China: Spreading the Sovereign Wealth to Buy Overseas Commodity Assets

PetroChina Company Limited (NYSE: PTR) topped the Financial Times Global 500 as of the end of the second quarter with a market capitalization of USD367 billion. The Chinese state-owned enterprise (SOE) first passed ExxonMobil (NYSE: XOM) on May 22, 2009.

Its rise coincides with the emergence of China’s economy, which overtook Germany in January to become the world’s third-largest. China could surpass Japan, currently the world No. 2, within three to four years. Some economists forecast that the Middle Kingdom will overtake the US by 2030.

This rapid growth will only be possible if China can secure sufficient resources to support infrastructure improvements and the development of a Chinese middle class. The Middle Kingdom, its leaders focused on maintaining social order through managed economic growth, is deploying its vast excess currency reserves through SOEs such as PetroChina and sovereign wealth funds (SWF) such as China Investment Corp (CIC) to buy overseas commodity assets.

PetroChina International Investment Company Limited is paying CAD1.9 billion (USD1.7 billion) for a majority stake in two oil sands projects in Alberta, the latest in a series of overseas investments by China’s various state-run entities designed to secure access to resources.

PetroChina International Investment, a wholly-owned subsidiary of PetroChina Company, the publicly listed entity of state-owned China National Petroleum Corp (CNPC), will acquire a 60 percent stake in privately held Athabasca Oil Sands Corp’s Mackay River and Dover projects.

The projects, located in the middle of the Athabasca region of northeastern Alberta, contain an estimated 5 billion barrels of bitumen. Production at full capacity is projected to reach 300,000 to 500,000 barrels a day (bbl/d) at a total capital cost of CAD15 billion to CAD20 billion. The first phase of Mackay River is due to come on stream in 2014 with daily output of 35,000 bbl/d at a cost of about CAD1.1 billion. Athabasca estimates the two projects are viable at an oil price of USD50 to USD60 a barrel.

PetroChina’s Canadian venture follows France-based Total’s (NYSE: TOT) deal to sell a 10 percent stake in the Northern Lights oil sands project to SinoCanada, a subsidiary of Sinopec (NYSE: SNP), also a Chinese SOE. SinoCanada now controls 50 percent of Northern Lights, an in-development project that could require capital costs as high as CAD10 billion to reach production of 100,000 barrels per day.

As the figures detailed above suggest, oil sands projects are capital-intensive, long-term investments. The global economic slowdown and the financial crisis have only exacerbated the difficulties of getting projects funded, forcing many players to sell out or seek partners. That PetroChina--one of the world’s largest energy companies, backed by the Chinese government--is involved means MacKay River and Dover will get off the ground.

Apart from its considerable financial heft, PetroChina also brings technical expertise. The SOE has heavy-oil projects underway in northeastern China, where it employs technologies including steam-assisted gravity drainage (SAGD). Athabasca Chairman Bill Gallacher noted in a statement announcing the deal that PetroChina’s

field developments, operational methods, heavy-oil experience and research facilities are world class, and as a partner they will bring these very valuable attributes to the MacKay River and Dover projects in Alberta.

As for CIC, it made high-profile investments in US financials--before Lehman Brothers imploded--but kept most of its powder dry during the 2008-09 market meltdown. CIC reportedly held 87.4 percent of its overseas investments in cash or cash equivalents last year. According to Lou Jiwei, CIC’s chairman, the USD298 billion SWF is investing as much overseas each month this year as it did in all of 2008.

In July CIC bought a 17 percent stake in Teck Resources (NYSE: TCK), among the world’s leading producers of copper, metallurgical coal and zinc. Teck also has an interest in the Fort Hills oil sands project. The deal, like the PetroChina-Athabasca union, appears to be a win-win for both parties.

CIC wanted Teck because China is the world’s leading importer of iron ore and other commodities and the country must secure the inputs needed to support its growth. Teck had to bolster its balance sheet, and the prospect of stronger ties to the world’s largest commodities market was also attractive; Chinese imports of metallurgical coal could reach 20 million tons this year and could grow significantly in coming years.

