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May 25, 2011 China Briefing

The China-Angola Partnership: A Case Study of China’s Oil Relations in Africa

Following our other recent articles concerning Sino-African oil relations and the role of Chinese national oil companies (NOCs), this article in our China-Africa series takes a look at the case of Angola, China’s largest source of oil in Africa. Oil is at the crux of the Sino-Angolan relationship and a main driver of China’s expanding relations with south-central African country. Major aspects of relations between the two countries are China’s loans in exchange for oil as well as involvement in Angolan infrastructure.

Angolan economic recovery and oil
After struggling for over a decade, Angola gained independence from Portugal in 1975 and lapsed into a long civil war that lasted for 27 years until 2002. Since the end of the war, Angola has focused on postwar reconstruction and has made great strides in the development of its economic, largely propelled by oil. According to the Economist Intelligence Unit, Angola had an average GDP growth rate of 10.5 percent between 2006 and 2010 and although the country’s GDP was adversely affected by the Global Financial Crisis, it appears to be on its way to recovery.

Angola’s main exports are oil, diamonds, coffee, timber, and other mineral resources. The country joined the Organization of Petroleum Exporting Countries in 2007 and since 2008 Angola has been the top oil producer in Africa. In 2009, oil comprised 85 percent of GDP, 95 percent of exports, and 85 percent of government revenue. The majority of its revenues come from oil and diamond exports, and the majority of oil production is concentrated in Cabinda Province.

Angola’s state capacity remains limited, and organizations like the World Bank have recommended institutional reform of the oil and diamond sector. Poverty, corruption, lack of transparency, lack of infrastructure, and economic inequality issues continue to challenge governance and question whether economic growth can bring economic development benefits. With political power still centralized and the new constitution in 2010 further postponing elections, the process of Angola’s democratization remains in question. Below is a snapshot of Angola’s rankings in different development indices (with China for comparison).

Angolan oil
Oil has become crucial for Angola’s government revenues and economic growth. Created in 1976, Sonangol Group (Sociedade Nacional de Combustiveis de Angola) is Angola’s powerful state-owned oil company that oversees the production of oil. Sonangol mainly cooperates with international oil companies through joint ventures and production sharing agreements. Africa’s offshore oil is divided into 76 blocks, of which 35 are active. The following tables below show the oil companies’ stakes in some of the important oil fields. Block 0 and Block 15 make up the majority of Angola’s oil production.

China and Angolan oil
Chinese and Angolan economic and political ties expanded during the late 1980s, with the signing of their first trade agreement in 1984 and the establishment of the Joint Economic and Trade Commission in 1988. Since then, bilateral trade increased steadily and jumped from 2005. In 2010, bilateral trade exceeded US$120 billion and Angola is currently China’s largest African trade partner.

The single most significant commodity for the Sino-Angolan economic relationship’s expansion has been crude oil. According to the Economist Intelligence Unit, crude oil still composed over 95 percent of Angola’s exports, and China remained a significant player.

As the previous section shows, Western international oil companies (IOCs) still retain the biggest stakes and most operational rights in Angolan oil fields. Among the largest players are ChevronTexaco (U.S.), ExxonMobil (U.S.), TotalFinaElf (France), BP (UK), and Agip/Eni (Italy). Even so, Chinese NOCs have gained somewhat of a foothold in Angola. China’s oil deals with Angola are characterized by loans and credit lines in connection with infrastructure projects. There have been three major multibillion-dollar deals through China Eximbank:

• 2004: US$2 billion line of credit
• 2005: US$2 billion loan in exchange for oil; in 2006 China added US$1 billion more
• 2007: US$2.5 billion line of credit

In the Angolan oil blocks themselves, Chinese presence and activity includes:

• Block 3/80: In 2004, Sinopec sought to gain production rights in Block 3/80. Sinopec’s bid included a China Eximbank US$2 billion line of credit offer. This helped to sweeten the deal, and Sonangol decided in favor of Sinopec and did not extend Total’s license.
• Block 14: Also in 2004, Sonangol and Sinopec established a joint venture, Sonangol Sinopec International Ltd., through which they cooperate on oil production and refinement. Their activity also extends to Blocks 15, 17, and 18.
• Block 15, 17, 18: Sinopec and CNOOC gained exploration and production rights in these blocks, in cooperation with Sonangol as well as foreign IOCs.
• Block 18: Sinopec currently owns a 50 percent stake in Block 18, which it purchased for US$2.46 billion in March 2010
• Block 32: In 2009, CNOOC and Sinopec purchased a 20 percent stake in Block 32 from Marathon Oil Corp for US$1.3 billion.

