiaChinaGasPipeline,startsinTurkmenistan
and traverses Uzbekistan and Kazakhstan, connecting to gas fields in each of these three
Page|32 countries,andentersChinaintheXinjiangUygurAutonomousRegion,whereitconnectstothe
secondphaseofChinasdomesticWestEastpipeline(Figures9and10).
In 2007, CNPC secured a production sharing agreement (PSA) for reserves on the right bank of
AmuDaryariver(EasternTurkmenistan)andanaturalgaspurchaseagreementfor30bcm/yper
yearfor30years,12aswellasagaspipelinefromTurkmenistantoChina.InthesameyearChina
signedatransitagreementwithUzbekistanandKazakhstanforthispipeline(IEA,2008).TheUSD
4billionloanfromtheChinaDevelopmentBanktoTurkmengaztodeveloptheSouthYolotengas
field(BlockAandB)furtherenhancedthecooperationagreement.Theentirepipelineextends
7000 km across four countries with a total cost estimated at USD 7.31 billion. CNPC, the NOC
which is highly involved in E&P activities in the region, demonstrated strong technical capacity
andabilitytocompletethislongestpipelineintheworldinrecordspeed.
The Central AsiaChina Gas Pipeline was inaugurated on 14 December 2009 by the Chinese
President Hu Jintao in Turkmenistan. Gas started to flow into China in January 2010 and it is
expected to supply China at 30 bcm level to begin with and then ramp up to 40 bcm by
2013/2014.OnlytimewilltellifTurkmenistanisareliablesuppliertofulfilthecontractterms.
The success in securing the pipelines and oil and gas supplies directly from Central Asia should be
creditedinparttotheChinesegovernmentslongtermlobbyingeffortsintheregiontoinfluenceits
economic development and energy policy. It also changed the energy cooperation landscape for
Central Asia. China is a founding member of the Shanghai Cooperation Organisation (SCO) with
membersKazakhstan,Russia,Tajikistan,KyrgyzstanandUzbekistan.Chinahasacomprehensivepolicy
inCentralAsiathatgoesbeyondoilandgas.Chinesecompaniesfromallindustrysectorsareworking
with or trading from these countries. Broader cooperation on issues pertaining to regional stability
andcrossbordersecurityhasbuiltarelativesoundenvironmentofmutualtrust(Seaman,2010).
The pipelines also changed the energy cooperation landscape for Central Asia and the global
energysupplypatternfromthisregion(Rosner,2010).ThecapacityoftheCentralAsiaChinaGas
PipelineexceedsthatoftheEUsplannedNabuccoPipeline(31bcm)by25%,andcreatesforthe
first time a physical pipeline link between the Chinese market and the European and Russian
markets.ItmakesTurkmenistanahubbetweentheAtlanticandthePacific(IEA,2010b).
CNPC may have an interest in eventually linking this gas pipeline to Iran, as it has significant
investmentsthere(seeSection2,Interests,WhyareChinasNOCsgoingabroad?).Theexisting
gaspipelineallowsIrantoimport20bcmofnaturalgasfromitsneighbourTurkmenistan;inthe
short term, Iran is likely to remain a net gas importer despite huge reserves. However, if Iran
were to abandon LNG projects that depend on foreign proprietary technology and decided
insteadtodeveloptheoffshorereservesandrecentonshorediscoveriesbylinkingthemintothe
onshore pipeline network, significant gas might be available forexport. Whether this gas flows
westoreastmaydependonhowsuccessfulthecurrentTurkmenistanChinapipelineprovesto
be and, separately, whether a political solution is found for Irans nuclear power and uranium
enrichmentprogramme.
12
Laterreportedas40bcm/y.
OECD/IEA2011
Figure10:CentralAsiagasnetwork
Page|33
The boundaries and names shown and the designations used on maps included in this Information Paper do not imply official
endorsementoracceptancebytheIEA.
Source:IEAresearch.
OECD/IEA2011
ChinasrisingdemandalsopresentedanopportunitytotheCentralAsianstatesthatinthepast
relied on Russia for sales of 90% of their gas, both to Russian customers and, indirectly, to
Europeanmarkets.Anewlongtermcustomer,China,couldhelpCentralAsiatodiversifyenergy
export markets and give them more bargaining power with their traditional customers, Russia
andIran,andtheirpotentialfuturecustomersinEurope.
Page|34
Chinaisaimingtoincreasetheshareofnaturalgasinitsenergymixto8.3%by2015from4%at2009.
Turkmenistanhastheworldsfourthlargestgasreserves.Aninterdependentcommercialrelationship
couldhelpbothcountriestoachievetheirgoals.ForChina,toshipgasthroughpipelinescouldavoid
LNG imports through the Strait of Malacca, particularly LNG imports from Qatar. Chinas Xinjiang
province,richinenergyresourcesitself,couldbenefitfromtheoilandgaspipelineandtheeconomic
developmentitbringstostabilisetheregion,whereethnictensionssurfacefromtimetotime.
