The race for energy acquisitions is on and the allegory of the hare and turtle often ascribed to China and India’s economies seems ever so fitting for the developing countries global oil deals. According to reports, China has been scouring the world from Venezuela to Saudi Arabia dipping into oil depots to secure enough oil for its burgeoeing population. Meanwhile, India which too has been bidding fiercely for the black gold has till date lost at least US$12.5 billion of contracts in the past year.
Is China hoarding too much oil, or is it being prudent? Is India’s bureaucracy bungling oil deals or are there just not enough funds in India’s coffers? According to the Paris-based International Energy Agency, India’s energy use may more than double by 2030 to the equivalent of 833 million metric tons of oil from 2007, while China’s demand may rise 87 percent to 2.4 billion tons. India’s oil import bill climbed six-fold in the past decade to US$85.47 billion for the year ended March, equivalent to about 7 percent of gross domestic product. China has spent at least US$21 billion on overseas resources in the past year, including state-controlled China Petrochemical Corp.’s $4.65 billion purchase in April of a stake in an oil- sands project in Canada. As energy consumptions rise in both developing economies, Inchin Closer looks deeper into the matter…
China succeeds in securing oil deals against India because it leans on its two biggest advantages against India – healthy finances and a government that has the financial breadth and the diplomatic will to push its oil companies. While China dips into its US$2.4 trillion of foreign currency reserves to buy stakes in oil and natural gas fields from Iraq to Uganda, India depends on its US$250 billion in foreign exchange reserves. State-run Chinese companies spent a record $32 billion last year acquiring energy and resources assets overseas versus India’s single $2.1 billion investment by Oil & Natural Gas Corp.
In order to raise funds for its oil acquisitions earlier this year India proposed a sovereign wealth fund to bid for reserves, told state-controlled ONGC and Oil India Ltd. to make a major acquisition each this year, and raised the amount they can spend without government approval to 50 billion rupees (US$1.1 billion).
ONGC plans to borrow US$10 billion over the next decade to purchase assets overseas. In September, China National Petroleum Corp., PetroChina’s state-owned parent, received a US$30 billion loan from China Development Bank at a discounted interest rate to buy energy resources, according to a Sept. 9 statement from parent China National Petroleum Corp.
“The financial firepower that the Chinese companies have is a factor,” Tom Deegan, Hong Kong-based head of energy and infrastructure at lawyers Simmons & Simmons, told Bloomberg. “They have access to capital and finance through Chinese banks which have the liquidity, which perhaps Indian companies don’t.” A stronger yuan would also make purchases cheaper for the Chinese.
“Chinese and Indian companies are getting into a competitive field and that is driving up asset prices,” Neil Beveridge, an analyst at Sanford C. Bernstein Ltd. in Hong Kong told Bloomberg, “That is why a lot of the companies try and do government-to-government deals. We saw that in the Indian companies getting a deal in Venezuela this year.”
ONGC, Indian Oil and Oil India were part of a group in March that agreed to develop reserves in Venezuela’s Carabobo blocks this year. “One of the advantages the big Chinese oil companies have is government support, it’s an open secret,” Gideon Lo, an energy analyst at DBS Vickers Hong Kong Ltd told Bloomberg. “The government establishes high-level contacts with oil-producing countries. Once this is done, the oil companies can come in and negotiate.” India is learning the tricks of this game only recently – ONGC agreed in 2005 to spend as much as US$6 billion on roads, ports, railway lines and power plants in Nigeria in exchange for 600,000 barrels a day of oil for 25 years. In April this year, Reliance Industries Ltd., operator of the country’s largest gas field, agreed to buy a US$1.7 billion stake in natural-gas properties from Atlas Energy Inc. On June 24 it announced a US$1.3 billion acquisition of shale gas assets in the U.S. from Pioneer Natural Resources Co.