China turns the tables on the US

by John Guerrerio

China seems to have taken a page from Warren Buffett's book of investing. Buffett says that only four things really count when making an investment, "a business you understand, favourable long-term economics, able and trustworthy management, and a sensible price tag".
It doesn't seem like the American government followed this advice in the recent financial bailout packages handed out; we still don't understand exactly how what happened occurred nor do we trust the management that caused the problems. China, on the other hand, seems to be following Buffett's advice to the 'T'. While the entire Western world remains cash-strapped, cash-rich China has been buying oil and natural gas assets around the world while expanding its coal production and investing in renewable technologies; in short, they are investing heavily in energy.

It is a turn of the tables that seems to fly in the face of established thought in the West that American democracy and capitalism has always and will always be the best way of running a society and doing business. Perhaps, the 21st century will belong to China.
China has already thrown down $ 13.4 bn on purchasing distressed oil companies around the globe this year; this is after throwing down $ 13.1 bn last year.

The number of locations and the dollar amounts are staggering:

-- Iraq (Aug.'09):
Sinopec, Asia's largest refiner, agreed to purchase Addax's development of the Taq Taq oilfield in its northern Kurdish region in June for $ 7.2 bn in China's largest-ever overseas acquisition. (AFP)

-- Russia (Feb.'09):
China reached a long-term deal to lend $ 25 bn to two Russian energy companies in exchange for an expanded supply of Russian oil. (WSJ)

-- Venezuela (Aug.'09):
Venezuela has promised to send China almost all its fuel oil output for three years in return for an upfront payment of $ 8 bn as part of China's global push to ensure future supplies of key natural resources. (Reuters)

-- Canada (Sept.'09):
PetroChina has agreed to pay $ 1.7 bn for a stake in a Canadian oil sands project in its biggest North American acquisition, widening the search for energy resources overseas. (Bloomberg)

-- Angola (Jul.'09):
CNOOC and Sinopec will acquire an undivided 20 % participating interest in the production sharing contract and joint operating agreement in block 32 offshore located in Angola. The transaction is valued at $ 1.3 bn. (AllBusiness)

-- Argentina (ongoing):
China National Petroleum Corp. and CNOOC have proposed paying at least $ 17 bn for all of Repsol-YPF's stake in YPF, its Argentine unit, two people close to the talks said. The potential deal, which could be the biggest overseas investment by China, highlights the country's growing thirst for energy resources globally and its willingness to offer big money for access. It also underlines the ambition of CNPC to build its presence in South America and elsewhere. (WSJ)

-- Brazil (Aug'09):
Petrobras has signed three different contracts with China. One with the Chinese Development Bank for $ 10 bn. The second would offer Sinopec up to 200,000 barrels of crude oil per day that they will pay for according to the international market price. The third agreement was also signed with Sinopec and it involves the possibility of joint ventures and evaluation of different opportunities in exploration in blocks in the northern part of Brazil; blocks outside of Brazil; and with possibilities in petrochemicals, refining, and logistics. (CIGI)

-- Ecuador (Aug'09):
Ecuador has reached out to China to ease its liquidity crisis, signing a deal to supply the energy-hungry nation with 69 mm barrels of oil over the next two years in return for a $ 1 bn advance payment. (FT)

-- Iran (Aug'09):
Chinese company ZPMC earlier signed a $ 2.2 bn agreement on building 10 offshore and seven onshore oil rigs with the Iranian Engineering and Building Sea Installations Company. ZPMC received a credit line of $ 10 bn from China Development Bank in August to finance the offshore section of the project. (IRNA)

-- Kazakhstan (Aug.'09):
Kazakh and Chinese state oil firms' joint $ 3.3 bn acquisition of a Kazakh private upstream company has been delayed. The terms of closing the deal have been extended by the parties' mutual agreement. Several issues are being resolved. (Reuters)

-- Singapore (May'09):
PetroChina's $ 2.2 bn bid to buy half a refinery in Singapore may look like yet another China deal for energy security, but really it says far more about Beijing's desire to flex its pricing muscle on world markets. Singapore Petroleum owns a 30 year-old, 285,000 barrel per day refinery. PetroChina adds the final piece of its trading arsenal: a major source of fuel supply in the trading hub where most of Asia's oil prices are determined. (GlobalNews)

China's thirst for fossil fuels is not just limited to oil; take a look at some of their natural gas deals:

-- Australia (Aug.'09):
PetroChina has agreed to buy $ 50 bn worth of liquefied natural gas -- 2.25 mm tpy over the next two decades -- from the yet-to-be developed Gorgon field off the coast of Western Australia. (ABC)

-- Burma (Aug.'09):
China is to boost its economic ties to the Burmese military Government with a $ 5.6 bn gas project in the Bay of Bengal, to be built by a South Korean and Indian consortium. (LondonTimes)

China sits on vast coal reserves, and is increasing coal production and buying foreign stashes.
-- China Shenhua Energy, the world's second-largest coal miner, has said it will invest $ 39.5 bn over the next four years to hugely increase its production. (Telegraph)
-- China's Yanzhou Coal Mining Co. agreed to buy Australian coal miner Felix Resources for $ 2.9 bn. (Reuters)

At a time when the US Congress wrestles with an energy and climate bill that will severely impact the oil, natural gas, and coal industries, China seems to be kicking sand in the face of any international agreement later this year in Copenhagen. Maybe, China has assessed that America is not ready to sign on to any binding agreement itself and is securing its fossil fuel-dependent future.
China also has a lock on the electric vehicle market. A report wrote earlier of a coming shortage of rare earth metals needed to make both electric motors and batteries. An Australian report said that the "global supply of the rare-earth metals, which are vital to the mechanisms of hybrid cars, wind turbines, iPods, lasers, super-efficient light bulbs and radar systems, is 95 % controlled by China". Their solar and wind markets are stronger than their US counterparts.

What is fuelling China's buying spree?
"China is sitting on the world's largest pile of cash, more than $ 2.3 tn by some estimates. With an estimated 70 % of that, or about $ 1.61 tn, in dollars, there is no question it's a huge source of financial firepower strength at a time when global markets are uncertain, if not downright weak."
Our domestic markets are exactly the opposite of the Chinese. Americans are strapped with debt, paralyzed and frozen in place. We had to borrow more money in order to keep our entire economic system from collapsing. Sure, saving the banks kept our economy afloat, but handing over nearly a trillion dollars to wealthy bankers who took too much risk knowing that their companies were "too big to fail" put our country in a position where other, better managed economies could position themselves better for future success.

When the next generation of Americans asks us how China became the dominant world power in 2050, we will have to explain the financial meltdown of 2008 as the catalyst. Additionally, we will have to explain how China chose to invest in energy (both renewable and non-renewable sources) while Americans chose to invest in banks that ultimately refused to lend the money for renewable and non-renewable energy projects alike.
While China continues to grow, America remains stagnant. Will we wake from our gluttonous slumber in time?