Itisnot clearhowquickly Turkmenistanwillbeabletoramp upexportsto thefull contractual
volumes (IEA, 2010b). It will depend on the speed of development of CNPCs production in
TurkmenistanandthatofSouthYolotanfield.
FromtheSouth
The last piece of the puzzle is the building of a gateway to shortcircuit the long sea travel,
therebyavoidingtheStraitofMalaccaandsupplyingChinaslandlockedsouthwestregion.This
time China has found a willing partner: Myanmar, which has access to the Indian Ocean and
extensivegasreserves(theworldstenthlargest).
CNPCandMyanmarsMinistryofEnergyhavesignedaMOU(June2009)toconstruct,operate
and manage the parallel SinoMyanmar Oil and Gas Pipelines. The oil pipeline with capacity of
440kb/d requires an estimated USD 1.5 billion investment. The 12 bcm capacity gas line will
requireUSD1billioninvestment.
TheoilpipelinewillstartattheKyaukpyuportofArakancoastintheBayofBengal.Bytheendof
October2009,CNPChadalreadystartedtoconstructtheunloadingwharfandterminal.This1100
kmpipelinewilllinktheIndianOceanwithChinassouthwesternprovinceofYunnan.Itwillenable
ChinatotransportoilimportsfromtheMiddleEastandAfricatoChina,avoidingpassingthrough
thenarrowStraitofMalaccaandsaving1200kmoftraveldistanceandtheassociatedcost.
The parallel gas pipeline will draw gas from blocks A1 and A3. However, these fields are only
expected to produce after 2013. The pipelines are to be completed by 2013/14, and could
transfer7%ofChinascrudeimportin2015.Theconstructionofbothpipelineswasreportedto
commence in June 2010. Even though the 440kb/d capacity only accounts for 14% of Chinas
importsfromAfricaandtheMiddleEastat2009levels(3.1kb/d),theoilpipelineopensagateway
toChinasSouthwestregionthattraditionallyhasdependedonreceivingoilproductsfromChinas
refinery on the eastern coast. Direct transport of oil to the region could boost new regional
refinerybusinessopportunities.CNPCisalreadybuildingrefineriesinKunmingandChongqing.
Chinas deal in Myanmar received international attention from human rights groups given
Myanmar governments poor human rights record, but the project has proceeded nevertheless.
SellinggastoChinacoulddiversifyMyanmarsgasexportdependencyonThaiconsumersandalso
helpMyanmarsgovernmentgenerateincome.Anestimated40%ofgovernmentrevenuecomes
fromgasexports.AccordingtotheUSscholarBoKong,theMyanmarChinaPipelinesarelikelyto
generateaboutUSD1billionormoreinannualrevenueforMyanmarsgovernmentover30years.
Inaddition,CNPCwillpaytheMyanmargovernmentsizeabletransitfeeswhichcouldreachUSD
15millionannually(Kong,2010).ThepipelineswillrunacrossMyanmarbeforeenteringChina.
OECD/IEA2011
DependenceontheMalaccaStrait
The investments by the NOCs in Chinas neighbours each project undertaken mainly for
commercialconcernsandnoneexclusivelyforpolicyconsiderationsmayaidChinatosignificantly
reduce the share of its oil imports shipped through the Strait of Malacca. This does not mean,
however, that the Strait will become less important to China, as it is only the share of imports Page|35
travelling through it, not the total volume, which will fall. Even were China to utilise these new
routestothefullest,thescopeislimitedtoradicallyshiftitsoilsupplylinesawayfromtheStrait.
ManyobservershavecommentedthattheenergyinvestmentsinChinasneighbouringcountriesare
changingenergysupplypatternsandmayhaveprofoundimpactsonregionalpoliticalandeconomic
relationsinNorthAsia,CentralAsiaandSoutheastAsia.Certainlytheseinvestmentsseemtoenhance
economic development for the partners involved. China gains energy supplies, while the host
countriesgaininfusionsofcapitalandaccesstomarkets.Whilethehostcountrieshavewelcomed
thesenewrelationswithChina,worriesthatothertradepartnerswillbeshutoutseemunwarranted
thusfar.InthecaseoftheCentralAsianrepublics,forinstance,thenewlinkswithChinaareclearly
beingusedtobalancethepreviousdominanceoftiestoRussia,nottoreplacethoseties.Russian
suppliershavemadeitclearthattheyarelookingatthewiderEastAsianandPacificmarket.Inthe
case of Myanmar, there are few significant existing energy trade ties to replace. Still, there are
certainrealitiesforChina,amongthemtheimportanceoftheStrait,thatwillnotchange.
TheMyanmaroilpipeline(expectedtobecomeoperationalin2013or2014)willcarrylessthan
500kb/d and KazakhstanChina Oil Pipeline has 400kb/d capacity. Assuming by that time the
pipelinecapacityfromRussiaisexpandedto600kb/dasplanned,Chinastotalpipelineimports
ofoilcouldreach1.44mb/d,or23%ofestimatedcrudeimportsin2015(6.4mb/d;IEA2010b).
AlthoughoiltransportedfromtheMyanmarpipelinewouldstillneedtobepurchasedinAfricaor
theMiddleEast,ChinawouldbeabletoreduceitsrelianceontheStraitofMalaccatoabout54%