Perspectives on China in Angola
China’s presence in Angola presents a fascinating case study of China’s oil relationships with African nations, and there is a complex interplay of benefits and challenges. In Angola, China’s presence remains modest relative to that of the Western IOC giants. However, beyond the percentage share of stakes, China’s loan-for-oil deals with Angola represent its growing reach and point to many intangible ramifications. China’s loans are an attractive alternative to those from international institutions that can have democratic-promoting strings attached. One common criticism is that China’s economic policy is resource-driven and goal-oriented; its means-to-an-end, non-interference approach can thus challenge Western countries’ hopes for democratic progress in Angola.

A fundamental question is whether moral responsibility is part of the equation, or whether oil deals are business transactions in essence ? one exchange for another. Another is what kind of balance is preferable between Angola’s economic growth and economic development objectives.

These perspectives can be useful for assessing the lens through which observers view China’s Angola policy. There is little doubt that an increase in Angola’s GDP output is necessary to increase its standard of living, but oil-rich countries ? Saudi Arabia and Oman, for example ? that experience “windfall gains” from oil may need more time to adjust.

Thomas L. Friedman’s “First Law of Petropolitics” posits an inverse relationship between the price of crude oil and the pace of freedom. Yet China also provides Angola with much-needed infrastructure construction, at the opportunity cost of possible transparency and corruption improvements often required of International Monetary Fund assistance. Ian Taylor has remarked that Angolan elites are “deeply appreciative of China’s ‘non-interference’ stance.” Comparatively speaking, the low-interest, condition-free, and infrastructure-friendly Chinese loans remain attractive to the Angolan government.

From Angola’s side, analysts note that the Angolan government also wishes to diversify both its exports and its trade partners. A 2007 Chatham House paper “Angola and China: A Pragmatic Partnership” found that the African officials interviewed wished to avoid overdependence on China as an economic partner. The Angolan government has also expressed this publically. For example, in 2008, Angolan President dos Santos remarked on the country’s economic relationships that “globalization naturally makes us see the need to diversify international relations and to accept the principle of competition, which has in a dynamic manner, replaced the petrified concept of zones of influence that used to characterize the world.” The People’s Daily also reported that the Angolan Trade Minister Maria Idalina Valente said in January 2011 that Angola’s biggest challenge is diversification of its economy beyond oil.

The Sino-Angolan oil relationship will likely remain significant and sustained for the coming decades. Yet it is important to avoid overstating China’s presence in Angola and to conclude that an increase in Chinese NOC activity means “crowding out” the IOCs in Angola. Principal-agent or neo-colonial conclusions of the bilateral relationship can overlook the two-way processes, as the Angolan government continues to bear in mind its relationship with China in context with its global economic partnerships and its long-term development. If the previous decade is any indication, China will continue to seek larger stakes in Angola’s oil sector, and both countries seem to favor the oil-for-infrastructure quid pro quo arrangement at present.

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April 13, 2011 China Briefing

The Geopolitics of China-African Oil

Since the mid-1950s and 1980s, China has expanded its relations with Africa as part of its broader strategy of developing friendly relations with the “Third World.” In recent years, China has achieved deeper ties with many African countries, and the issue of Chinese energy security and geopolitics in Africa has received more attention. This article offers an overview of the Sino-African oil relationship to provide a foundation for future analyses.

China’s growing energy needs
China’s pursuit of energy resources has generated great interest in the last decade, and energy concerns are indeed a vital national security interest for China in order to sustain both economic growth and economic development. According to the International Energy Agency (IEA), as of July 2010, China surpassed the United States as the world’s largest energy consumer. Analysts say that for China, energy security is crucial for its economic health and directly relates to the legitimacy and survival of the Communist Party. China’s push to secure energy resources and raw materials is part of its energy security diversification strategy, which is also evidenced in other regions such as the Middle East, Latin America, and Central Asia.

Oil, or petroleum, is only one component of the energy resource picture, though an increasingly important one. China remains dependent on fossil fuels such as coal, oil, and natural gas. In 2008, China’s oil consumption made up just under 20 percent of China’s total energy use.

