China’s Back-Door Push into Our Front Yard
Li Hui – we all call her Nancy – is one smart young lady. But don’t let the pleasant smile and social graces fool you.
As one of the new South American project managers for China Petroleum & Chemical Corp., or Sinopec (NYSE:SHI), Nancy is one of the shrewdest energy business negotiators I have ever met – and the only woman at a level still controlled by rapidly rising Chinese male execs.
What Nancy is doing will change the way you need to think about investment opportunities in oil and gas in both North and South America. Sinopec is awash with cash and on a development spree.
And that means new wealth is about to come pouring into our corner of the world.
China Is Ready to Spend Big on Western Energy
Here, it is another sunny day in the Bahamas… and Sinopec’s turn to spend an afternoon at my place on the water, watching the yachts drift by. Nancy and three of her staff have come up from Guayaquil, ostensibly to confer on the refinery project I advise – and Sinopec is building – in Ecuador.
But, as on previous occasions, the discussion quickly moves elsewhere.
Nancy is more interested in my views on unconventional oil and gas production, U.S. refinery margins, the offshore market in Brazil … and problems with the Red Sox starting rotation. (I brought her to her first ballgame at Fenway Park years ago, and she has followed my team ever since. The scientist in her likes crunching numbers – and baseball has plenty of those.)
Nancy has been here so many times, she moves freely about the house. She asks a question and then walks over to hit the refrigerator behind the bar while I answer. When I am with her, there is always a feeling of a decision about to be made, an environment of there not being quite enough time…
And for good reason.
These days, Nancy and the Sinopec staff are moving rapidly into what used to be our front yard – the Western Hemisphere.
They have their marching orders from higher-ups. As China continues to wrestle with exploding domestic energy demand, the country’s main oil and gas companies are frantically scouring the globe for sources and projects. They are finding more and more of those over here.
In the last 18 months, roughly the time the Ecuadorian refinery has been in development, Sinopec
- acquired vast oil sands reserves in Alberta from suddenly debt-ridden ConocoPhillips (NYSE:COP) for $4.6 billion;
- provided a $10 billion line of credit to Brazilian oil major Petrobras (NYSE:PZE), from which it will receive seven million tons (51 million barrels) of crude this year and over 10 million tons next year;
- struck a multi-billion dollar deal with Hugo Chavez in Venezuela to process heavy oil;
- became an upstream operating company in its own right by investing the first $500 million of a $2.5 billion to $3 billion commitment to develop the Oglan deposit in Ecuador’s Amazon; and
- is currently being wooed by Columbia and Brazil for major investments in hydrocarbons.
Beijing is sitting on at least $2 trillion in immediately available foreign hard currency reserves – funds that can be spent on any acquisition worldwide. In addition, Sinopec has just received permission to float 20 billion yuan ($6.3 billion USD) in bonds. So there is plenty of money to go around as Sinopec sets out to achieve its goals.
Sinopec is no longer only China’s largest refiner. It is about to embark upon major projects in unconventional gas sources coal bed methane (CBM) and shale gas, both at home and wherever it can find them abroad, to complement the huge track of unconventional oil (oil sands) it just obtained in Canada. In addition to deposits, that means the company will need to acquire technology and expertise as well. That access will come through the financing of, acquisitions in, and joint venturing with American and Canadian technical providers and specialty drillers.
Turns out, that is precisely the reason the delegation came up to see me.
It took several bottles of Kalik Export (the best local beer) to get to the main subject Nancy had in mind for our meeting. Once the discussion moved in that direction, however, she focused all of her attention on it. Sinopec wants to move into the Marcellus Shale Play in Pennsylvania and the Power River Basin CBM deposits in northeastern Wyoming. They are less interested in control over volume from these drillings and more interested in gaining access to the technology used. And they will pay top dollar.
Sinopec, of course, knows I advise both operators and technical companies in both basins. So stay tuned.
I just might end up with back-door access of my own – right into where the Chinese may be putting a chunk of their energy investments in our hemisphere.