of its total crude imports, down from the current level of 77%. This still means, however, that
importspassingthroughtheStraitwouldrisefromsomewhatover3.1mb/dcurrentlytonearly
3.5mb/din2015.
China is already less dependent on the Malacca Strait for its LNG supplies than for oil, as the
majority of LNG shipments (based on existing and future contracts) would still come from
Australia,PapuaNewGuinea,IndonesiaandMalaysia.TherecentinvestmentsbytheNOCswill
makeitevenlessdependent,astheyhavehelpedChinatosecureatotalof120bcmofnatural
gasby2015,whichcouldaccountfor52%ofChinasdemand.Thisassumesthatthetworoutes
from Russia are completed (total 68 bcm/y), all pipelines are used in full capacity, and Chinas
demandin2015is230bcmaccordingtoCNPCsforecast.
OECD/IEA2011
5. Conclusions
Frominvestinginleftover13assetsinpoliticallyriskyareasoftheworldinthe1990s,topartnering
withIOCstojointlybidforprojectsandacquiringassets,ChinasNOCshaveundergonearemarkable
transformation into globally competitive energy companies. With more experience in foreign
operations,skilledworkforcesandstrongfinancialbacking,theyareabletoacquirebetterquality Page|37
assets,areworkinginpartnershipwithotherNOCsandIOCs,andhaveestablishedsuccessfultrack
records.SuccesshasgiventheNOCsconfidenceintheirglobalquest.Evidenceregardingtheprices
Chinas NOCs have paid for assets is mixed; in some cases, they may have paid above market
values,butrecenteconomicconditions,goodfinancialperformance,andgrowingexperiencewith
international deals have allowed them to maintain an assertive resource investment stance. The
question of whether, and under what circumstances, they are paying premiums for their
investmenthasnotbeenansweredconclusively,andrequiresfurtherinvestigation.
TheNOCsinvestmentinglobalupstreamassetshasandwillcontinuetocontributesignificantly
toexpandingglobaloilandgassupplies.TheNOCsoverseasacquisitionshavealreadyaccounted
for 13% of total global M&A deals in the sector in 2009 and for 20% in Q1 2010. Their
investmentsbroughtmuchneededfinancialresourcesinthewakeoftheglobalfinancialcrisis.
TheloansextendedtoRussiawillfundthedevelopmentofRussiasEasternSerbianoilandgas
fields, which will supply the Asian and Pacific Rim markets. NOCs activities and investments in
CentralAsiacontributedtothegrowingoilandgasproductioninthatregion.Theirinvestments
intheMiddleEastandparticipationindevelopingofIraqioilfieldswillcontributetoprojected
incremental crude production as well. In 2010, NOCs invested nearly USD 16 billion in Latin
America,contributingtodevelopmentoftheoilandgasindustryinthatregion.
Despitetheincreaseintheirequityproductionvolumeoverseas,NOCsarestilldependentonthe
internationalmarkettopurchasemostoftheoilimportedtoChina.TheMiddleEastisandwill
continuetobethelargestcrudeoilsuppliertoChinaforyearstocome.Moreover,asignificant
proportionoftheoverseasequityproductionofChinasNOCsissoldintothemarketratherthan
senttoChina,thoughitisnotpossibletosaywithprecisionwhatthatfractionis.
ChineseNOCsinvestmentsinthedownstreamsector,particularlyintransnationalpipelines,will
add new dynamics to regional energy supply patterns, affecting the political landscape and
economicdevelopmentinneighbouringregions.However,theNOCswillstillhavetodependon
seabornetrade,includingthroughtheStraitofMalacca,tobringinmostoftheirimportedoil.
Somequestionsremainunansweredinthispaper.Futurestudieswouldneedtobecarriedout
with partners with deeper knowledge of the regions in which Chinas NOCs are investing
(particularlyAfrica),aswellasongovernanceissuesandChinesedomesticmarkets.Specialised
studiesofparticularinterestwouldinclude:
investmentsinAfricaandinLatinAmericabyChinasNOCsincomparisonwithotherNOCsandIOCs;
impactsofforeigninvestmentsintheenergysectoronthegovernancepracticesofAfricannations,
againbalancinganalysisoftheactivitiesofChinasNOCsandthoseofotherNOCsandIOCs;
motivations,rolesandinfluenceofthevariouspartiestodealsontransnationalpipelinesto
ChinafromCentralAsia,Russia,andMyanmar;
scenarioanalysisofpossiblesupplydisruptions,includingimpactontherelationshipbetween
theChinesegovernmentandtheNOCs;
influenceofChinesedomesticmarkettrendsonoverseasinvestmentsbytheNOCs;and
comparisonofthestrategiesfollowedbyChinasNOCsintheiroverseasoilandgasinvestments.
13
NOCsoftenrefertheearlieracquisitionstheymadeasleftoversfromtheIOCsbecauseoftheirlateentrytotheglobalM&Amarket.
OECD/IEA2011
6. Annexes
1.Chineseforeignoilandgasacquisitiondealssince2002
Deal size
Date
Company
Assets
December 2010
Sinopec
Acquired 18% of Chevrons Gendalo-Gehem deep water gas project