China is currently the second-largest consumer of oil in the world, and more than half of its crude oil is imported. By 2020, official sources estimate that China will import about 65 percent of its crude oil. China does produce oil domestically, though in 1993, China became a net importer of oil and has since increased its dependency on foreign imports. According to the EIA, China was the second largest net oil importer in the world in 2009; official statistics also record China’s oil imports at 204 million tons in 2009, and crude oil accounting for 52 percent of China’s oil consumption.

China’s presence in Africa to secure oil resources has been increasing. It is important, however, to contextualize these relationships, and not overestimate China’s oil demands. For example:

• China still produces much of the oil it consumes
• China imports most of its oil from the Middle East (Saudi Arabia, Iran, and Iraq), Africa, as well as Asia (Russia), Latin America (Brazil, Venezuela), and North America (Canada)
• Africa reportedly only accounts for 9 percent to 10 percent of global oil reserves
• China imports an estimated one-third of its oil from Africa

For China, the Middle East remains the most important source for oil. While Chinese oil imports from the Middle East are projected to increase in the future, China also seeks to reduce its dependence on Middle Eastern oil. While African countries are neither the top oil-producing nor the top oil-exporting countries in the world, there are opportunities for future expansion and production.

Key aspects of Sino-African oil relations
In discussing Sino-African relations, there is perhaps a tendency to consider the African continent as one entity. While one can make broader observations about China’s relations with Africa, there is also much diversity and complexity in the many countries with which China has oil relationships. Below are some of the important points in contextualizing the China-Africa oil relationship.

• While a country may have large oil reserves, they may not be developed, or internal conflict may prevent stability of development and production.
• While the presence of Chinese National Oil Companies (NOCs) is expanding in Africa overall, it should be considered relative to Western presence and not overestimate their influence. It would be an overstatement to say that Chinese oil companies would supplant Western presence in the near-term.
• Oil is one component of China’s growing reach into Africa. Other resource extraction includes copper (Zambia, Democratic Republic of the Congo), cobalt (Democratic Republic of the Congo), and iron ore (Liberia).

The Sino-African oil relationship can become complex due to other linked areas of concern. Oil, as part of China’s desire to acquire more natural resources, has brought criticism of China’s “neo-colonialist” presence in Africa, and questions whether China’s presence benefits governance and the African people. Some of the related areas of interest include:

• Foreign aid: Chinese aid to developing countries can be attractive because of their no-strings attached conditions, in contrast with aid from Western countries or institutions such as the World Bank. (The “tied aid” from Western lenders may involve economic, political, social, or environmental penalties, as well as other “strings” such as democracy promotion or human rights concerns.) Chinese loan policies also tend to be less transparent and easier for recipients to use.
• Infrastructure: Linked with aid, China’s infrastructure projects in Africa can involve concessional or low-interest loans as well as direct financing. In addition, China can promote economic projects in areas in Africa deemed too risky or unfeasible by other governments or multinational corporations.
• Arms sales: China’s ties with many authoritarian regimes in Africa have continued to receive criticism about its lack of consideration for governance and human rights issues. China maintains a foreign policy position of “non-interference in domestic affairs,” and China’s arms sales to certain regimes in Africa have received international criticism. Notable cases are Sudan, Zimbabwe, Liberia, and Nigeria.

Main African sources of oil for China
The following chart provides information on the five African countries that are China’s largest sources of oil in Africa. With the exception of Sudan, Western oil companies are the largest players. In these cases, oil relationships point to comprehensive arrangements that involve trade and infrastructure as well as oil extraction and export.

Other African sources of oil for China
This chart briefly outlines other countries in Africa that provide sources of oil. In many of these countries, China has focused on entry and exploration of potential oil resources, again often seeking comprehensive development and economic arrangements.

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May 3, 2011 China Briefing

China’s Energy Strategy and the Role of Gov’t Oil in Africa

In a follow up to last month’s article “The Geopolitics of China-African Oil,” this article looks at the players in foreign policy on oil and, in particular, the role of Chinese national oil companies (NOCs), as well as potential opportunities for foreign businesses. Some of the main questions addressed are: Who are the main players in China’s African oil strategy? Are the NOCs really arms of the state? What opportunities exist for foreign companies in Africa?

