China, Angola, and Oil

Via Africa-Asia Confidential, a report that China’s relations with Angola suffered a setback this month when Luanda turned down the acquisition by China National Offshore Oil Corporation and Sinopec of a coveted oil block, and a look at the complicated ownership structure of Sonagol Sinopec International (SSI), a joint venture between Sinopec and China Sonangol International Holding. As the article notes:

“…Sonangol, the state-owned oil company, invoked its right of first refusal on 10 September on a 20% share of Block 32 held by United States-based Marathon Oil. China National Offshore Oil Corporation and China Petroleum and Chemical Corporation (Sinopec) were planning to buy the block – a promising investment, boasting 12 oil discoveries and estimated recoverable reserves of 1.5 billion barrels of light crude – in a 50-50 joint venture for US$1.3 bn.

As an existing equity holder, Sonangol (20%), with partners in the block Exxon Mobile (15%), Petrogal (5%), and operator Total (30%), has the right of first refusal to buy the stake for the price on offer. Marathon Oil says that the decision does not change their plans and the deal is expected to go through before 2010. Sinopec and CNOOC, collaborating for the first time in such a venture, had outmanoeuvred Brazil’s Petrobras, India’s ONGC Videsh and even a separate bid by China National Petroleum Corporation (CNPC) for Block 32. The agreed price is much lower than Marathon’s hoped-for $2 bn. or even the Goldman-Sachs evaluation of $1.4-1.65 bn.

China is seen as one of Angola’s closest partners, and a partner who understands Angolan politics particularly well, so the failure of CNOOC and Sinopec in their bid is significant. Yet Chinese relations with Angola are not special; they are as pragmatic as Angolan relations with other countries.

Despite counting China among its largest concessional lenders, Luanda has made no secret of its efforts to diversify its portfolio of investors, ensuring that no one partner becomes too powerful in the oil industry. Consequently, Chinese efforts to secure oil equity in Angola have proved less successful than Beijing’s original expectations, and the Western oil majors still predominate.

Friends and finances
Predictions that the global downturn would not affect trade and investment in Africa proved optimistic and half-year trade statistics show that year-on-year from June, China-Angola trade fell 57% to US$5.8 bn., one of the biggest drops in bilateral trade. As in Congo-Kinshasa, Angola’s relationship with World Bank and IMF has been altered by its relations with China. High oil prices during the post-war boom and Chinese loans made dealing with the conditionalities of the Bank and Fund unnecessary. Now, with a weakened economy – by mid-year, the government had slashed the budget by 25% or $11 bn. – there is little choice.

Harnessing the opportunities provided by the financial crisis, Chinese multinationals have increasingly been on the lookout for overseas acquisitions. Efforts to acquire assets in Western markets, particularly in the USA, have repeatedly been quashed by concerned shareholders and governments alike. Smarting from such reactions, Chinese oil companies thus turned to developing countries, where their investment met with less resistance.

African countries, however, are also not keen to hand prized assets to Beijing’s companies, especially when oil prices have risen to between $70-80 per barrel. In Libya, the state-owned National Oil Corporation prevented the sale of Canadian company Verenex’s assets to CNPC this month, preferring to buy the assets itself and hold on to or sell them off for more when prices rise.

There are, though, some relations between the Angolan state and Chinese companies that are close. ONGC Videsh Limited (OVL) of India hoped to buy Royal Dutch Shell’s 50% share in Block 18 and cut a deal with Shell in April 2004, but the deal was blocked by Sonangol and OVL was accused of not understanding Angolan politics. The stake in Block 18 was eventually acquired by the Sonangol Sinopec International. SSI, a joint venture between Sinopec and China Sonangol International Holding, has the backing of key stake holders in the Angolan elite. It is majority owned by Sinopec with 55% and Beiya International Development (now known as Dayuan) and CSIH are partners with 31.5% and 13.5%. Sonangol Exploration and Production only has an indirect interest in SSI through its 30% stake in CSIH. New Bright International Development is Sonangol E.P.’s senior partner in CSIH with 70%.