in Indonesia
18%
0.68
November 2010
CNOOC
Acquired 60% of Pan America Energy from BP under Bridas which

CNOOC has 50% share
60%
2.47
November 2010
CNOOC
Purchase 33.3% interest in Chesapeakes 600,000 net acres in the

Eagle Ford Shale
33.3%
2.16
October 2010
CNOOC
Purchase 2/3 of Tullow Oils stake in three blocks in Uganda with Total
2/3
Possibly
more
than 1
October 2010
Sinopec
Purchased 40% stake of Brazilian subsidiary of Spanish oil

company Repsol
40%
7.1
May 2010
China
Investment
Corp. (CIC)
Will hold 45% of Canadas Penn West Energy Trust to jointly develop
its bitumen assets in the Peace River region of Alberta, Canada.
45%
0.8
May 2010
CNPC
Purchased 35% stake of Shells wholly owned subsidiary, Syria

Petroleum Development BV. (SPD). SPD owns three production
licences in Syria covering 40 oil fields with 23 kb/d output in 2009.
35%
Reported
1.2-1.5
May 2010
Sinochem
Purchased Statoils 40% stake in Brazils Peregrino Oilfield. Statoil

will still retain 60%share and remain as the field operator.
40%
3.07
April 2010
Sinopec
Purchased 9.03% in Canadian oil sands company Syncrude from

ConocoPhillips. TOTAL is the partner who holds 50%.
50%
4.675
March 2010
CNPC/
PetroChina
and Shell
Joint bid for 100% share of Arrow Energy, Australia-based coalbed

methane (CBM) producer.
March 2010
CNOOC
Purchased 50% stake in the Argentinean oil company, Bridas

Corps., which has oil and gas exploitation operations in Argentina,
Bolivia and Chile.
October 2009
CNOOC
Purchased partial share of Norwegians Statoils US assets in

deepwater areas of Gulf of Mexico.
October 2009
CIC
Purchased 45% stake in Nobel Oil Group to fund Russian expansion

plans.
45%
0.3
September 2009
CIC
Purchased 11% stake in KMG by purchasing global depository receipts.
11%
0.939
September 2009
Xinjiang
Guanghui
Investment
Purchased Kazakhstan TBMs 49% share to jointly develop Zaysan

block in eastern Kazakhstan.
September 2009
CNPC/
PetroChina
Purchased 60% of Athabasca Oil Sands Corpss Mackay River and