China’s energy strategy
China’s diversification strategy is key for energy security and seeks to be comprehensive and maneuverable. In terms of oil, it is particularly significant in the short- and medium-term. There appear to be a few main areas of China’s energy strategy that take into account short-term as well as long-term considerations:

• Domestic exploration and extraction of non-renewable resources such as coal, oil and natural gas, as well as refining the fossil fuels for use (short to medium-term).
• Exploration and production of non-renewable resources, including exploration of potential new reserves as well as building of pipelines and other key infrastructure for transport (short to medium-term).
• Construction of renewable energy infrastructure, which include hydropower, solar, wind, and nuclear (medium to long-term).
• Investment and research for efficiency and sustainability, which targets both non-renewable resources, renewable resources, as well as negative externalities such as environmental degradation and waste management (medium to long-term). This is also emphasized in the 12th Five-Year Plan.

In the short to medium-term, fossil fuels will continue to play a crucial role in China’s energy security. In addition to extraction, China also aims to secure a long-term presence in African states in order to gain continued access to these resources. Since fossil fuels are finite and polluting energy resources, the Chinese leadership is also concurrently developing greener renewable energy sources for its long-term strategy.

China energy security and Africa
Given the importance of oil in China’s energy security, there has been much discussion regarding oil’s role in Chinese foreign policy. China’s main energy strategy in Africa emphasizes securing overseas contracts for exploration and extraction. Historically, the development of the oil industry in Africa required technologies and necessitated outside presence. In particular, the upstream business ? exploration and production ? continues to see large foreign investors. For China, this means generous investment infrastructure projects, for which oil-rich African states give oil as payment. A few of the consequences and perspectives are:

• Increased demand for foreign oil and relationships with oil-producing states. China is a net importer of oil and its oil imports are only expected to increase in the future. Heinrich Kreft has said that the trend of China’s dependence on fuel imports “is irreversible.” China’s energy demands mean strategic ties are needed with oil-producing states ? not only with African governments, but also with governments in the Middle East, Latin America, Central Asia, and Southeast Asia.
• Increased pluralism and strengthened role of oil players in the foreign policy process. Kenneth Lieberthal and Michel Oksenberg’s “fragmented authoritarianism” model of policymaking examines the growing political pluralism, competition between players, and challenges of coordination in Chinese foreign policy. The NOCs in China’s energy security will most likely become more influential as they pursue their own corporate interests.
• Energy insecurity and vulnerability may encourage neo-mercantilist, zero-sum approaches to energy acquisition. Some scholars say that since energy resources are crucial for China’s national security interests and survival, energy connects with issues such as regime legitimacy and governance as well. Other risks include the possibility of price changes and oil shortages. Edward Steinfeld has said energy has become “central to the issue of good governance” while Heinrich Kreft argued that energy is “a key factor in maintaining the Party’s leading role and keeping it firmly in control,” and sees this leading to a neo-mercantilist approach to gaining non-renewable energy resources overseas.
• China’s energy policy benefits developing countries, and the threat is overstated. There is also the argument that China’s role in oil-supplying countries is beneficial for their market and industrialization, as well as the export of oil that has been extracted with Chinese infrastructure investment.
• Less room for ethical behavior? Whether China’s rise will be peaceful and whether China will adhere to a “responsible player” role has been a point of much debate. China’s aggressive energy strategy has lead scholars such as David Zweig and Bi Jianhai to observe in 2005 that China has a “resource-based foreign policy” that “has little room for morality.” Scholars such as Ian Taylor have also pointed out that the domestic non-interference policy is an important question in regards to stability in states such as Sudan.

Oil continues to be a significant component of Sino-African foreign relations; in the context of energy insecurity, China has developed friendly relations with oil-supplying states, sometimes regardless of the internal ramifications in the country. China also appears to incorporate oil as part of the broader diplomatic and economic relationship. Sino-African trade has increased considerably over the past decade, and China sometimes links oil with infrastructure and other aid in “package deals.” It is important, though, that these observations be contextualized, since China has varying degrees of influence in different countries in Africa, and African NOCs and Western international oil companies still play enormous roles.

