OT How China is winning the oil race

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How China is winning the oil race
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As Americans pay more for gas, China gobbles up deals for new supplies of
oil and other critical resources -- often from rogue regimes in Africa,
South America and the Middle East.

By Jon D. Markman

Is America too ethical to have cheap gasoline?

That is the inescapable question presented to U.S. investors and policy
makers as pump prices soar following a state visit by Chinese President Hu
Jintao.

The United States is the world's greatest consumer of energy at present, but
China is the world's fastest-growing consumer. That puts us in direct
competition for any new sources of crude oil, natural gas, coal and uranium
that materialize through exploration and discovery, not to mention any
current sources that profit-seeking producers decide to put up for grabs.
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Increasingly, new energy sources that China is acquiring are in countries
that Americans find distasteful. Many of them are in Africa, in countries
with horrific human-rights records such as Sudan, Chad and the Republic of
the Congo. And much of the energy is controlled by rapacious despots in the
Central Asian republic of Kazakhstan and in Southeast Asia's Myanmar.

Energy acquisition is a zero-sum game in which there are winners and losers.
Any new energy that China obtains for its fast-growing economy is
unavailable to us forever. So you just have to wonder whether the United
States' antipathy for dealing with the worst of the world's rogue states has
led inexorably to $4-a-gallon gasoline this spring.

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The new colonial power
Dan Zhou, chief analyst at CEB Monitor Group in Beijing, points out that
China has emerged as an attractive partner in Africa and Central Asia in
four ways: Its intensifying demand drives up prices for their products,
which are largely raw materials such as oil, zinc and copper. It sets
virtually no standards for political transparency or economic reform to get
deals done. It ignores internal human-rights abuses as an impediment to
deal-making. And it is a one-stop shop, offering not just investment, trade,
skilled workers and military weapons, but also diplomatic protection in the
form of its United Nations Security Council veto.

China's hunt for oil in Africa has made it essentially the new colonial
superpower in the region, surpassing the memories of prior imperial forces
like Belgium, Italy, the Netherlands, Great Britain and France. And it has
achieved that status in record time. Trade between China and Africa, which
totaled $10 billion in 2000, soared to $39.7 billion in 2005. According to
research by CEB Monitor, here is a guidebook of China's assets in the
region:

* Sudan. China has a $4 billion investment in the country widely
believed to have the largest untapped oil reserves in Africa. The China
National Petroleum Corp. has a 40% stake in Greater Nile Petroleum, which
owns oil fields, a pipeline, a large refinery and a port. Last year, China
purchased more than half of Sudan's oil exports. Conversely, Sudan accounted
for 6% of China's oil imports, about 200,000-plus barrels a day.

* Angola. Offshore wells have made this Africa's second-largest oil
producer. Through February of this year, Angola accounted for 13% of all oil
imports to China -- making it the country's main supplier. China has
committed at least $3 billion in loans to Angola for additional oil rights,
and has supplied engineers and trained workers to develop fields. China is
now Angola's largest aid donor as well.

* Nigeria. This is Africa's largest oil producer, and until recently has
not been a major supplier to China. However, China's largest publicly held
oil company, CNOOC (CEO, news, msgs), bought a 45% stake in a Nigerian
oil-and-gas field for $2.27 billion last month and has also bought 35% of an
exploration license in the Niger Delta for $60 million.

* Elsewhere in Africa. CNOOC has been active in Equatorial Guinea, Chad
and Gabon; made investments of $170 million in the mines of Zambia; and
become a major weapons supplier and trading partner of Zimbabwe, run with
unbounded corruption by global outcast Robert Mugabe.


A less meddlesome buyer
In Latin America, the story is much the same: China is increasingly becoming
the partner of choice for repressive, paranoid or regionally ambitious
regimes that want to buy guns and tanks with their oil and ore revenues.

According to The Los Angeles Times, the Bush administration held talks with
the Chinese to encourage them to curb their role in training and advising
forces in our southern hemisphere. This is getting to be a problem, as the
region -- fabulously rich in metal, energy and agricultural resources -- is
increasingly run by ideologues willing to snub traditional U.S. interests
and seek less meddlesome buyers.