Dover oil sands projects in Alberta, Canada.
60%
1.9
August 2009
Sinochem
Purchased 100% Emerald for assets in Syria and Colombia.
100%
0.878
June 2009
CNPC/
PetroChina
Purchased 96% of SPC (Singapore).
96%
June 2009
Sinopec
Purchased 100% of Addax.
100%
8.8
April 2009
CNPC and
KMG
Purchased MMG in Kazakhstan assets with KMG.
100%
1.7 CNPC
3.3 total
Share
(USD
billion)
3.13
jointly
50%
3.1
0.1
0.3
Page|39
OECD/IEA2011
Deal size
Date
Company
Assets
2009
CNOOC and
Sinopec
2008
Share
(USD
billion)
Purchased 20% stake for block 32 (Angola) from Marathon Oil.
20%
1.3
Sinopec
Purchased 1005 of Tanganyika for assets in Syria.
100%
1.8
2008
CNOOC
Purchased 100% of Awilco.
100%
2.5
2008
Sinopec
Purchased 60% of Australias AED oil for assets in Australia.
60%
0.561
2008
CNOOC
Purchase of 50% interest in Husky (Madura) Energys assets in

Indonesia.
50%
0.125
2008
Sinochem
Purchased 100% Soco Yemen for assets in Yemen.
100%
0.456
2006
CNOOC
Purchased 45% interest of OML 130 from South Atlantic Petroleum

Ltd in Nigeria.
45%
2.3
2006
CNPC/
PetroChina
Purchased 100% of Block H in Chad from Swiss company Cliveden.
100%
0.48
2006
CNPC and
Sinopec
Purchased 100% EnCana for oil and pipeline interest in Ecuador.
100%
1.47
2006
Sinopec
Purchased 97% of Udmurtneft for assets in Russia, then sold 51%

to Rosneft.
46%
1.7
approx.
2006
CITIC
Resources
Holdings
Purchased 50% of JSC Karazhanbasmunai for assets in Kazakhstan.
50%
0.950
2006
CITIC
Resources
Holdings
Purchased 51% in Seram block in Indonesia through acquiring the

assets from KUFOEC.
51%
0.0975
2006
Sinopec
Purchased oil sands projects by acquiring 50% of Ominex de

Colombia with ONGC.
25%
0.4
2005
Sinopec
Purchased 50% interest in Northern Lights oil sands project.
50%
0.05
approx.
2005
CNPC (50%)
and ONGC
Purchased 38% of Al Furat Production Company from PetroCanada.
19%
0.574
2005
CNOOC
Purchased 14.52% stake in MEG Energy for oil sand business.
15%
0.22
2004
CNPC
Purchased block 18 (Angola) from Angolan government when Shell

exited Angola
50%
2004
Sinopec
Purchased petroleum assets from First International Oil Corporation

in Kazakhstan.
100%
0.153
2003
CNOOC
Purchased 16.93% interest of Tangguh LNG project from BP and

then sold 3.06% to Talisman.
14%
0.340
2003
Sinochem
Purchased 100% Atlantis from Norwegian Petroleum Geo-Service

(PGS).
100%
0.105
2003
Sinochem
Purchased 14% interest in block 16 in Ecuador from ConocoPhillips.
14%
0.1
2002
CNPC/
PetroChina
Purchased Devon Energy Corporation for six blocks in Indonesia.
100%
0.585
2002
CNOOC
Purchase YPF Repsols upstream assets (Southeast Sumatra etc)

in Indonesia.
Page|40
0.585
Total: 65. approx.

Sources:FACTSGlobalEnergy (2010);Interfax;companywebsites;CNPCResearchInstituteofEconomics&Technology(2010);IEA
research;Chinesemediareports.
OECD/IEA2011
2.Chinasloansforlongtermoilandgassupplysignedsince
January2009
Country/Date
Lender
Angola
13 Mar 2009
CDB
Bolivia
Apr 2009
Borrower
Amount (USD)
Notes
Angola
government
USD 1 billion for

agriculture
projects
Since 2002, China provided an estimated

USD 5 billion in oil-related loans.
Bolivian
government
USD 2 billion to
build infrastructure
In return for energy contracts.
USD 10 billion Interest rate may

be 6%
Brazil
18 Feb 2009
CDB
Petrobras
Brazil
15 Apr 2010
CDB
Petrobras
Ecuador
Jul 2009
CDB
PetroEcuador
USD 1 billion
payment up front,
interest possible
6.5%
Ghana
Jun 2010
CDB
GNPC
Kazakhstan
17 Apr 2009
CEIB
KMG
USD 10 billion
Rosneft
USD 15 billion for

