Courtesy of The Financial Times, an excellent look at the reach of China’s state oil companies around the globe.  As the article notes:

On a leafy street in Almaty, a few hundred miles from Kazakhstan’s border with China, the elegant mansion of China National Petroleum Corporation is kept under close guard. Behind its closed shutters, Chinese oilmen have plotted a strategy to win a huge portfolio of Kazakh energy assets to feed their country’s need for oil.

China began discreetly buying Kazakh oilfields 10 years ago and now has more energy projects on the go in the central Asian nation than any other country. While the west’s biggest oil groups agonise over the risks of undertaking expensive infrastructure developments in obscure locations, Beijing has boldly built a 3,000km pipeline to lock Kazakhstan’s oilfields into its orbit.

It is moves such as these that have prompted fears of a clash between the west and China over oil. Both John McCain and Barack Obama used the threat during last year’s presidential campaign to call for greater energy independence. Sombre oil executives fear they will never be able to compete with the deep pockets of China’s government-backed companies and will be driven out of the few last available new oil patches.

The predicament seems even more dire in light of warnings from authorities including the International Energy Agency, the rich countries’ energy watchdog, that the world is heading towards another oil crunch by the middle of the coming decade.

At a conference last month, Christophe de Margerie, chief executive of France’s Total, challenged other oil executives to disprove his theory that the world would never be able to produce more than 100m barrels of oil a day – 20 per cent more than today – because so many of its remaining reserves lay in countries unwilling or unable to let international oil companies tap them.

In some areas, particularly central Asia, China’s ambitions are yielding results and Beijing is outmanoeuvring both Russia and western Europe. But for further-flung oil deposits, a new willingness by China to forge partnerships with international oil companies suggests the western oil executives’ worst fears have not become a reality.

Beijing’s readiness to invest in pipelines to bring central Asian oil and gas to its doorstep has given it an edge in the race for the remote region’s resources. It has also challenged Russia’s control over export routes out of the area – spurring Moscow to activate stalled plans to build pipelines to China.

China will be able to take up to 20 per cent of the former Soviet republic’s exports by the end of this year when a pipeline, already pumping oil from central Kazakhstan to the Chinese frontier, is linked with fields near the Caspian Sea. Chinese-controlled oil output from Kazakhstan already runs at nearly 300,000 b/d, more than one-quarter of China’s total foreign production.

Strengthening its hold on the region’s oil, China gave Kazakhstan a $10bn (£6.1bn, €6.8bn) loan this year repayable via future supplies and equity in a Kazakh oil producer. Beijing’s sovereign wealth fund recently bought 11 per cent of London-listed KazMunaiGas Exploration and Production, which is majority owned by Kazakhstan’s state oil company.

Sudan is another country in which Beijing has had successes in terms of production. China produces about 225,000 b/d in the north-east African nation.

But political strife is threatening its investment. Much of the oil China controls there is pumped from fields in the south to refineries in the north. Southern Sudan is expected to vote for independence from the Khartoum regime in a referendum in 2011, or fight for it before then – risking supply disruptions and the cut-off of its route for shipments.

In the rest of Africa, however, China has a far smaller presence than the western groups that shun Sudan. Its companies are making only gradual progress as politics and the power of the established companies get in its way.

In fact, in much of the world, rather than becoming the dominant force, Cnooc, CNPC and Sinopec, Beijing’s three main state oil companies, are learning that deep pockets, cheap labour and a willingness to look the other way are not enough to overcome the handicap of entering the oil race a century after it began.

In spite of its willingness to make agreements with rogue regimes such as those of Burma, Iran, Sudan and Guinea, China satisfies just 14 per cent of its needs through its overseas production, according to Wood Mackenzie, an industry consultancy.

“The Chinese national oil companies’ international equity production, even if it were all shipped back to China, will be only a fraction of its needs,” says Claire Wong-Low at PFC Energy, another consultancy. Although she expects their activities abroad to increase further, “political obstacles in many regions will grow as countries view them as a threat to domestic jobs and resources”.

The scope of China’s ambitions and the willingness of its companies to go head to head with established energy groups such as Royal Dutch Shell and ExxonMobil are evident in Cnooc’s proposal to buy 6bn barrels of Nigeria’s oil reserves.

The oil being discussed represents one in every six barrels of Nigerian reserves and much of it is in soon-to-expire contracts that belong to the western oil majors. It emerged just weeks later that the company was ready to compete with ExxonMobil, the west’s biggest energy group, to gain control of almost a quarter of Ghana’s Jubilee field, Africa’s largest offshore oil field.

But that is all still in the realm of ambition. Both Nigeria and Ghana have sought to play down the likelihood that Cnooc would achieve what it wanted.

For its part, Sinopec in March launched the biggest Chinese oil takeover of the year when it spent $7.6bn to buy Addax, a company headquartered in Switzerland that has operations in Nigeria, Gabon and the Kurdish region of northern Iraq. But Sinopec paid dearly. Baghdad, which is at odds with Kurdistan over how to share oil riches, retaliated by tossing Sinopec out of the consortium that last month won the right to develop the Zubair field.

In Nigeria, politics also threatens Chinese deals. The Lagos government is reconsidering the deals that Chinese groups struck with the previous regime. Those deals gave Asian companies the right of first refusal on oil projects in return for their promising to develop infrastructure, such as the Kaduna refinery, a railway from Lagos to Kano and a hydroelectric complex at Mambilla.

