Strategic Advisors in Global Energy

China’s External Energy Relations:

Strategic and Corporate Dynamics
Presentation at 2005 China Symposium
WEAI, Columbia University, New York City
by
FAREED MOHAMEDI
Head, Country Strategies

April 21, 2006

The Age of Energy Insecurity
 Growing sense of global energy insecurity

 Potential destabilizing force in global economic and

political relations:
 Industrialized countries question the intentions and
capabilities of the major resource holders
 The competition for access to energy resources from
the newly industrializing countries in Asia
 The major resource holders question the sustainability
of demand and the new obligations assigned to them
 The populations of the major resource holders demand
a greater share of the country’s revenues

| Country Strategies Group | Page 2

The International Architecture
US Hegemony Multilateralism

 Bush Admin’s Sole

US US
Superpower Policy
EU China constrained
EU China
 Return to full scale
multilateralist
Nationalist Nationalist
Confrontation Coexistence
policies unlikely

US
 Uneasy relations
US due to constraints
and dependencies
EU China EU China

| Country Strategies Group | Page 3

Global Tensions (1)
Global Reallocation of Production

Treasury
Bonds Investment

United
China World
States

Merchandise Commodities,
Exports Other Inputs

 Accommodating the rise of China and India

 Industrialized world fears Emerging Market’s quest
for energy

| Country Strategies Group | Page 4

Global Tensions (2)
National Distribution of Income

Disenfranchised groups want their share


They either capture the state or blackmail companies

Can IOCs/NOCs be promoters of economic development? Lower Returns
Governments IOCs/NOCs


al s

R a
i

ev ri
c nd
Sh o

en ng
S a
em
ue
D
Local
Disenfranchised
Groups

| Country Strategies Group | Page 5

 State Types and Implications For NOCs/IOCs

Government NOC IOC Role

Primary
Entrepreneurial Privatized & Open
Concern: Capitalist Competitive Competition
Efficiency

Social
Public Limited
Democratic
Entrepreneurs Opening
Capitalist

Primary
Concern:
Inputs
Authoritarian Driving Entrepreneurial
Oligopoly
Globalizer Bureaucracy
Forces
Populist Statist Traditional
Development Bureaucracy Monopoly

Primary
Concern:
Rentier Façade/No
Revenue Excluded
State Institution

| Country Strategies Group | Page 6

China
Government NOC IOC Role

Entrepreneurial Privatized & Open

Capitalist Competitive Competition

Social
Public Limited
Democratic
Entrepreneurs Opening
Capitalist

Authoritarian Entrepreneurial
Oligopoly
Globalizer Bureaucracy

Populist Statist Traditional

Development Bureaucracy Monopoly

Rentier Façade/No
Excluded
State Institution

Oil Sector Gas Sector

| Country Strategies Group | Page 7

NOCs: What Happens When the Oil Runs Out?
Key Driver: Risk Key Driver: Risk
Management / Business Key Driver: Asset
Management / Business
Development Skills Management Skills
Development Skills
Illustrative Production Cycle
Production Volumes

Time

| Country Strategies Group | Page 8

Industrializing States: Choices For Their NOCs

Resource Needs Create New Imperatives

 Support industrialization
 Protect home territory
 Go overseas and seek new assets
 Move into domestic gas
 Reconfigure to accept IOC partnership
 Be privatized
 Entirely change their function possibly to
regulator
 Fail

| Country Strategies Group | Page 9

 China: Attempting to Rise Quietly

Dragon Zone Panda Zone

(Local) (Global)
 Security
Japan
 Commercial
issues prevail Iran issues
prevail
 Making
conciliatory Taiwan  Prefers
overtures, Sudan Vietnam bilateral deals
but…

 …Retains  No credible
serious military option
military option
 General
 US actions acceptance of
evaluated US leadership
case by case

| Country Strategies Group | Page 10

 China: Regional Preferences For Sourcing Oil

#5

Dragon
Zone #4 #1 Panda
Zone
(Local) (Global)

#6

#3
#2

| Country Strategies Group | Page 11

Matrix of NOC Functional Capabilities
CNPC Sinopec CNOOC Sinochem
U/S Oil & Gas
Heritage Shengli Not yet
Onshore strength
Offshore With Petrobras Heritage strength
Foreign Sudan, Venezuela Norway Atlantis
Discussions with
Iran and SA gas Indonesia,
and Kazakhstan Australia; LNG Assets
Iran and Iraq

Pipelines W to E Gas

D/S & Chem.