China is now Latin America's second-largest trading partner, surpassing
Europe. From 2001 to 2006, exports from the region to China rose more than
500%. In 2004 alone, Hu signed letters of intent worth $100 billion over the
next 10 years, according to published reports. Here are the key developments
by country, according to CEB Monitor:

* Brazil: The largest South American country exports iron ore, soybeans,
cotton, oil and sugar to China and jointly develops satellites and aerospace
equipment. China has promised $10 billion in additional investment in the
short term.

* Argentina: China has signed agreements offering $20 billion in
investment over 10 years. CNOOC is developing an offshore oil field.

* Venezuela: This is the third most important source of foreign oil to
the United States, but political and social disputes have led strongman Hugo
Chavez to seek alternative partners. He plans to double oil exports to China
to 300,000 barrels a day, about a fifth of the 1.5 million barrels a day
that are sent to the United States. The Chinese are buying stakes in several
oil fields, making their output unavailable to U.S. consumers.

* Ecuador: This country is a top-three producer of oil for the West
Coast of the United States. The Chinese just purchased one oil field and are
in negotiations for more.

Meanwhile, in the Middle East, Hu has found in Saudi Arabia another
repressive regime that wishes to ease away from a highly dependent
relationship with the United States. He visited in January, and turned
around and visited again this month on his way home from Washington, with
weapons sales and technology transfer high on the discussion list. China
gets an eighth of its oil imports from the Saudis, and trade has increased
ninefold since 2000 to $14 billion.

As you might expect, Iran is China's fastest rising partner in the region.
There have been unconfirmed reports that Hu has committed to spend $70
billion to $100 billion to develop a single large oil field in Iran, about a
fifth of which involves a $20 billion order to purchase liquefied natural
gas over the next 25 years. Zhou says that one Chinese company is expanding
Tehran subways, another is building out the city's fiber-optic networks, and
others are setting up auto and electronics factories. It probably won't be
long before Iran becomes China's largest source of imported oil, which will
put their economic and political interests directly opposed to U.S.
politicians and consumers.

Neighbors: theirs and ours
And finally we get to Central Asia republics, which formerly belonged to the
Soviet Union, all nestled up against China's back door. They deliver almost
500,000 barrels of oil a day through pipelines and tankers. This has been a
boon to the commissars of Kazakhstan, where gross domestic product has
reached $56 billion due to the development of its robust energy fields by
U.S., European and Russian explorers. The country shares a border with the
gigantic Xinjian province of China and has developed fast-expanding
bilateral trade, not just in oil and gas, but also cement and small
manufactured goods.

Of course, the Chinese have not left democratic countries' resources off its
shopping list. A couple of years ago, it bought a big stake in the big
Canadian miner Noranda, and it has dozens of supply relationships with
individual Alberta and Saskatchewan oil, gas and coal producers. No rock is
left unturned, so to speak; a venture capitalist in my Seattle office
building has helped Chinese entrepreneurs acquire privately held coal, gold
and silver mining interests throughout the western United States.

For stone-cold U.S. investors, the obvious play here is to simply tag along
by taking positions in foreign and domestic companies supplying the Chinese
juggernaut, whether they are base metal producer Falconbridge (FAL, news,
msgs) in Canada; a producer of Turkish energy like Toreador Resources (TRGL,
news, msgs) of Texas; a producer of Venezuelan oil and gas like Harvest
Natural Resources (HNR, news, msgs); or the two big Chinese energy companies
CNOOC or China Petroleum & Chemical (SNP, news, msgs).

For consumers, outraged indignation is about the best you can do, along with
new personal choices about limiting the use of fossil fuel. China has no
incentive to bend to U.S. demands to force change on its repressive foreign
energy partners. And our politicians are unlikely yet to ease up on rules
preventing U.S. companies from participating in the sort of bribery and
weapons brokerage that has become de riguer for doing business in the
equatorial zone where most new energy sources are being discovered.
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So this really is just another case of joining 'em when you can't beat 'em.
Shake your fist at the Chinese if you must, but also continue to buy global
miners and drillers on dips in this bull market for commodities; sell your
SUV; move closer to work; install solar energy panels; and make peace with
nuclear energy.


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