Rilwanu Lukman, Nigeria’s oil minister, says the new government is investigating whether the projects signed under the oil-for-infrastructure deal were still in the best interests of the country, especially after several companies failed to deliver on their promises. “It is up to discussion. We are looking at some projects to see whether we need to substitute other infrastructure projects that suit us better,” he adds

In Angola, China has gained a bigger presence than in much of the rest of Africa. Chinese banks have lent the war-ravaged country as much as $15bn at low rates with long repayment times and Chinese financial and technical help has kick-started 120 projects in the past five years, according to estimates by Chatham House, the UK-based think-tank. China’s own statistics suggest 50,000 of its nationals worked on bilateral infrastructure projects in Angola last year.

Since 2007, China has been importing more Angolan oil – 18 per cent of its needs – than any other country. Its companies have gained stakes in exploration and production projects led there by western companies. But even Angola has become more demanding, seeking to move away from loans backed by oil and insisting that foreign investors use more local labour and equipment.

Angus McCoss, exploration director at Tullow, a UK-listed oil company with large operations in Ghana and Uganda, has observed the maturation of Chinese companies working in remote African areas. “It has been no secret that some of the early projects the Chinese have been involved in in Africa have not gone down well because they didn’t use a lot of local labour,” he says. “I think they have realised their mistakes. They have learnt very quickly from them.”

At Total, Mr de Margerie believes the Chinese companies’ experiences have made them more open to partnering with western oil companies, saying: “They have discovered that it is not so easy. They have spent more than they needed to spend.” He adds: “When it is close to China, they might remain aggressive and want to go it alone. But in other areas they will be more pragmatic.”

Perhaps the clearest pointer to a constructive way forward is that of BP and CNPC in Iraq. On Tuesday, the two became the first team to win the right to develop Iraq’s oil fields, more than 30 years after the country nationalised its industry. They will work on Iraq’s giant Rumaila field, bringing its production to 3m b/d from barely 1m b/d today.

BP will provide technological expertise and the knowhow that comes from having discovered the field in 1952 and having studied it from afar for the past few years. CNPC will keep down costs on the $10bn-$20bn project. The Chinese will do this by providing “rigs, valves, pipes, pots and pans”, as Tony Hayward, BP’s chief executive, put it recently.

Providing basic industry hardware in a partnership that will add 2m b/d of supply to world markets and provide badly needed revenue for Iraq may be a far cry from a clash of civilisations. Nevertheless, China’s ambition and its advances abroad are a reminder that Beijing is deadly serious about its own rise from poverty. Regardless, of how benignly it proceeds, China will demand more additional oil in the coming decades than any other country in the world.

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Behind the quest

‘Profits first, national interest second’

Like Rahm Emanuel, the White House chief of staff, China’s energy planners do not want “a serious crisis to go to waste”.

The country’s big three state-owned oil companies – China National Petroleum Corporation, Sinopec and China National Offshore Oil Corporation – have been strongly encouraged to make use of the global downturn in order to expand.

The crisis “is equally a challenge and an opportunity”, Zhang Guobao, head of the national energy administration, said this year. “The slowdown … has reduced the price of international energy resources and assets and favours our search for overseas resources.”

The country’s oil companies are latecomers to the international oil exploration business and have few technological advantages of their own. But they do have two strong cards to play – abundant liquidity in the state-controlled financial system and strong political connections with a handful of oil-rich regimes.

The oil groups have always maintained close ties with China’s leading banks, but during the past year they have found it even easier than usual to access foreign exchange. China Development Bank and China Export-Import Bank have given enormous backing to resource-based investments, while CNPC recently signed a $30bn loan facility with state-owned banks to finance acquisitions.

The oil companies have also been quite happy to take advantage of Beijing’s strong ties with regimes shunned by the west – from Iran to Sudan to Burma.

At the back of the minds of China’s energy planners is an increasing concern about how to meet the country’s growing need for foreign oil. During the past decade, oil consumption has doubled – to 8m barrels a day – and analysts believe it could double again in the next decade as car ownership takes off among middle-class Chinese. Moreover, the country already needs to import about half of that oil.

While the investment in overseas production can appear to outsiders like part of a coherent government strategy aimed at securing future resources, however, the reality is much more complex.

Beneath the surface, China’s state sector often behaves like a group of fiefdoms battling for greater power and influence. “Executives in the industry like to say that when they make investments abroad, it is first about profits and only second about national interest,” says Shan Lianwen, director of corporate strategy at Cnooc.

The competition between the big three companies can be particularly intense and there have been occasions when they have bid against each other on overseas deals – notably when CNPC and Sinopec competed to develop an oil pipeline in Sudan in 2005.

That said, Beijing has made great efforts to co-ordinate the overseas investments of state-owned groups, especially given a growing perception that governments in Africa and elsewhere are playing its companies off against each other. In February Xiao Yaqing, the former chief executive of Chinalco, the state-owned aluminium miner, was appointed to a job on the state council, China’s cabinet, where he is trying to improve co-operation.

However, observers think that the interests of the individual companies remain at the fore. “The government gives broad guidance,” says Erica Downs, a specialist in Chinese energy at the Brookings Institution, a Washington think-tank. “But when it comes down to actually doing most of the deals, it is the companies which are in the driving seat.”