Main players in oil
Resource acquisition is the main push for China’s Africa strategy. The government remains the most significant player that pushes to secure oil and other resources. A number of commissions and ministries under the State Council work in China’s oil strategy in Africa, as it is inextricably linked to its economic growth and national security. The National Development and Reform Commission (NDRC), formerly called the State Development Planning Commission, focuses on administration and formulation of plans for economic growth. It coordinates strategies and manages China’s oil reserves as well as approves overseas resource acquisition (e.g. The Global Times recently reported that the NDRC approved 2 billion tons of iron ore purchases by the Wuhan Iron & Steel Group in Madagascar.)

The Ministry of Commerce (MOFCOM) formulates trade policy and plays a role in approving investment, aid, and loan packages to Africa. A number of departments work together to coordinate Africa policy, including the Department of West Asia and African Affairs and the Department of Foreign Aid. The MOFCOM also coordinates with the Export-Import Bank on loans and projects in Africa, while the Ministry of Foreign Affairs focuses on diplomacy and works to expand China’s bilateral relationships with African countries.

China’s national oil companies are influential state-owned enterprises (SOEs) that dominate the oil industry in China, and among the largest oil companies in the world. The State-owned Assets Supervision and Administration Commission under the State Council manages these SOEs and appoint the leadership of the NOCs. The three main NOCs are China National Petroleum Corporation (CNPC), China Petroleum & Chemical Corporation (Sinopec), and China National Offshore Oil Corporation Ltd. (CNOOC). CNPC and Sinopec focus on a range of production and exploration (Sinopec more so on downstream), while the smaller CNOOC is more oriented toward overseas acquisition. Below is a comparison chart of China’s main NOCs.

National oil companies ? Arms of the state or independent entities?
China’s three major oil companies are state-owned and have state financial backing. The role of the government vis-à-vis the NOCs has been subject to much interest and debate. While there is government push for energy resource acquisition, the NOCs also behave much like private corporations and pursue their own objectives. The interaction between the Party-State and the NOCs is an interesting one, in which the players can exert influence and are subject to mutual pressures.

The NOCs have a large degree of autonomy and do not always act at the behest of the state. Bates Gill and James Reilly wrote in their 2007 article “The Tenuous Hold of China Inc. in Africa” that the State Council agencies such as MOFCOM and MOFA do not have much authority or overseas influence over the NOCs. A February 2011 report by the International Energy Agency also found that the NOCs have a great deal of independence. Far from being arms of the government, the NOCs are profit-driven in their commercial interests. Erica Downs of the Brookings Institution, who has written extensively on NOCs, also pointed out at a Center for Strategic and International Studies event in October 2010 that China’s NOCs are lobbyists who have a powerful political role and often gain a “sympathetic ear” from the NDRC in pursuing their company interests.

Scholars have pointed out the tensions between the government and the NOCs, as well as between the NOCs themselves. The NOCs were created to obtain oil supplies for the country, but the state has encouraged commercial pursuit of interests. China’s NOCs also compete with each other to secure resources and increase influence at home. The IEA report noted that managers of the NOCs wear “two hats” and must balance their state and corporate roles. Because the NOCs have relatively narrow interests, their actions can have unintended impacts for Chinese foreign policy. For example, the actions of the NOCs abroad ? for example, in Angola and Sudan ? can affect international perceptions of China’s role in Africa, and these issues also concern China’s political and diplomatic relationships with their African partners. Being self-interested and foreign investment-oriented entities, as well as an interest group with autonomy, the NOCs have potential to provide both benefits and challenges for the Chinese government.

Opportunities for foreign businesses in Africa
Chinese NOCs may seek to establish ties with other firms, including Western firms, in order to expand their global reach, which can take the form of JVs. However, Chinese oil companies still seek to increase competitiveness vis-à-vis international oil companies. China likely sees more risk in bidding for Western firms as well, a lesson gained from CNOOC’s unsuccessful 2005 bid for the U.S.-based oil company Unocal.

Even though the role of Chinese NOCs seems to be expanding in Africa, Western international oil companies are still the dominant foreign players in Africa, both in terms of asset holdings and production quantities. Some of the major plays are Royal Dutch Shell (UK/Netherlands), BP (UK), Eni (Italy), ChevronTexaco (U.S.), Exxon Mobil (U.S.), and Total (France). The exceptions are projects in Sudan and Nigeria, for example, where China has a larger stake. African NOCs enjoy significant power as well, and many African countries remain open to investment from Western companies.