Downstream North and west Heritage strength Guangdong WEPEC w Total

Chemicals North and west Heritage strength Guangdong

LNG Dalian & Guanxi Shandong 6 or 7 projects Likely candidate

Trading JV w CNOOC JV w Sinopec Heritage

strength
Other Power Gen in Storage
Hainan

| Country Strategies Group | Page 12

 CNPC: Overseas Leader

Algeria—
75.1% of exploration
license agreement of
Block 112/102a and
Block 350

Canada— Russia—
Oil Sands development Libya— Kazakhstan—
Block 4 through Acquired In talks over
interest; partnership
EPSA IV PetroKazakhstan; 25% Sakhalin
with Enbridge; 200,000
b/d interest acquisition of Aktobe
fields
Prod

Niger— Dev
Exploration
agreement for
Block Bilma Expl

Talks
Chad—
Acquisition of
Block H (Encana
Ecuador— assets) Sudan— Indonesia—
Exploration activity 40% working interest in Took over Hess’
in Block 11 blocks totaling 440,000 holdings; seismic and
b/d drilling (21 wells) going
on in other blocks

| Country Strategies Group | Page 13

Sinopec: Early stages of International growth

Algeria—
Service contract to
increase oil recovery
rate at Zarzataine, near
Hassi Messaoud oil field

Canada—
40% Interest Northern
Lights Oil Sands

Russia—
25.1% interest in
JV with Rosneft to
explore
Veninskoye block, Prod
Sakhalin-3
Dev

Oman— Myanmar— Expl

Blocks 36 and 38 Onshore Block D

Talks
Iran—
Saudi Arabia—
Cote d’Ivoire— 40k sq kms Yadavaran field and LNG
27% interest in exploration contract imports
Block CI-112 in Rub Alkhali basin

Nigeria—
Service contract to
develop shallow water
OML 64 and 66 in
cooperation with NNPC

| Country Strategies Group | Page 14

CNOOC: The LNG Leader

Algeria—
Morocco— Various blocks Offshore China—
Oil Sands— 15% interest in Ras Bohai Bay
16.69% interest in Tefelney deepwater Eastern S. China Sea
MEG, which holds permit Western S China Sea
oil sands leases East China Sea
covering 13k
hectares

Prod

Dev

Expl

US GOM— Talks
Planning to bid on
Pioneer’s GOM assets,
potential production
40mbbls/d Kenya—
Negotiations underway
for a PSC for 6 Blocks Indonesia—
39.51% interest in 5
blocks
42 mboe/d production

| Country Strategies Group | Page 15

 Chinese Energy E & P Interests in Africa
Country Note
Algeria CNPC: Blocks 102a, 112 in Cheliff Basin; Blocks 350, 438b in Oued Mya Basin;
Morocco various blocks in Adra/Sbaa Basin
Algeria Libya Rogue States
CNOOC: various blocks
Sinopec: Zarzaitine license in Illizi Basin; Blocks 416a, 417 in Oued Mya Basin;
Blocks 418, 419, 438a Amguid Massaoud Basin

Mauritania Angola Sinopec: 50% equity in Block 18

Mali Niger Unnamed: JV with Sonangol for Blocks 3/05 and 3/05a
Chad Sudan
Stranded
CAR Basin
Sinopec:
Basins
Negotiating for Grynberg Petroleum concession in Doseo and Salamat
Nigeria
CAR Chad CNPC: Equity in H Concession

Equatorial Guinea Congo Sinopec: Awarded Marine XII, Haute Mer B acreage
Brazzaville
Sao Tome Congo
Gabon Brazzaville
Kenya Asset
Equatorial
Stakes Through
CNOOC: Block S
Energy Diplomacy
Guinea
Gabon Sinopec: Holds options on 3 offshore blocks; signed TSA on 3 onshore blocks
near Port-Gentil

