Not strategic or profitable

Another case of poor planning?

Those looking for evidence of Chinese oil cunning often point to Iraq. While the US government spends $300 million a day on its troop presence in the country, state-owned PetroChina is now the largest foreign investor in the Iraqi oil sector.

But if the oil majors at China Inc are so full of guile, why is the domestic media accusing them of gross mismanagement of their foreign affairs?

It turns out that CNOOC, PetroChina and Sinopec have sometimes been less George Washington and more George III in their overseas ambitions in recent years. A new report from the China Petroleum University warns that as much as two thirds of their overseas investments are now losing money.

That’s an alarming conclusion for the world’s largest car market, which already has to import 57% of its oil.

The three majors have invested $70 billion in projects across 50 countries, according to the China Petroleum and Chemical Industry Association. Of that, $30 billion was spent last year alone.

“Not only the three companies, but many centrally-administered SOEs have suffered shocking losses,” a State Council researcher told the China Daily. He put the setbacks down to “wrong decisions”, “investment failure” and “arrogance”.

An over-aggressive expansion programme and a cumbersome approvals process have also been blamed. Sinopec’s 2008 acquisition of then Canadian-listed firm Tanganyika Oil is a typical example of what can go wrong. By the time that senior policymakers had signed-off on the takeover, the share price had doubled. Management ended up paying C$31.5 per share, up from only C$17.5 when negotiations started.

Nor can Sinopec’s refineries process Tanganyika’s heavy oil – it has to be sent to Libyan refineries first (where operations have been seriously hampered by the civil war).

In theory the oil majors are controlled by their state shareholder, Sasac. In practice, less so, leading to criticism from their controlling partner.

“The phenomenon of Chinese oil companies ignoring profitability and blindly building scale overseas should be taken seriously,” one annoyed Sasac official complained to newspapers last week. “Supervision of state-owned assets overseas should be strengthened.”

That wasn’t always the case. “[Before 2005] we invested in projects with significant revenue,” Zeng Xingquan, a former chief geologist at Sinochem, told the 21CN Business Herald. “Lately we’ve started to see problems including the lack of comprehensive risk assessments.” (He may be thinking – again – of Libya, where Chinese firms stand to lose almost $3 billion in investment capital if projects are nationalised under a new regime).

Those low returns might be justifiable, it is argued, if they lead to an improvement in China’s overall energy security.

“Since they are state-owned oil companies, they should contribute to the country’s oil supply,” thinks Wang Yong, former head of China’s Petroleum Chamber of Commerce.

But just 7% of foreign oil is shipped back home (the rest is hawked around the world). “Most of the oil from China’s overseas assets is sold on the international market at the spot price – not to China,” points out 21CN.

Increased production flow helps keep global prices down, of course. But the larger share of overseas sales make it harder to outline a direct case on energy security grounds.

Few believe that oil company bosses are acting on patriotic motives, either. “With the growth of the oil companies’ own financial strength,” writes 21CN, their primary goal is profits. But as they seek to build empires abroad, those profits are evidently proving elusive.

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