20 years
Average rate of
5.69%
CDB
Beneficiary/
Buyer
Sinopec and
its trading
subsidiary
Unipec
150 kb/d of oil in 2009; 200 to 250 kb/d

from 2010 to 2019 at market price.
Sinopec
Petrobras and Sinopec to co-operate in

expanding deep-water exploration,
production, refining and transport.
CNPC/
PetroChina
96 kb/d for two years.
Sinopec
Sinopec and GNPC signed MOU on

upstream, midstream and downstream
related oil projects. The loans provided to
GNPC are for the development of its
offshore Jubilee Oilfield.
CNPC
USD 3.3 billion used to buy 49% of

Manguistaumunaigas (MMG) from
Indonesias Central Asia Petroleum.
CNPC
300 kb/d for 20 yrs (2011-2030, 15 Mt/y

+/-4.1%). Market price at Nakhodka port
to CNPC. Pricing could be quoted
monthly. Will sell 9 Mt to CNPC and 6 Mt
to Transneft
Russia
17 Feb 2009
CDB
Transneft
USD 10 billion
CNPC
For construction of pipeline linking East

Siberia-Pacific pipeline system (ESPO)
at Skovorodino to Chinese Daqing
oilfield. Capacity 600 kb/d, length 1 030
km. Transneft to build part in Russia
(70km) and CNPC to build part in China
(980 km). China part finished June 2010.
Turkmenistan
Jun 2009
CDB
Turkmengaz
USD 4 billion
CNPC
40 bcm/y of natural gas for 30 years.
Venezuela
21 Feb 2009
CDB
Bandes
(PDVSA)
USD 4 billion into

a joint
development fund
CNPC/
PetroChina
200 kb/d of oil to CNPC, market price,

term contact, USD 1-2/b discount is
offered, invoiced monthly.
CNPC
Petroleos de Venezuela and CNPC to

form joint venture to jointly develop
Junin 4 block. It will produce 2.9 billion
barrels of heavy oil over the next
25 years. Also tied with infrastructure
projects including freeways and
power plants.
Venezuela
17 Apr 2010
Total
CDB
Bandes
(PDVSA) and
government
USD 10 billion and

RMB 70 billion
Approx. USD 77 billion
Sources:IEAresearch;FACTSGlobalEnergy(2010);Interfax;CNPCResearchInstituteofEconomics&Technology(2010);Chinese
mediareports.
Page|41
OECD/IEA2011
3.Recentagreementsrequiringsubstantialfutureinvestment
intheMiddleEastsince2008
Page|42
Date
Company
Country
Project Detail
Notes
May 2010
CNPC/
PetroChina
Qatar
PetroChina signed a 30-year PSA with

Qatar Petroleum and Shell to jointly
develop natural gas in Qatars Block D.
Shell will be operator, holds 75 % share.

PetroChina holds 25%. In case of
successful discovery, Shell and
PetroChina to produce natural gas under
supervision of QP, which agrees to buy
all output.
May 2010
CNOOC
Iraq
Partnered with Turkish Petroleum

(TPAO), won a technical service
contract to develop Missan Oilfields.
CNOOC holds 63.75% and is operator.
TPAO and Iraq Drilling Company hold
11.25% and 25 % respectively.
CNOOC and TPAO to increase the daily

output to 450 kb/d over six years.
CNOOC will earn USD 2.3/b on
incremental oil output once daily output
increases by 10% from current level.
Dec 2009
CNPC
Iraq
Formed consortium with TOTAL and

Petronas, won second-phase bidding.
Will jointly develop Halfaya oil field for
20 years. (CNPC 37.5%, TOTAL
18.75%, Petronas 18.75%, Iraqi South
Oil 25%)
Estimated reserve is 4.1 billion b/d. The

consortium aims to increase production
from 3.1 kb/d to 535 kb/d. Service fee is
USD 1.4 per barrel after 70 kb/d.
Aug 2009
CNPC
Iran
MOU for buyback contract to develop

South Azadegan field. (CNPC 70%,
Inpex 10%, NIOC 20%)
CNPC to invest USD 2.25 billion and

Inpex USD 0.25 billion for first phase of
development.
Jun 2009
CNPC
Iran
Preliminary agreement to develop

