Energy & Resources

Loved in Lagos?

Oil-for-infrastructure deal may signal new Chinese charm offensive

Goodluck Jonathan sounds like an appropriate name for the current Nigerian president, in view of the fate of most of his predecessors. At last count, nine of the country’s 13 previous heads of state were deposed, murdered or died in office.

But the president may have been feeling a little truer to his Christian name this week, on news that one of China’s largest construction firms had made a $23 billion offer to build three oil refineries and a petrochemical plant in his country.

Under the deal, China State Construction Engineering Corporation (CSCEC) will lead the project. Statefinancing will be secured against oil export proceeds, with the refineries to be managed by a CSCEC consortium until full recovery of the loans.

Goodluck’s gambit in all of this looks straightforward. Nigeria is the world’s eighth-largest oil exporter but has little refining capacity of its own, relying instead on foreign imports of fuel. That would change under the volume targets envisaged in the deal. Nigerian refineries would pump out more than double domestic fuel demand, with the surplus to be exported to neighbours.

Chinese intentions look plain enough too, says FT.com. The hope is for a deeper integration into Nigeria’s petro-economy, so as to be better positioned to “gorge” on the oil reserves themselves. Forget about the commercial calculations for the moment. This is a deal in which Beijing is keen to make itself more friends.

That fits with speculation that Beijing has long had a beady eye on Nigerian output, following the leaking of correspondence between Chinese oil major CNOOC and a Nigerian presidential advisor last year that appeared to outline a desire to buy up 6 billion barrels of reserves.

The rumour was that the Chinese would bid for 16 licences currently held by Western oil companies, although CNOOC denied the claims. But a series of ‘oil-for-infrastructure’ investments in the region in which Chinese firms commit to building ‘downstream’ projects (like refining capacity) in exchange for access to ‘upstream’ assets (oil concessions) has done little to assuage the critics.

Let’s assume for a moment that the Chinese offer does have an ulterior motive, and really is part of a gameplan to secure some prime offshore real estate. Will it work?

Quite possibly not in the Nigerian case, says Chatham House, an independent think-tank in the UK. Most of the previous deals have failed to get off the ground. Dams, railways and gas pipelines also slated for construction under oil-for-infrastructure arrangements have not been built either.

The problem is the fluid nature of Nigerian politics, with changes in government forcing contract reappraisals and rebids. For example, the flurry of deals concluded under the Obasanjo regime before 2007 were largely consigned to the presidential dustbin under next head of state Yar’Adua (Goodluck’s predecessor). That makes Nigeria somewhat different to Angola, where the regime is more stable and China’s investments have often enjoyed more successful outcomes.

Back in Nigeria, the Chinese have had to take their place in a lengthy queue of bewildered foreign suitors. Sinopec’s $7.2 billion acquisition of Addax in 2009 (and its series of Nigerian oil blocks) seemed to suggest that a lesson had been learned, with its focus on buying out an existing oil producer direct rather than engaging in more complex oil-for-infrastructure agreements.

Not that the Chinese seem quite ready to give up on the charm offensive completely, and the CSCEC offer may even signal a new round of overtures.

The China Daily was certainly keen to present a wider discussion of China’s commitments in Nigeria this week, highlighting CSCEC’s 56 projects, $10 billion of investment, and 10,000 local employees. All that hard work was having a positive impact, the newspaper implied. Take last year’s Pew Global Attitude survey, in which 85% of Nigerians viewed China favourably. That was the best response from all 24 foreign countries surveyed.

At the other end of the scale, of course, are those who distrust anything that China does in Africa, calling it a “rogue donor”.

Deborah Brautigam, an associate professor at the American University’s International Development Programme, disagrees. In her recently published The Dragon’s Gift: The Real Story of China in Africa, she argues instead that the Chinese way of doing business donor-wise sometimes has advantages.

For one thing, they rarely “poach” skilled staff from African ministries. Their own experts don’t cost much, and they concentrate on turnkey infrastructure projects that put less strain on the weak capacity of their partner governments. Embezzlement and corruption is minimised by rarely transferring cash to governments. Instead, aid is disbursed to the Chinese companies who do the projects.

Brautigam also says that the Chinese see nothing wrong with using subsidies to help foster investment by their own companies, something that the Japanese did too while investing in the Southeast Asian “miracle” in the 1970s and 1980s. All the same, she sounds her own note of caution on the CSCEC deal, pointing out that it is only an MOU at this stage. That makes it “more than a first date, but much less than a wedding ceremony”. But who knows: perhaps with a little more Goodluck, the happy couple might yet reach the altar.


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