Will China Play Nice With Oil or Break Its New Toy?
Jan 14th 2014 11:14AM
Updated Jan 14th 2014 11:16AM
According to the U.S. Energy Information Administration (EIA), China surpassed the United States as the the world's largest importer of crude oil in 2013. Oil has an interesting history because of the large role that often politically volatile countries play in the industry. As Chinese oil companies look to become the new ExxonMobil and Chevron , will growing pains and an authoritarian government lead to troubles for CNOOC , PetroChina , and China Petroleum & Chemical ?
Room to run
China's growth has been a boon to many industries, from iron ore to automobiles. For example, China is the world's largest consumer of coal and copper, among other commodities. And, as noted, it just became the largest importer of crude oil.
The interesting thing about oil is that it's a consumable commodity—use it and it's gone. That's different than, say, steel. A car built from steel gets used for years and then the metal can be recycled. The gasoline that goes in the car, however, is replaced with brand new fuel with every fill up.
So while demand for things like iron ore and metallurgical coal may wax and wane over time, China's appetite for oil is going to keep growing. The same thing happened in the United States: More people, more cars, more oil. And China is a massive country, so there's still plenty of runway for it to follow the U.S. example.
Locking it in
The problem with importing oil is that the energy source is located in some undesirable locations. That includes hard to reach places like deep water, but also easy to reach places in the Middle East—like Iran and Libya. These countries don't always play nice with others.
That's one of the reasons why big oil companies like ExxonMobil and Chevron work so hard to diversify their sources. Sure, they have no option but to deal with unsavory characters at times, but those risks can be balanced by owning operations in more stable regions—like North America. For example, Exxon paid $40 billion for XTO Energy to lock in natural gas reserves in the U.S. market at what in hindsight proved to be peak pricing.
But Chevron's ongoing, and often farcical, lawsuit with Ecuador shows the risks of dealing with unstable governments. And it threatens to tie up Chevron's assets in other countries. This, despite the very real questions about the legitimacy of the case and the evidence against Chevron.
This helps explain why Chinese companies are looking to secure access to oil in politically stable regions. For example, China Petroleum & Chemical, more commonly known as Sinopec, acquired oil and natural gas reserves in Canada when it paid over $2 billion for Daylight Energy in 2011. And CNOOC finalized its purchase of Nexen, another Canadian energy company, for around $15 billion in early 2013.
PetroChina has also been expanding in North America, buying out its partner in a Canadian Oil Sands venture for about $675 million in 2012. However, this same company also just bought a 25% stake in an Iraqi oil project from ExxonMobil. Exxon remains involved in the project, which also includes BP, showing that everyone has to venture into world "hot spots" if they want access to oil.
Watch the politics
As China spars with neighbors over control of the Senkaku Islands (or Diaoyu Islands, depending on what country you back) because of oil, it will be interesting to see how the country handles political instability in oil rich regions. That's especially true as the world becomes increasingly concerned about China's global expansion.
It looks like CNOOC, PetroChina, and China Petroleum & Chemical have plenty of growth ahead as they try to sate China's growing oil demand. But don't forget who China has to deal with to get oil. These giants could get hurt quickly if tensions flare.
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The article Will China Play Nice With Oil or Break Its New Toy? originally appeared on Fool.com.Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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