Phase 11 of South Pars field. (CNPC
40%, NIOC 50%, Petronas 10%)
Partners aim to produce 1.765 bscf/d

natural gas and other products. CNPC to
invest USD 4.7 billion.
Jun 2009
CNPC
Iraq
20 year service contract to develop

Rumaila oil field. (CNPC 37%, BP
38%, Iraqi South Oil 25%)
Service fee of USD 2 per incremental

barrel above baseline production of
1.75 mb/d. Consortium to pay USD 500
million soft loan to Iraqi treasury and
commit USD 300 million to develop field
in the short term. Long-term investment
could be up to USD 20 billion for capital
and operating expenses.
Jan 2009
CNPC
Iran
Buyback binding contract for

exploration and Development of North
Azadegan field for 25 years.
CNPC is expected to produce 75 kb/d in

first phase and 150 kb/d in the second
phase. It will invest USD 1.76 billion in
the first phase and total investment
increases to USD 3.5 to 4 billion in the
second phase.
Re-signed in
Nov 2008
CNPC
Iraq
Exploration and development of AlAhdab oil field.
Plan is to produce 25 kb/d in 2011-2012,

and to produce 110 kb/d for at least six
years. CNPC will need to invest at least
USD 1 billion for the exploration and
development.
Sinopec
Iran
In Dec. 2007, Sinopec signed a USD 2

billion deal to develop the Yadavaran
field.
Under phase I, expected to produce

85 kb/d in four years, increasing by
100 kb/d in three years under phase II to
reach 185 kb/d. Work started in Sep
2008.
(originally
signed in 1997)
2008
Sources:IEAresearch;FACTSGlobalEnergy(2010);Interfax.
OECD/IEA2011
4.ChinaslongtermLNGcontracts
Buyer/Supplier
CNOOC
NWS, Australia
Volume
(bcm/y)
Duration
Status
28.0
4.5
2006-30
Sales and purchase agreement (SPA) in December 2004.

Delivery began in May 2006
Tangguh, Indonesia
3.5
2008-32
SPA in September 2006. Delivery started in July 2009
Malaysia Tiga
4.1
2009-33
SPA in July 2006. Delivery started in October 2009
Qatargas
2.7
2009-33
SPA in June 2008. Delivery started in October 2009
TOTAL
1.4
2010-24
SPA in January 2009, following an MOU in June 2008
Qatargas
4.1
2013-na
MOU in November 2009
Qatargas
2.7
Queensland Curtis LNG, Australia
5.0
2014-33
SPA in March 2010
North Phase, Iran
n/a
20 years
Ongoing negotiations
PetroChina (CNPC)
12.7
H1 2010s
MOU in November 2009
Qatargas
Qatargas IV
4.1
2012-35
SPA in April 2008
Shell, Gorgon, Australia
2.7
2014-33
SPA in November 2008, following an HOA in September

2007
ExxonMobil, Gorgon, Australia

Woodside, Browse, Australia
Sinopec
3.1
2.7-4.1
2014-33
SPA in August 2009
15-20 years
Cancelled in 2009
2.7
SPA in December 2009
PNG LNG
2.7
2014-34
BG
1.4
2013-
Source:IEA(2010b).
2.7
Discussion as of November 2009
Cancelled, after an HOA in June 2008
Page|43
OECD/IEA2011
AbbreviationsandAcronyms
AED
AEDOilLimited
Bandes
VenezuelasSocialDevelopmentBank
bcm
billioncubicmeters
BP
BritishPetroleum
CBM
coalbedmethane
CBRC
ChinaBankingRegulatoryCommission
CDB
ChinaDevelopmentBank
CEIB
ChinaExportImportBank
CIC
ChinaInvestmentCorporation
CNOOC
ChinaNationalOffshoreOilCorporation
CNPC
ChinaNationalPetroleumCorporation
CPC
CommunistPartyofChina
E&P
explorationandproduction
ESPO
EastSiberiaPacificPipelineSystem
EU
EuropeanUnion
FIOC
FirstInternationalOilCorporation
GDP
grossdomesticproduct
GNPC
GhanaNationalPetroleumCorporation
HOA
Headsofagreement
IMF
InternationalMonetaryFund
IOCs
internationaloilcompanies
JSC
jointstockcompany
MOF
MinistryofFinance
MOFA
MinistryofForeignAffairs
KMG
Kazmunaigas
KUFOEC
KuwaitForeignPetroleumExplorationCompany
LNG
liquefiednaturalgas
M&A
mergersandacquisition
mb/d
millionbarrelsperday
MMG
Mangistaumunaigas
Mt
millionmetrictons
MOU
memorandumofunderstanding
Page|45
Page|46
NDRC
NationalDevelopmentandReformCommission
NEA
NationalEnergyAdministration
NEC
NationalEnergyCommission
NIOC
NationalIranianOilCompany
NOCs
Nationaloilcompanies
OECD
OrganisationforEconomicCooperationandDevelopment
OMR
IEAOilMarketReport
ONGC
OilandNatureGasCorporationLimitedofIndia
PDVSA
VenezuelanStateOilCompany
PGS
NorwegianPetroleumGeoServices
PNG
PapuaNewGuinea
PSA
productionsharingagreement
QP
QatarPetroleum
R/Pratio
reservestoproductionratio
SASAC
StateAssetsSupervisionandAdministrationCommission
SCO
ShanghaiCooperationOrganisation
Sinopec
ChinaPetroleum&ChemicalCorporation
SOEs
stateowned(invested)enterprises
SPA
salesandpurchaseagreement
SPC
SingaporePetroleumCorporation
TBM
TarbagatayMunay
TPAO
TurkishPetroleum
USD
USDollars
WTO
WorldTradeOrganisation
OECD/IEA2011
OECD/IEA2011
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OVERSEAS INVESTMENTS