China’s leadership will do everything possible to sustain the 8 percent rate of growth that’s necessary to support populations migrating from rural areas to urban centers. The government launched a USD587 billion stimulus plan in November 2008 and successfully boosted bank lending to USD1.1 trillion in new loans in the first six months of 2009, efforts that combined account for 45 percent of GDP. The amount of capital deployed via its SOEs and SWFs is relatively small, but its further indication that China will aggressively pursue its long-term interests and that Canada will benefit from these efforts.

Bubble Up

“It will not be too bad this year. Both China and America are addressing bubbles by creating more bubbles and we're just taking advantage of that. So we can’t lose.” -- China Investment Corp Chairman Lou Jiwei, speaking to reporters at a Washington, DC, conference sponsored by the Brookings Institution and the Chinese Economists 50 Forum.

Comments

[erniem:]

Welcome to the future. China is getting hundreds of billions every year in interest payments alone on US debt. They are doing what any smart investor would do, invest for the future.

Sep 06 11:04 AM

[john s. gordon:]

chinese understand the nature of capitalism better than we do.
> jack

Sep 06 12:15 PM

[utilitus:]

The Chinese represent the faction of the human species that has evolved pragmatically over millenia under the less than 'disneyland' conditions the western hemishere provided at the beginning of the industrial revolution (once the original inhabitants and other 'guest workers' were dealt with).

Capitalism is manifested most often just as an ideology run up the flagpole by naive average americans marinated in propaganda as intense as any cooked up by Mao. American democracy has so far failed to produce an electorate smart enough to handle either government or the market, yet that's all they talk about. Humans have always adapted creatively without such blather, though Ghandi and others thought they would they be 'good ideas'.

Science, socialist or otherwise, is the way foreward. Marx was probably right about the ultimate end of capitalism, where the rope manufacturers would have to sell their leveraged production to those non-capitalists about to lynch them with it, or I would add, to those who will hoist the white flag over Wall Street.

Question is, how are the Chinese, Arabs and those nations which can live within their means and without loutish capitalist rhetoric going to treat the enfeebled, destitute giant. What job will they offer? He does pack a big pistol he bought on credit, and has a 'legacy' slot awaiting him at a top university, if he can pass the entrance exam and pay the tuition.


On Sep 06 12:15 PM john s. gordon wrote:

> chinese understand the nature of capitalism better than we do.

Sep 06 02:41 PM

[RECESSIONPROOF:]

they need to put this papers somewhere

Sep 06 03:53 PM

[Canadian Re...:]

Do not put Chinese on the pedestal. They will spend just as good as us one of these days. Right now, they are just getting out of survival mode, so minimal spending overall. But the "middle class" is spending quite well just like the new rich.

All through Chinese history, dynasties collapsed because the emperors overspent and the peasants were overtaxed. China is not there yet. I believe quite a few of western countries are in the thick of it right now. So, be prepared for the day of reckoning.

Sep 07 12:43 PM

[anarchist:]

Let me see, how long has Canada been an independent Country? The U.S. was created a little over 200 years ago. How long did those dynasties take to collapse?


On Sep 07 12:43 PM Canadian Red Neck wrote:

> Do not put Chinese on the pedestal. They will spend just as good
> as us one of these days. Right now, they are just getting out of
> survival mode, so minimal spending overall. But the "middle class"
> is spending quite well just like the new rich.
>
> All through Chinese history, dynasties collapsed because the emperors
> overspent and the peasants were overtaxed. China is not there yet.
> I believe quite a few of western countries are in the thick of it
> right now. So, be prepared for the day of reckoning.

Sep 07 06:31 PM

[Spook:]

Because trade and business has been in the Chinese culture since the time of Roman Empire, the silk road, the paper money, standardization of weight and so.

But a huge chunk of Chinese are still more intellectuals than business or scientific.


> chinese understand the nature of capitalism better than we do.

Sep 07 09:15 PM

[Spook:]

Yep, dynasties overspent and overtaxed its subject, became paranoids and protectionist. But before the decline, there was this golden years, the rise of an empire that lasted at least 300 years on average, that's a long dynasties and lots of wealth.


> All through Chinese history, dynasties collapsed because the emperors
> overspent and the peasants were overtaxed.

Sep 07 09:19 PM