Double Stroke Tie

Double Stroke Tie

Wenran Jiang
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Oil and gas from sub-Saharan countries, a historic destination for Chinese investments abroad, have for years been a fundamental support to the growing growth of the Dragon's economy, in exchange for infrastructural interventions essential for the growth of the Continent

In China’s heavily promoted "Belt and Road Initiative (BRI)," the African continent is strategically positioned as a major destination of China’s massive infrastructure building, investment and trade. From the sea routes of the Indian Ocean to the African coast, Beijing has proposed an unprecedented vision linking much of the developing world together across continents, a project that far exceeds the scale of the U.S. Marshal Plan for Europe after the Second World War. China is well prepared for playing such a role given the fact that it has been the largest trading partner of Africa since 2009, now doing twice as much trade with African countries as its trade with the United States. As China-Africa economic ties intensify, so is Africa’s increasing role in China’s global search for energy security, especially in terms of oil supply. Unlike the United States, which has increased its domestic oil and gas production dramatically in recent years due to the shale revolution, China’s dependency on imported oil and gas has increased substantially, with two thirds of oil and one third of gas now coming from abroad. Africa now ranks second to the Middle East as the major source of China’s oil imports. Thus, investing in Africa energy sources and importing them to China have been central to Beijing’s strategic planner and to its national oil companies.

Keeping up energy investment in Africa

Africa is one of the earliest destinations of Chinese overseas energy investment. China National Petroleum Corp. (CNPC), the top Chinese national oil company (NOC), entered the Sudan oil fields as early as the 1990s. Despite the controversies over the Darfur conflict, the separation of South Sudan and the civil war between the North and the South, Chinese NOCs survived, adjusted and consolidated their positions in the country, with a strong equity oil production presence in both Sudan and South Sudan, controlling as much as 75 percent of Sudanese oil production, according to one estimate. Prior to South Sudan’s succession in 2011, China had invested more than USD 20 billion in Sudan’s energy sector. While CNPC reduced its worldwide investment due to the declining oil prices in recent years, Sudan was an exception, and the Chinese Ambassador to Sudan Li Lian promised more investment in 2015 in an effort to boost Sudanese oil output.  While Sudan opened the door to Chinese oil companies, it is today a relatively small player in terms of both oil production and export to China. Chinese NOCs and private energy companies have expanded in the continent, currently operating in Angola, Nigeria, Chad, Uganda, Gabon and other African oil producing countries. The original Chinese energy investment model in Sudan, by focusing on upstream production, has been modified with many investment forms, and one of them is the well-known "infrastructure in exchange for resources" formula. In Angola, which has occupied the top three spots in China’s oil import (together with Russia and Saudi Arabia), China provided integrated energy investment focusing not only on upstream but midstream and downstream as well, such as the USD 2 billion loan for refinery construction. The Chinese government also provided USD 14.5 billion loan credit to build road, airport, port and other infrastructure projects. From 2010-2016, China gave Angola around USD 25 billion under their "infrastructure-in-exchange-for-oil" arrangement. In Nigeria, the largest oil and natural gas producer in Africa, China had to play catch-up as most of the country’s oil and gas development blocks have long been monopolized by Western IOCs. And here again Beijing plays a long-term game. While Nigeria was hit hard by the sustained low oil and gas prices after 2014 and domestic turmoil and violence, China extended its financial support to the country by pledging a USD 6 billion infrastructure loan, followed by a massive USD 80 billion energy specific MOU to upgrade Nigeria’s oil and gas infrastructure, both in 2016, a year in which the Nigerian economy was hit by its first contraction in 25 years. These agreements will take time to implement, but some of the provisions may have been implemented in the spring of 2017 and there is no doubt that these are life saving measures to a government that depends more than 90 percent on petrodollar income to sustain itself. Overall, China’s foreign aid and investment in Africa are now rivaling that of Western countries. In 2016 alone, China poured USD 36.1 billion into Africa, which accounted for 39 percent of the continent’s total foreign investment. In a continent where Western international oil companies (IOCs) have dominated the energy sector for decades, Chinese oil companies have managed the challenge of being the newest kid on the block with inexperience in host countries and a lack of advanced technology and management knowhow. They caught up by providing large-scale local investment in areas traditionally neglected by Western countries, thus taking a strong foothold in many African oil-producing countries.

