Why China is the Next Big Oil Play
Stockpiling of reserves and foreign investments solidifies positioning in sector.
If you're looking for the next "Big Oil" play, bet on Beijing.
As my firm has been reporting for the past several years, China has been on a global commodities shopping spree, which includes locking up every source of oil that it can. The Red Dragon has cut deals in Africa, South America, Russia, and the Middle East -- and won't stop there. Even the mainstream news media is finally becoming aware of this crucial trend.
But here's the thing. It's not enough just to know that this is happening. In order to profit, an investor really needs to understand why it's happening -- and to invest accordingly. Investors who lack this insight may make the strategic misstep of betting heavily (or exclusively) on the Western heavyweights-- Exxon Mobil (XOM), BP PLC (BP) or Royal Dutch Shell (RDS.A) -- while ignoring the oil sector's real growth story, which is China.
Just this year alone:
- China and Russia have signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply directly to China. Actually seven agreements in one, the terms depict a deal worth trillions of dollars -- including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loans to Russian oil companies Transneft and OAO Rosneft Oil Co. China even gets a cut of Rosneft's production, as part of the deal.
- In Africa, China's CNOOC Ltd. (CEO) and Sinopec Shanghai Petrochemical (SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from US-based Marathon Oil (MRO). A key point of note: Angola -- historically one of Exxon's favorite investment targets -- has recently overtaken Nigeria as Africa's biggest oil producer.
- While noting that it's hardly a done deal, The Wall Street Journal did report earlier this month that China National Petroleum (CNPC) is interested in buying all or a part of Argentina's YPF SA (YPF) for $14.5 billion.
- Reports continue to circulate that CNPC will be taking the majority stake in Iraq's Rumaila oilfield from BP. Rumaila is Iraq's biggest oil field, producing more than a million barrels of crude oil per day.
- And China has become quite chummy with Brazil's Petroleo Brasileiro (PBR). Petrobras is developing a huge new offshore field -- one of the biggest new discoveries in decades, in fact -- and any deal would include a production-supply agreement.
This flurry of deals hasn't been a surprise to readers. Even so, it's worth taking a moment to look at some of the key catalysts behind many of these deals. Let's look at the Top Three:
1. Nervous Reserves: China is sitting on the world's largest pile of cash -- more than $2.3 trillion by some estimates. With an estimated 70% of that, or about $1.61 trillion in US dollars, there's no question it's a huge source of financial firepower strength at a time when global markets are uncertain, if not downright weak. But it's also a liability in that China can't diminish its high-concentration of greenback holdings without pushing the dollar off a cliff. So buying oil is a great way for China to diversify its reserves without kneecapping poor old Uncle Sam.
2. Those Not-So-Free "Free" Markets: China has less faith in the "free" markets than the West does. Ironically, the United States and other Western powers are partly to blame for Beijing's free-market skepticism. For instance, not only did the United States slam the door in China's face when it tried to buy Unocal (now a part of Chevron Corp. (CVX)) a few years back, but when former US President George W. Bush invaded Iraq, the war summarily cut off China's ability to source oil from that Middle East member of the OPEC 12 (the Organization of the Oil Producing and Exporting Countries). Prior to the invasion, Beijing really didn't consider the need to diversify China's foreign-oil sources so our military action prompted their economic reaction. Now the genie's out of the bottle.
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