Opportunities in smallcaps header image 2

China is buying energy resources left, right, and center..

February 20th, 2009 · 3 Comments

We already noted it earlier, but the sums are large, and the format is nice: cash strapped energy developers get cash for long-term supply contracts.

With Cash to Spend, China Starts Investing Globally
Published: February 20, 2009

SHANGHAI — With the world suffering through a massive credit crunch, China has suddenly gone shopping.

Beijing said on Friday that one of its big state-owned banks, the China Development Bank, agreed to lend Brazil’s oil giant Petrobras $10 billion in exchange for sending China a long term supply of oil.

That investment came after similar deals were signed this week with Russia and Venezuela, bringing China’s total oil investments this month to $41 billion.

China’s biggest aluminum producer also agreed earlier this month to invest $19.5 billion in Australia’s Rio Tinto Plc, one of the world’s biggest mining companies. And last Monday, China Minmetals Corp, bid

$1.7 billion to acquire Australia’s OZ Minerals, a huge zinc mining company.

Call it the new China play. Flush with cash and eager to take advantage of weak commodity prices, China is once again on the hunt for global energy and resources to power its growing economy. But this time, China is being welcomed to invest overseas.

With Chinese President Hu Jintao travelling this week on his “Friendship and Cooperation Tour” in Africa, where China has huge interests in resources and mining, vice president Xi Jinping was visiting South America, meeting with the leaders of Brazil and Venezuela and signing cooperation agreements on oil and minerals.

Venezuela got a $6 billion loan from China and agreed to increase its oil exports to China, bringing China’s total investment in the country to $12 billion. In Brazil, China signed a $10 billion “loan-for-oil” deal that guarantees the country up to 160,000 barrels a day at market prices.

And in Beijing this week, Prime Minister Wen Jiabao met his Russian counterpart after China agreed to loan Russia’s struggling oil giant, Rosneft and Russia’s oil pipeline company, Transneft, $25 billion in exchange for 15 million tons of crude oil a year for 20 years.

“This is heavy energy diplomacy,” says Philip Andrews-Speed, director of the energy policy center at the University of Dundee in Scotland.

“If you need money you go to where the money is, and today, China’s the place.”

The huge investments are China’s biggest moves since 2005, when a Chinese state-owned oil company made an unsuccessful bid for Unocal, the American oil company, amid worries about whether fast-growing China was seeking to tie up global resources.

But the world has changed dramatically since then. Commodity prices have fallen sharply in recent months,following a long bull market that was partly fueled by China’s voracious demand for energy and resources. And China has built up nearly $2 trillion in foreign currency reserves, giving the country easy access to capital.

“What’s changed for China is that their key competitive strength has increased, — and that’s capital,” says Andrew Driscoll, a resources analyst at C.L.S.A., the investment bank. “A lot of companies are begging for capital.”

China wants reliable supplies of crude oil, to fuel its growing transport sector; it needs iron ore for steel production, and copper and aluminum to build new homes and consumer goods.

Analysts say there are still worries about whether China will compete with other nations, like the United States and India, for oil and other natural resources.

But some analysts say China’s recent investments are welcome because they will help finance much needed development, increasing the global supply of oil and natural resources at a time when many of the world’s biggest banks are reluctant to lend.

It’s a good thing because a lot of projects have been postponed,” says Professor Andrews-Speed at the University of Dundee. “Oil companies may now have the money to produce oil. There’s going to be more oil produced.”

Analysts say China could continue to make deals this year, for a variety of small oil and gas companies, mineral producers and mining firms.

This week, for instance, shares of the Australian miner Fortescue Metals Group rose after reports the company was in talks with China over a big investment to help the company expand its operations.

In many cases, China has struck deals in countries that have access to large supplies of oil and minerals but where American and European countries are not well positioned, such as parts of Africa and the Middle East.

In one of the deals struck this week, China made an alliance with the government of Hugo Chavez, the president of Venezuela, who has denounced American leadership.

While the oil deals announced this week vary in terms, analysts say they ensure China a steady supply of oil for decades to come, sometimes at favorable prices.

In Brazil, the $10 billion loan is to be used to finance a deep water oil reserve that Brazil hopes will help turn the country into a major oil producer.

Tags: Emerging Markets · Natural Gas

3 responses so far ↓

  • 1 rory mcgowan // Feb 20, 2009 at 4:33 pm

    tullow project in uganda and ghana China going to show them the money?

  • 2 What US gas glut? — // Mar 17, 2009 at 6:54 am

    […] is looking for partners like China or Japan, who are increasing investments today (see links), because securing long-term energy […]

  • 3 InterOil: A lot more to come.. — // Apr 10, 2009 at 7:42 pm

    […] know that the Chinese are using their financial clout today to secure energy supplies long-term (here and here). In fact, for many of these Asian countries securing energy supplies for the long-run is […]