Why China seeks to intensify foreign oil investment

Just by looking at how fast China’s been investing in oil companies would lead one to believe that the country is in a hurry to build up energy resources to feed domestic demand. Last week alone, 3 oil firms from China, Cnooc, Sinopec as well as CNPC have shelled out billions to invest in foreign oil companies.

Cnooc bought into Canada’s Nexen by shelling out $15 billion. CNPC (together with Cnooc) entered into a partnership with Royal Dutch Shell to undertake oil exploration projects. Meanwhile, Sinopec paid $1.5 billion to land a 49% stake in British company Talisman Energy.

Some observers note that the country is actually after foreign technology and, most likely, profits.

Chinese oil firms are raring to align themselves with world-class oil firms and it sees acquisition of foreign technology as a more rational move.

In 2010, Cnooc clinched two contracts with Chesapeake for a minority interest in its shale gas project. Soon after, it was Sinopec’s turn to form a partnership with Devon Energy to explore unconventional shale gas in the U.S.

Economic policy fellow Derek Scissors of the Heritage Foundation commented that the two Chinese oil firms seem to take on a herd mentality. As soon as one buys into an oil firm, the other follows. He said the “pack” will invest in oil regions where more advanced drilling techniques are used to frack shale and that, of course, is in North America.

China has invested a little over $7 billion in U.S. oil projects during the first half of this year. The huge cash outlay is partly due to the high premium paid by China for these clinched deals. Cnooc reportedly paid a 60 percent premium when it bought into Nexen. A good number of contracts entered into by China did not materialize or had been delayed, so it is now paying a hefty price for creating such a poor image.

Nevertheless, China continues to pay as much just so it can close deals with oil and gas firms and eventually acquire the needed technological expertise. Still other groups, like the Brookings Institution, say that the deals with Devon and Chesapeake were carefully thought out. Their contract does not allow China to have a majority stake in company operations and the Chinese are kept out of drilling rig zones. Thus, there’s really no real transfer of technology as Chinese workers are off-limits to where the action really is.

But the Nexen contract will be different. China will have access to Nexen’s oil exploration technologies.

EIA revealed that China surpasses the U.S.’ recoverable shale gas deposits by almost 50 percent. The country has no immediate plans of tapping them but estimates that it will turn out to nearly 100 billion cubic meters of shale gas in the long-term.