Strong energy demand drives China’s resource asset purchases

05 November 2009 10:14  [Source: ICIS news]

By James Dennis

SINGAPORE (ICIS news)--China’s aggressive drive to acquire foreign resource assets is borne of the country's need to secure energy supplies for its burgeoning economy and should not be seen as a move to galvanise its global influence, said an official at China market intelligence service C1 Energy on Thursday.

The acquisitions should be seen in the context of the country’s rapidly growing demand for energy, said Xin Yaoyuan, vice general manager at C1 Energy, at the 2009 Asia Pacific Petroleum Conference (APPEC) in Singapore.

Oil consumption in China had grown by an average of 7% since 2002 and was still expected to grow by 2.0-2.5% in 2009 despite the global economic downturn, he said.

China imports about 51% of its crude energy needs, Xin said. The country was forced to become increasingly reliant on imported crude due to strong demand, coupled with the rapid expansion of its refining capacity, while increases to its domestic crude output had been limited, he added.

Between 2002-2008, the country's crude imports grew at an average annual rate of more than 17% and were expected to rise by 5.24% in 2009 to 188m tonnes/year (approximately 3.8m bbl/day), said Xin. Net imports of oil products into China jumped 34% over the same period.

In order to meet its energy requirements, China had used its large foreign currency reserves to fund substantial acquisitions of energy assets around the globe, Xin said.

These included the purchase of Singapore Petroleum Corp by CNPC and a long-term deal to lend $25bn (€16.8bn) to two Russian energy companies in exchange for increased supplies of Russian crude.

Elsewhere, the purchase of the UK's Emerald Energy by Chinese oil and chemical firm Sinochem will provide oil supplies from wells in Syria and Columbia. 

Meanwhile, CNOOC and Sinopec have invested $1.3bn to secure offshore fields in Angola. Negotiations for further crude reserves are ongoing with Nigeria and Ghana.

Being a late entrant into the global energy markets, China had to concentrate on targeting assets at countries ridden with political instability, Xin said.

Investments by China in Iran and Sudan led to criticisms that China had undermined international sanctions.

Meanwhile, a joint venture between BP and CNPC to develop the giant Rumaila oilfield in Iraq led to accusations that China had benefited from the US military protection, Xin said.

China’s overseas crude production feeds into its massively expanding domestic refining system.  

In 2008, eight new projects raised Chinese refining capacity by some 1.4m bbl/day. Between 2009 and 2013, about 3.7m bbl/day of new refining capacity would be added, Xin said.

Major projects due to be completed after 2010 include Sinochem Gaoqiao's 12m tonne/year refinery and the 15m tonne/year Sinopec-KPC Zhanjiang refinery.

The relatively high run rates of around 70-80% at Chinese refineries also raises China's crude requirements, Xin said. The government encourages refineries to run at high rates through a new pricing system that guarantees refiners reasonable margins, he added.

“China’s refineries under Sinopec and PetroChina have enjoyed enviable profits this year, when overseas refineries are suffering losses” Xin said.

In addition, the steep contango in the crude and products markets had stimulated the building of strategic and commercial reserves in China, Xin added.

China's plan to set up 10m tonnes/year of state fuel reserves by 2011 was expected to lift demand this year, Xin said. The planned reserves represent roughly two weeks of current consumption of gasoline diesel and kerosene combined, he said.

End-user consumption, discounting inventory builds, had been almost flat in 2009 despite China's strong economic growth of about 8%, the C1 energy official said. 

Stronger demand from the agriculture and construction sector had been offset by slack demand from transportation, industrial and power sectors, Xin said.

($1 = €0.70)

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By: James Dennis
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