Angola Kenya CNOOC: E&P agreement for 6 blocks in Lamu basin

Libya CNPC: ESPA IV for Block 17-4; 65% stake in Block 20
Mali
Aggressive
Sinopec: Exploration agreement on four to five blocks in the Timbuktu and Gao
Namibia
Overbidding
areas of northern desert
Mauritania CNPC: PSA for Block 12, 13 (two areas)
Morocco CNOOC: Exploration agreement for blocks: Missour basin in Boulmane
Legend province, Haha basin, two offshore concessions off Agadar
Namibia China Shine: 72% stake in Circle Energy onshore acreage
Holds assets
Niger Sinopec: Exploration agreement on Tenere and Bilma permits
In negotiations/ Nigeria Sinopec: SC for OML 64, 66; interested in JV with NPDC for OML 110 and JV
energy diplomacy with Amni Co. for OML 112
CNOOC: 45% equity stake in OML 130 (Akpo field)

Most Extensive Portfolio Sao Tome Chinese government engaged in energy diplomacy
Sudan CNPC: 40% share of GNPOC (Blocks 1,2, 4); 41% share of Petrodar (Blocks 3,
7); 100% of Block 6; 35% share of Block 15
| Country
Sinopec: 6% share of Petrodar (Blocks 3, 7) Strategies Group | Page 16
Chinese Oil Services/Downstream Interests in
Africa
Country Note

Algeria CNPC: 100 kbd refinery project in Sbaa Basin

BGD: CNPC’s seismic affiliate, Algerian seismic work

Algeria Libya Libya Unnamed: Pipeline construction project

BGD: CNPC’s seismic affiliate, Libyan seismic work

Niger BGD: CNPC’s seismic affiliate, Nigerien seismic work

Niger Nigeria CNPC: downstream agreement to refurbish Kaduna refinery
Sudan BGD: CNPC’s seismic affiliate, Nigerian seismic work
Nigeria
Sudan China Petroleum Engineering & Construction: construction branch of
CNPC; oil pipeline construction to Port Sudan and oil terminal on the
coast; deals worth $405 million

CNPC: pipeline from Al-Fulah field in Block 6 to main pipeline

CNPC/Sinopec: equity in refineries

BGD: CNPC’s seismic affiliate, several projects in Sudan

Where Chinese Oil Companies Go,

Their Service Companies Follow
Legend  Activity is integrated into the overall Chinese goal of energy security

Holds assets  The companies are able to compete on labor, cost, manufacturing, and
increasingly, know-how
In negotiations/
energy diplomacy
 This may have implications on host government local content policies (ex. Nigeria)

| Country Strategies Group | Page 17

 China’s Energy Diplomacy in the Middle East
Covering All the Bases
Iraq: Kuwait: Iran:
- 0 Agreements (post- - 8 Agreements - 7 Agreements
2003) - 7 Projects - 4 Projects
- 2 Projects (pre-2003); - $1.2 billion trade
662 service projects - $6.6 billion trade
(pre-2003) - Sale of 300 cruise missiles,
- Sale of 150 missiles plus other military hardware
- Transfer of nuclear
technology

Egypt:
- 4 Agreements
- 2 Projects Qatar:
- $1.5 billion - 8 Agreements UAE:
- 0 Projects - 10 Agreements
trade
- $490 million - 1 Project
- Sale of 50
trade - $7.7 billion trade
Silkworms

Saudi Arabia:
- 13 Agreements Oman:
- 2 Projects - 7 Agreements
- $9.5 billion trade Yemen: - 2 Projects
- 7 Agreements - $7.7 billion trade
- Sale of 56 CSS-2
missiles - 2 Projects
- $2.0 billion trade
| Country Strategies Group | Page 18
 Who are NOCs?
More adept

Entrepreneurial NOCs
Statoil National Asset Holders
Petrobras
Petronas S. Aramco
PEMEX
Technology

Gazprom/Rosneft
Sonatrach
CNOOC CNPC QP
NIOC
Market
Sinopec ONGC LNOC KPC Seekers
Strategic Resource Seekers
PTT Technology
Pertamina PDVSA
EGPC Seekers
Sonangol
Less adept

Ecopetrol

Declining NOCs NNPC Finance and Security

Seekers

Diminishing Production Resources Expanding Production

| Country Strategies Group | Page 19
NOC-NOC Relations

Will they succeed?

