China and the U.S. on a Collision Course Over Energy

RelevanceFriction between the U.S. and China on matters energy has been evident for some time. The reasons for this are numerous, and some are not unique to the U.S. – China relationship. But the problem for both countries is that on most issues that pertain to the energy debate they are diametrically opposed. We can therefore look forward to more confrontation in the coming years. In the meantime, oil and gas firms from outside the U.S. will continue to stretch their lead over their U.S. based counterparts in China. In particular, the European based majors seem to be well placed.

AnalysisSeveral factors are dictating the nature of the U.S. – China relationship on energy. These include:

  • Competing for security of supply. This is the most obvious source of U.S.-China friction. The largest suppliers of oil to the U.S. are becoming less reliable by the day. The top 5 include: Canada, Mexico, Saudi Arabia, Venezuela and Nigeria. While Canada is a secure source of oil, the other 4 are clearly not. Consider:

Mexico, where production is falling quickly and there are concerns that reserves additions are not keeping pace.

Saudi Arabia, where there are real concerns over its ability to increase capacity and therefore meeting growth in demand.

Venezuela, its anti U.S. politics and question marks over its ability to exploit its reserves now that most IOCs have a reduced role to play.

Nigeria, which is beset by internal political issues.

With the Chinese economy powering ahead and its demand for oil increasing at a time when U.S. faces security of supply issues, the E.U., with its lower consumption rates and higher reliance on other sources, takes a back seat.

  • Aggressive international expansion by China. Chinese state owned oil companies have been scouring the planet seeking supplies, and doing deals in nearly every major province. These companies enjoy a much lower cost of capital than their competitors, and do not always need to trouble themselves with maximizing shareholder value or the profit motive. They are happy dealing with pariah states, and can easily call upon bilateral trade agreements to strengthen their negotiating hand abroad. This approach of “policies without principles” is seen as confrontational by Western governments (especially that of the U.S.) which use trade (or sanctions) as a tool to spread their version of the free market, human rights and the democratic process.
  • The demise of the IOC? Meanwhile, as the NOCs power ahead, the IOCs (the traditional vehicle of Western oil supremacy) seem to have been caught on the back foot, and are now playing a much smaller role within the industry than has historically been the case. They increasingly have to access technically and politically more challenging projects, and these are proving difficult, as evidenced by the increasing list of projects delays. At the same time they are handing back money to shareholders in record amounts – a sure fire indication that they are short on opportunity, even in today’s high oil price environment.
  • Chinese hegemony. These days it’s very hard to buy goods in the U.S. that are actually made within the country. There’s a good chance that your purchase, in fact, was made in China. Americans are heavily in debt, have a large trade deficit and their government is spending more (much more) than it collects in taxes. A large portion of these imbalances are funded by the Chinese. Add in the fact that China’s economy is projected to overtake (in size) the U.S.’s in the not too distant future and the concerns within the U.S. over the future role and intentions of China are understandable. When it comes to external relations, China dominates the thinking of U.S. academics, politicians, business leaders and opinion formers.

Europeans, on the other hand, do not give them same priority to China, and many will see that country’s ascent as a useful counter point to U.S. hegemony.

  • Globalization. While the U.S. has been a strong supporter of the globalization of the world’s economy, its credentials on foreign ownership of U.S. assets are less than sparkling. Americans like American investors and managers to own and run American firms. In this respect it is a fairly mono cultural country. Witness the furor over the purchase of American ports by a firm from Abu Dhabi and the blocking of CNOOC’s bid for Unocal(NYS:UCL). This lack of reciprocation may have hindered U.S. oil firm’s efforts to expand into China.

Some (but by no means all) countries in Europe have reciprocated to a greater extent.

  • Internationalization Strategies of U.S. Firms. The typical model followed by U.S. firms when expanding abroad has become known as an “international” approach. A U.S. firm will typically exploit domestic knowledge and capabilities by diffusing these to foreign subsidiaries, resulting in a centralization of core competencies and much head office control. It may be that the Chinese have found this model inappropriate for such a strategically important sector such as energy, where local control, influence and learning is deemed more appropriate.

The firms of many European countries (but by no means all) in contrast, have historically followed what is known as a “multinational” approach. Here the firm has provided for flexibility in responding to local differences through strong, resourceful, and entrepreneurial local operations, leading to a decentralized approach. Within the oil and gas industry Shell has been the exemplar of this approach. This may have fitted China’s requirements better.

29 August 2007

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