China's Insatiable Thirst for African Crude

By Julian Murdoch

When it comes to crude oil, Nigeria and Angola aren't exactly household names like, say, Saudi Arabia. Yet these two West African countries are currently the fifth and sixth top exporters of crude oil to the U.S., exporting 668,000 bpd and 504,000 bpd, respectively.

But Americans aren't the only ones buying up African crude. Guess who else wants to poach our sources?

China, of course.

China's thirst for oil is on the rise; the International Energy Agency forecasts Chinese crude oil demand to grow to 8.3 million bpd for this year, only to increase to 8.6 million bpd in 2010. With domestic production basically flat, China must import almost two-thirds of the oil it needs, even as demand just keeps going up. Thus, the emerging giant has turned its eye toward Africa.

Although Chinese demand for West African crude is projected to fall slightly in October due to higher domestic inventories, that doesn't mean China has lost interest. Far from it.

Angola: Small Country, Growing Role

Since its civil war ended in 2002, Angola has intensified its crude oil production, almost doubling it in the past few years. It became a member of OPEC in 2007, and now has a production quota somewhere between 1.52 million bpd (according to OPEC internal documents) and 1.656 million bpd (according to country sources).

Either way, Angola is currently producing above its quota, with August numbers coming in at 1.835 million bpd. Surprise!

But Angola is a poor country, and has therefore needed a lot of foreign investment to develop its oil fields. Current investors include all the biggies: Exxon Mobil, Chevron, Marathon Oil and BP. Chevron especially has invested heavily in the country, funding several projects both on- and offshore.

"Looking forward, Chevron (CVX) has more than a dozen other significant capital projects in various phases of completion in Angola," said company spokesman Scott Walker in an article in Forbes. That includes the newly-launched Tombua-Landana deepwater project, which is expected to produce 100,000 bpd by 2011.

With all the foreign investment and new discoveries taking place, Angola may soon snag the title of Africa's largest oil-producing country away from Nigeria—if it hasn't already. As of August, the countries are still neck and neck by the stats: Angola produced 1.835 million bpd, Nigeria produced 1.870 million bpd.

Angola's Exports

Angola exports its crude across the globe, but is a particularly big supplier to China; in the first five months of 2009, 12% of Chinese crude imports came from the small sub-Saharan country. Last year, Angola was the second-largest source of crude for China, right behind crude giant Saudi Arabia.

With the big dogs of energy consumption at their table, Angola's in a particularly plum position, especially given falling output from other countries—such as its rival, Nigeria.

Nigeria

Ah, Nigeria. So much potential, yet so much conflict. Political turbulence has hamstrung the country's oil industry, as civil unrest and ongoing militant attacks on existing sites have prevented any new discoveries or oil lease offerings for the past two years. Since 2005, production has remained well below the country's estimated 2.7 million bpd capacity, with the latest August figures barely skimming the 1.870 million bpd level.

Yet, despite all the turmoil, at least some oil made it to export. In 2008, a full 44% of Nigerian crude headed to American shores; only 2% made it to all of Asia. China now wants to change that.

Growing Chinese Interest

For starters, China's CNOOC is currently in talks with Nigeria to buy up stakes in some pretty rich oil blocks currently controlled and operated by companies like Chevron, Total, Exxon and Shell. Of the 23 blocks China reportedly wants, 16 licenses are up for renewal.

That means there's a chance China could end up buying 6 billion barrels of oil—or one out of every six barrels Nigeria has in its proven reserves. That would go a long way in satisfying China's growing demand for oil—should Nigerian production ever pick up, of course.

The Impact For The Future

Of course, this recent interest isn't China's first foray into Africa; over the past five years, China has entered into numerous deals with various African countries, to varying degrees of success. Recent setbacks include Libya's veto of China National Petroleum Corp.'s bid for Verenex Energy, and when Sonangol, Angola's state-owned oil company, blocked the sale of Marathon Oil Corp.'s 20% oil field stake to Chinese oil companies CNOOC and China PetroChemical Corp. (Sinopec).

But should CNOOC succeed in winning some (or, by some miracle, all) the oil blocks it wants in Nigeria, the majors currently in the country will feel the bite.

The idea isn't completely out of the question. Companies currently doing business in Nigeria are frustrated over a supposed overhaul of the sector, and the Chinese may be in a strong financial position to negotiate. Mr. Tanimu Yakubu, the Nigerian president's economic adviser, recently told the Financial Times, the Chinese "are really offering multiples of what existing producers are pledging [for licenses] ... we love to see this kind of competition."

Of course, Mr. Yakubu could just be playing hardball, as he also said that China might not secure "anything close" to 6bn barrels from the negotiations, and that "We want to retain our traditional friends."

Still, should China's investments in Africa pay off, and the country's own oil consumption continue to grow, inevitably China would end up with a larger piece of the global crude oil pie. Imports to the U.S. could conceivably be siphoned off and sent to China, causing oil prices to rise here at home.

That said, if prices were to climb high enough, China would have a huge incentive to sell some of the oil it then controlled—because, after all, everyone likes making a buck.

Comments

[Denis Gould:]

China is being very smart, as usual, in its approach to African oil. The oil majors shy away from Africa's thugocracies for obvious reasons. But China doesn't need to worry about the Africans not playing by the rules, because they ain't gonna play by them either. If the Ugandans start any monkey business they can expect some Chinese military hardware (so beautifully displayed yesterday) headed their way.

Obama's comments today on Iran are worth noting for oil watchers. Matters Iranian seem to be coming to a head and it looks like it is another non-player-by-the rules, Russia, who is pushing Israel into a corner with higher oil prices the goal.

Oct 02 12:11 AM

[Faisal Humayun:]

A really nice article. China (in my opinion) is doing the right thing by focussing on natural resources and trying to diversify from the Dollar.

When the global economy recovers and 3.6 billion Asians start to grow and expand at a rapid pace again, Commoditiy prices would surely be much higher then it is today.

Also, African countries have been the center of exploitation for centuries. I hope that they get a better deal this time round.

Oct 02 01:49 AM

[Jimbo:]

The author seems to have a different metric regarding what is "small" and what is "large". Both Nigeria and Angola seem to be LARGE to me.

Oct 02 10:04 AM

[Willliam:]

It is not poaching if the Chinese are willing to pay more.

Oct 05 02:00 PM

[NoImSpartacus:]

Poaching? Oil is sold on an international market. What makes this writer think that Africa's oil 'belongs' to the Americans. Quite frankly, the rest of the world is waking up to the fact that the US pays for its commodities in IOUs (treasuries, printed money, 'securities') which it has no intention of ever paying back. When was the last time America retired any of it's National Debt?

Oct 18 04:20 AM

[Graham and ...:]

China has an insatiable thirst for Africa, period.

The Africans thought that European colonization was bad.

They will soon experience the Chinese variety.

Oct 26 04:06 PM