China on the Prowl for Oil

Higher energy costs are clearly a factor for industrialized and emerging markets. Given the global industrial boom, the demand for oil will continue to rise, although an economic slowdown could hasten the upward trend. A clear example of this is China, where GDP growth is in the double digits and the demand for imported oil continues to be a priority going forward.

The July light sweet crude on the New York Mercantile Exchange surged to yet another record high at $139.89 a barrel on June 16. And to make matters worse, analyst Jeffrey Currie of The Goldman Sachs Group commented that oil could trade at $150.00 a barrel this summer, or about 11% from current levels, due to supply issues.

In my view, the scenario of high oil prices will dampen economic growth and corporate profits. I feel that China could be especially hard hit given its massive industrial push and insatiable appetite for oil. To deal with this possibility, the country has been increasingly scouring the world for oil by venturing with oil companies in oil- rich countries that require capital infusion from countries such as China. For instance, China has been very active in Africa.

In a recent deal, China National Petroleum Corp. entered into a $5.0-billion deal with West Africa country Niger that would see exploration, drilling, and building pipelines and a refinery. Estimates call for about 324 million barrels of oil in the proposed drilling area. There was no indication on what China will receive for its capital infusion, but my best guess is another reliable oil source.

Clearly the Chinese government wants to make sure the oil pipeline to China does not dry up and we expect ventures and investment in foreign oil companies to intensify. This could mean takeovers, mergers, or alliances with foreign oil companies outside of China. An example of China’s interest in foreign oil is its investment in the vast oil reserves in Canada’s oil sands deposit in Alberta, where there is estimated to be a whopping 174 billion barrels of proven reserves. This number is significant considering that Saudi Arabia has proven reserves of about 262 billion barrels based on data from the U.S. Energy Department. By 2013, production could be two million barrels a day, according to Enbridge, Inc.