Personalities who are close to the Angolan elite hold key positions in many of the companies linked to the CSIH and SSI. Helder Bataglia, Chief Executive of Espirito Santo Commerce (Escom), has partnered with Beiya International Development (now Dayuan) in the joint venture China Beiya Escom. Escom completed the construction of Luanda’s new tallest building, the Escom tower in August. French national Pierre Falcone acts as an advisor to CSIH through his private equity company, Pierson Asia, and is also a close confidant of Angolan President José Eduardo dos Santos.

Tangled webs
The Chairman of the China International Fund is also the Vice-Chairman of CSIH, Luo Fanghong. CIF, the construction arm of Dayuan, has a multimillion-dollar portfolio of infrastructure projects all over Angola. In Luanda, General Helder Vieria Dias Junior ‘Kopelipa’ chief of the presidential guard and head of the
Gabinete de Reconstrução Nacional is probably the closest advisor to President Dos Santos. The GRN was established to manage the CIF funds. It is also significant that Manuel Vicente, the Chief Executive Officer and Chairman of Angolan national oil company Sonangol, is also one of the directors of CSIH.

If relations between Angola and China are not special, relations between this group of individuals (and others) certainly are. Politics in Angola revolve around personal friendships and trust that has been won over many years and, in some cases, decades. The link surrounding CSIH, SSI, Dayuan, New Bright, as well as the personalities associated with them are largely based on an opaque clique.

SSI evades the classic definition of a national oil company and there are indications that within the company private interests are more overt than national interests. Nevertheless, Sinopec, despite being a national oil company, is one of the few state-owned companies that has managed to be included in this network through SSI. The CSIH and these personal relationships are the key to Chinese success, rather than the economic or bilateral considerations.

The informal nature of the ties leads to greater opacity. The World Bank, US government and Angolan sources estimate that CIF has loaned somewhere between $3-10 bn. to the Angolan government. CIF projects are approved on a project-to-project basis, with little oversight from the Ministry of Finance. In the run-up to the publishing of the 2009 budget, statistics showed that the GRN was supplied with a credit line worth $157 mn., most of which was directed towards low-income housing construction. The final 2009 budget, released in June, showed that the GRN only had funds of $125 mn., a far cry from the billions of dollars suggested in the West. Such a large discrepancy may be due to poor planning and inertia at the GRN, a lack of money at CIF and funds tracked so far off the books that they do not appear in any budgets.

Sonangol’s Vicente announced on 10 September that a new licensing round is likely to take place by the end of 2010. Before that can take place, a new constitution must be ratified. Presidential elections are now likely to take place in September 2010. A new licensing round is long overdue; it was delayed first by parliamentary elections in September 2008 and most recently because of low oil prices. Among the pre-qualified companies are several Asian oil companies such as Sinopec, India’s ONGC Videsh and Essar Exploration and Production, Pakistan’s Oil & Gas Development and Japan’s Inpex. SSI also pre-qualified as a non-operator and is expected to win acreage.

Dos Santos did not meet China’s President Hu Jintao at July’s G8 summit in L’Aquila, Italy as Hu had to cut short his visit because of violence at home, but he did meet South Korean President Lee Myung-bak and Indian Prime Minister Manmohan Singh. In August, South Korea revived its Angola/South Korea Joint Bilateral Commission on Economic, Technical and Scientific Cooperation. Angolan Minister of Public Works Higino Carneiro and South Korean Minister of Trade Kim Jong-hoon led their respective delegations. Oil acreage is surely part of the calculation, but it remains to be seen whether bilateral relations can trump the close-knit ties of friendship.”

This entry was posted on Tuesday, September 22nd, 2009 at 9:26 am and is filed under Angola, China, China National Offshore Oil Corporation, Sinopec, Sonangol.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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