 Why should the National Resource Holders share
their rents?

 Strategic Resource Seeking NOCs are in best

position to gain access in some areas especially
if they improve their technical skills
 Unlikely to cooperate on particular deals
unless host governments want that
 Key Question: Is it going to be material?

 Entrepreneurial NOC have the challenge of

distinguishing themselves from the IOCs
| Country Strategies Group | Page 20
 Resource Holder Needs and Asian NOC Advantage
Technology Market Money Political Cover Social Military Sales
Infrastructure
Iran LSPM, EOR,LNG Asia Yes China China
Iraq LSPM, IOR, EOR Yes Competing Yes
Canada No
Nigeria LSPM, DW, LNG Yes Yes Anyone
Angola LSPM, DW, LNG, Ref. Yes Yes
Other W. Af.
NOCs now DW Yes Yes
Asian can
Russia US, China Yes Restore super power
provide Markets, status
Money
Kazakhstan and Political China Yes China, US Yes
Cover
India for resource
LSPM, DW, IOR, gas, Yes
holders…however, pipelines Western
…however,
IOCsnew usedgeopolitical
to ensure
Venezuela
Money is theLSPM, Heavy, LNG
primary Divers. Technology,
developments
Yes Political
weakens
Diversifying Cover
the
Yes appeal
and Russia, et al
Bolivia
advantage
LSPM, LNG, pipelines US Social
Yesof the
Infrastructure
US flag, andspending
resource
Yes
Mexico DW, EOR, gas US Yesholders
for resource
are unsatisfied
holders…with
Kuwait LSPM, IOR Western
No IOCUS, approaches
UK to social
UAE LNG Asia Yes
infrastructure
US
development US
Qatar LSPM, GTL, LNG Divers. Yes US US

Legend: DW = deepwater
LSPM = large scale project management Heavy = heavy oil
EOR = enhanced oil recovery LNG = liquefied natural gas
IOR = increased iol recovery GTL = gas to liquids | Country Strategies Group | Page 21
NOC-NOC Relations: Broader Initiatives

Without IOCs and cooperatively

The NOC Forum
 4th NOC Forum in November 2006:
 23 NOC CEOs will attend
 Two central themes to be discussed:
 How can NOCs meet the HR challenge?
 Sharing the best practices of the industry

 Considerable progress made by 3 task forces

formed at 3rd NOC Forum (July 2005 in Rio)
 Environmental challenges
 Monetizing natural gas
 Technology most needed by NOCs
| Country Strategies Group | Page 22
 Resource Holder Needs and IOC Opportunities
Technology Market Money Political Cover Social Military Sales
Infrastructure
Iran LSPM, EOR,LNG Asia Yes China China
Iraq LSPM, IOR, EOR Yes Competing Yes
Canada No
Nigeria LSPM, DW, LNG Yes Yes Anyone
Angola LSPM, DW, LNG, Ref. Yes Yes
Other W. Af. DW Entry opportunities Yes will Yes
Russia
requireUS,substantial
China Yes
above-
Restore super power
status
Kazakhstan
ground risk tolerance
China Yes China, US Yes
African opportunity set still large, due
India LSPM, DW, IOR, gas, Yes
to relinquished acreage in deepwater;
pipelines
Venezuela LSPM, Heavy, LNG all need
Divers.technology,
Yes money
Diversifying and Yes Russia, et al
Bolivia social development
LSPM, LNG, pipelines US Yes – commitment to Yes
Mexico DW, EOR, gassocial development
US Yes can be an IOC
Kuwait LSPM, IOR differentiator
No US, UK US
UAE LNG Asia Yes US US
Qatar LSPM, GTL, LNG Divers. Yes US US

Legend: DW = deepwater
LSPM = large scale project management Heavy = heavy oil
EOR = enhanced oil recovery LNG = liquefied natural gas
IOR = increased iol recovery GTL = gas to liquids | Country Strategies Group | Page 23