BY CHINESE NATIONAL OIL COMPANIES

Julie Jiang and Jonathan Sinton

INTERNATIONAL ENERGY AGENCY

IEA member countries:

Please note that this publication

The European Commission

Main strategies used to expand

Expand oil and gas reserves and production.

Diversify energy supply sources and take

Diversify energy supplies to avoid risks.

Target assets to add synergy to existing assets.

Become international NOC.

Partner with other NOCs and IOCs, build

Develop an integrated supply chain.

Pursue market-for-resources deals that exchange

Gain technical know-how and streamline

Utilise strong financial resources and government

The NOCs ambition to expand internationally is reflected in personnel choices as well as in

Northeast (location tbd)

Investors from resourcerich countries

Saudi Aramco/ ExxonMobil

SABIC (Saudi Arabia)

Kuwait National Petroleum

Number of filling stations planned

Refinery product types

Qatar Petroleum /Shell

From east Siberian oil and gas fields

South Yolotan gas field

West Siberian oil and gas fields

Acquired 18% of Chevrons Gendalo-Gehem deep water gas project

Acquired 60% of Pan America Energy from BP under Bridas which

Purchase 33.3% interest in Chesapeakes 600,000 net acres in the

Purchased 40% stake of Brazilian subsidiary of Spanish oil

Purchased 35% stake of Shells wholly owned subsidiary, Syria

Purchased Statoils 40% stake in Brazils Peregrino Oilfield. Statoil

Purchased 9.03% in Canadian oil sands company Syncrude from

Joint bid for 100% share of Arrow Energy, Australia-based coalbed

Purchased 50% stake in the Argentinean oil company, Bridas

Purchased partial share of Norwegians Statoils US assets in

Purchased 45% stake in Nobel Oil Group to fund Russian expansion

Purchased 11% stake in KMG by purchasing global depository receipts.

Purchased Kazakhstan TBMs 49% share to jointly develop Zaysan

Purchased 60% of Athabasca Oil Sands Corpss Mackay River and

Purchased 100% Emerald for assets in Syria and Colombia.

Purchased 96% of SPC (Singapore).

Purchased 100% of Addax.

Purchased MMG in Kazakhstan assets with KMG.

Purchased 20% stake for block 32 (Angola) from Marathon Oil.

Purchased 1005 of Tanganyika for assets in Syria.

Purchased 100% of Awilco.

Purchased 60% of Australias AED oil for assets in Australia.

Purchase of 50% interest in Husky (Madura) Energys assets in

Purchased 100% Soco Yemen for assets in Yemen.

Purchased 45% interest of OML 130 from South Atlantic Petroleum

Purchased 100% of Block H in Chad from Swiss company Cliveden.

Purchased 100% EnCana for oil and pipeline interest in Ecuador.

Purchased 97% of Udmurtneft for assets in Russia, then sold 51%

Purchased 50% of JSC Karazhanbasmunai for assets in Kazakhstan.

Purchased 51% in Seram block in Indonesia through acquiring the

Purchased oil sands projects by acquiring 50% of Ominex de

Purchased 50% interest in Northern Lights oil sands project.