An important source of oil for China

With the deepening of Chinese investment in Africa in general and energy related investment in particular, the continent has become an important source of oil for China. Angola, Nigeria, Libya and Algeria are among the top oil exporting countries to China, but Angola has taken an even more significant spot in recent years. During September to October 2017, Angola topped Russia as the largest supplier of oil to China, and the Top Ten list of China’s oil exporters also includes Congo and Gabon. Some reports attributed the surging demand of China’s growing regional refineries and the reduced U.S. imports from Africa and the Middle East as causes of the growing exports from Angola and Saudi Arabia to China. However, a key factor in Angola’s case is that the structure of its "loan for oil" arrangement with China requires using oil as the repayment index of the loans. So the higher the oil price, the less oil it requires for processing the scheduled payment. But when the oil price declines, as has been the case over the past several years, Angola needs to allocate a lot more oil to repay the debt. The same logic applies to Angola’s arrangement to pay the services IOCs perform in its oil fields. This arrangement has left Angola with much less oil to sell in the open market to earn income and to finance its own government programs. Other countries with similar agreements with China, such as Nigeria and Venezuela, are facing the same problem, and they may face increasing debt repayment pressure under the sustained low oil prices scenario. On the other hand, one recent study reveals that while the total volume and value of Chinese oil imports from Africa have increased substantially in the past 15 years, both the share of African oil on China’s fuel imports and China’s  share on African fuel exports have in fact decreased from the peak period of 2007-2009. This points to China’s accelerated  efforts to diversify its oil import sources as well as Africa’s rapid expansion in oil exports to the rest of the world. The data also demonstrate that China’s overseas investments in the energy sector do not necessarily translate into its moving equity energy production abroad back to China. In fact, most of China’s overseas equity oil and gas production, be they in Canada or in Nigeria, are sold to the open market rather than shipped home. Such a shift in strategic thinking is very different from China’s initial rationale for its energy "go-out" strategy over a decade ago, when Chinese policy makers felt overseas acquisition of upstream assets and moving the products home would be the best way to secure China’s increasing dependence on imported oil. In terms of supply and demand dynamics, the growing downstream capacities of China’s refineries, both NOCs and private, lead it to buy certain crude products that maximize their profit margin. For example, China is reluctant to import high quality light oil from Nigeria due to its higher price tag. Chinese oil companies prefer to import lower quality but cheaper crude oil to further refine back home-this despite the fact that China has invested extensively in Nigeria’s energy sector.

Navigating new challenges and opportunities

While China continues to strengthen its traditional energy investment and trading relations with Africa, it is also confronted with many difficulties. In the host state, there are political risks of instability, unrest and civil war; there are the lack of established legal frameworks and consistent policies to sustain stable operations; there is rampant corruption and "rent seeking" behavior for implementing projects; and there are places where local resistance to China’s presence is strong. Internationally, there is competition from other NOCs and IOCs for energy resources; there is consistent criticism of China’s behavior in Africa from the Western press, and there are accusations of China’s "new colonialism." At the enterprise level, Chinese companies face unfamiliar cultural, language and social environments. Thus the learning curve is deep. These challenges, coupled with prolonged low energy prices, may have been behind Sinopec’s recent decision to sell its assets in Nigeria and Gabon, something unthinkable only a few years ago. With Sinopec also selling its energy assets in Argentina, China’s overseas energy engagement may enter a more complex era. On the positive side, Chinese President Xi Jinping’s Belt and Road Initiative has injected new developments with China’s energy engagement with the continent in recent years. One development is that more non-NOC investors and enterprises from China have entered the energy sectors in African countries. These new actors follow similar developments in China where some reforms have allowed other state owned enterprises, local investors and the private sector to complete with NOCs in energy related sectors. Another emerging trend of China’s energy investment in Africa is going beyond traditional oil and gas sectors to include other forms of energy investment, such as the close to USD 6 billion massive hydro project in oil and gas rich Nigeria. The focus on new energy sectors mirrors China’s rapid growth as the world leader in renewable and alternative energy sources. Chinese enterprises have quickly entered Africa in these new energy sectors since 2010. They have noted that two thirds of the population in sub-Saharan Africa still have no electricity, making the potential for hydro, solar and wind energy sources very attractive. For example, five of every six solar production firms in the world are Chinese, and these Chinese companies have expanded their operations in African countries in recent years. As documented by China-Africa Trade Research Centre, Chinese solar, wind and nuclear power companies have successfully bid on renewable and alternative energy projects in South Africa, Kenya, Namibia, Ethiopia and other sub-Sahara African countries. In the summer of 2017, the China-Africa Renewable Energy Cooperation and Innovation Alliance (CARECIA) was established in Beijing under the broader framework of the BRI.  Therefore, Africa to China is now more than a key supply source of energy and other resources. It is also a growing energy market with a population almost as big as that of China. Just like the penetration of Chinese manufactured commodities, electronics and mobile services in the continent, we can expect large scale Chinese energy products and services to enter into the African market as economic development and urbanization pick up pace in many African countries. If managed well from both sides, there is a distinct possibility that fast growing Chinese interests in Africa’s new energy sectors may promote local economic development by facilitating many countries to leap frog over the current fossil dependency situation and help the continent’s one billion population attain more renewable and alternative energy sources, thus accomplishing the goals of the Paris Climate Accord both in China and in Africa. But to such an end, Beijing may need to think carefully about how its new energy investment activities are indeed beneficial to the local economy and local jobs, and not predatory plans designed to seize the emerging lucrative market.

 

 


 

Wenran Jiang is the President of Canada-China Energy & Environment Forum and its annual conference since 2004, a Senior Fellow at the Institute of Asian Research at the University of British Columbia, a Global Fellow at the Woodrow Wilson International Centre for Scholars, and Special Advisor to the U.S. and Canada-based Energy Council.