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China's push for oil in Gulf of Mexico puts U.S. in awkward spot

Four years after denying a Chinese bid to buy Unocal, the U.S. may be in too weak an economic position to object. Rebuffing China could also push it into the arms of countries hostile to the U.S.

October 22, 2009|David Pierson

BEIJING — A Chinese company's gambit to drill for oil in U.S. territory demonstrates China's determination to lock up the raw materials it needs to sustain its rapid growth, wherever those resources lie.

The state-owned China National Offshore Oil Corp., or CNOOC, reportedly is negotiating the purchase of leases owned by the Norwegian StatoilHydro in U.S. waters in the Gulf of Mexico, the source of about a quarter of U.S. crude oil production.

China's push to enter U.S. turf comes four years after CNOOC's $18.5-billion bid to buy Unocal Corp. was scuttled by Congress on national security grounds. The El Segundo oil firm eventually merged with Chevron Corp. of San Ramon.

Whether CNOOC's second attempt to lock up U.S. petroleum assets will trigger a similar political backlash remains to be seen. The sour U.S. economy and the need for Washington and Beijing to cooperate on potentially larger issues could mute any outcry.

The U.S. could also find it difficult to rebuff China when it has long welcomed other foreign investment in the gulf. In addition to StatoilHydro, foreign oil companies with stakes in deep-water projects there include Spain's Repsol, France's Total, Brazil's Petrobras, British oil giant BP and the Dutch-British multinational Shell.

The U.S. risks undercutting its foreign policy goals as well. Concern is growing over China's aggressive investment in oil-rich nations with anti-U.S. regimes, including Iran and Sudan. Denying China a shot at drilling in U.S. waters would only encourage Beijing to make deals in volatile regions given that new oil reserves in stable, democratic nations are getting harder to find.

"China doesn't have a lot of alternatives," said Ben Simpfendorfer, chief China economist for Royal Bank of Scotland. "They're very late to the game."

China, the world's third-largest economy, is the second-largest consumer of oil at 8.2 million barrels a day, behind only the U.S. at 18.4 million barrels a day. The Asian giant's consumption surpassed its domestic production capacity in the early 1990s; it now imports about half of its daily needs. China's consumption is projected to grow 31% between 2008 and 2010, according to the U.S. Energy Information Administration.

Beijing has urged the four major state-run oil corporations -- China National Petroleum Corp., Sinopec, CNOOC and Sinochem -- to acquire more international assets.

"Their predicament is they have growing demand and stagnant local supply of oil. So they are looking for sources abroad," said Leo Drollas, deputy executive director and chief economist of the Centre for Global Energy Studies in London.

To that end, China has been scouring the globe to slake its thirst for oil. The CNOOC-StatoilHydro deal, which was first reported last week by Dow Jones Newswires, has yet to be confirmed by Chinese officials. But if it comes to pass, it would be just one of a slew of natural resources deals cut by China since the recession began. Armed with record holdings of foreign reserves, the oil-hungry nation has spent billions locking up supplies at a time when crude oil prices are half what they were just over a year ago.

At $14.9 billion so far this year, the value of Chinese oil and gas mergers and acquisitions in 2009 is already double last year's figure, according to research firm Dealogic.

The largest this year was Sinopec's $8.9-billion purchase of the Swiss oil exploration company Addax Petroleum Corp. The deal, which was announced in June, gave the Chinese access to potentially vast oil deposits off the coast of West Africa and in northern Iraq.

China has also extended huge sums of credit, including a $25-billion loan to Russian companies Rosneft and Transneft, to pay off debt and develop the East Siberia Pacific Ocean pipeline in exchange for 300,000 barrels a day of oil.

The Chinese Development Bank lent Brazil's Petrobras $10 billion to help with its $170-billion, five-year plan to increase its crude output. In exchange, Petrobras agreed to give the Chinese 200,000 barrels a day of oil exports.

China extended a $4-billion loan to Venezuela to expand various oil projects, according to the Energy Information Administration. Chinese companies are also reportedly eyeing new oil deals in Nigeria and Ghana.

The positive effect of all that investment, some analysts said, is that Beijing is helping expand the world's oil supply at a time when many major oil companies have scaled back.

"The [global economic] crisis has put a stop in foreign company expansion plans, freezing mergers and acquisitions because profits are deteriorating," said Lilian Luca, chief operating officer of advisory group Beijing Axis. "China remains one of the few sources of capital."

But much of that capital is being funneled to governments with poor human rights records and links to terrorism.

China's importing of crude oil from war-torn Sudan increased 13.8% in August from a year earlier, according to Chinese state media.

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