Over the past decade, the many implications of the rise of the People’s Republic of China have become a topic of intense debate, as many seek to understand the impact of Chinese economic growth on the functioning of international markets. Of particular interest have been Chinese efforts to secure various physical resources, notably oil and gas. Chinese analysts expect the projected energy mix to increase from 25 per cent to 27 per cent reliance on oil by 2030, thus implying this commodity will remain of vital interest for the country throughout the next two decades.[ii] In an effort to ensure viable energy sources, the Chinese Ministry of Foreign Affairs has sought to strengthen relationships between China and various oilproducing countries in partnership with three key state-owned oil and gas companies. As Africa is increasingly being viewed as the ‘final frontier’ insofar as global energy supply is concerned,[iii] it is not surprising that China has dramatically increased its footprint on the continent. This is illustrated by the exponential growth of trade between the People’s Republic of China and Africa. According to the Forum on China-Africa Cooperation, trade volumes have soared from approximately US $12 billion in 2002 to just over US $91 billion in 2009.
China’s primary oil and gas firms
In 2012, there were three major players within China’s oil and gas sector: China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec) and China National Offshore Oil Corporation (CNOOC). While integrated through the entire value chain of oil and gas development (which includes upstream, midstream and downstream activities), each firm maintains a specific focus in terms of production capabilities.
CNPC is the nation’s largest oil and gas producer and supplier, and has great strengths in engineering construction. The firm currently has operations in over 30 countries. In June 2010, PetroChina, a subsidiary of CNPC, became the second highest valued company in the world in terms of market capitalization. The 2010 fiscal year saw the firm reporting just over RMB 124 billion.[iv]
Sinopec is one of the largest integrated energy and chemical companies in the world, with a focus on the downstream end of production. Sinopec operates under a mission of “Enterprise development, contribution to the country, shareholder value creation, social responsibility and employee wellbeing”.[v] Sinopec is China’s second largest producer and supplier of crude oil, refined oil products and major petrochemical products. In 2009, Sinopec became the first Chinese firm to be listed on the Fortune Global 500 list. In 2010, the firm’s revenues were just under US $308 billion.[vi]
CNOOC is the third largest of China’s national oil companies. Its emphasis has long been on offshore oil and gas exploration. By focusing on exploitation, exploration and development of crude oil and natural gas offshore, the firm has become China’s largest producer of crude oil. In 2010, CNOOC had total profits of almost RMB 98 billion.[vii]
While all three oil and gas firms operate independently, they function under government control. As such, their initiatives and operations follow the directives of the State-owned Assets Supervision and Administration Commission of the State Council of China, making it almost impossible to separate the business dealings of the three firms from the ambitions of China as a nation.
Arguably the state-controlled nature of CNPC, Sinopec and CNOOC presents these firms with an increased latitude for risk taking, particularly when it comes to capitalizing on high-risk, highreward ventures such as FDI in smaller and unstable economies. Furthermore, privileged access to capital allows Chinese firms to shift their planning from reaching short-term profitability targets towards long-run objectives,[viii] increasing their competitiveness over time.
Additionally, Chinese oil and gas firms benefit from their experience in dealing with onerous government regulations. While other international firms, particularly MNEs from developed economies, may be less accustomed to dealing with the red tape commonly associated with a highly politicized bureaucracy, Chinese firms must navigate and circumvent ambiguous political constraints on a continuous basis.
A final benefit afforded by the state-owned nature of Chinese oil corporations is that the government frequently consults the industry on policy matters. This allows Chinese firms to advocate for offshore developments that not only enhance national energy security, but also allow them to gain the experience needed to compete effectively with the leading international oil companies.[ix] As a result, the Chinese oil industry is better able to align overseas operations and company directives with state policies as they pertain to the nation’s energy security strategy. Ultimately, this creates a situation of mutual benefit for the oil and gas industry and the Chinese government.
China’s energy security strategy
While China still consumes less energy than North America, the pace of its industrial and social development already requires energy consumption levels that surpass those of western Europe.[x] With insufficient domestic reserves China has been forced to seek supply of natural resources in the international market and, as a means of circumventing oil price volatility and physical supply disruptions, China has elected to purchase oil and gas rights in Africa.[xi] Guiding Chinese MNEs’ entry decisions in the African continent and beyond has been the nation’s energy security strategy. The key objective is to secure adequate and reliable sources of energy at a reasonable cost. Furthermore, it is critical to the nation that accessing energy supplies does not jeopardize internal values and objectives.[xii] That is to say, China will only pursue energy opportunities that ensure continuity with its domestic programmes and strategies, namely the ‘One China’ policy. The ‘One China’ framework precludes China from engaging in relationships with other nation states that do not acknowledge there is only ‘One China’, of which Taiwan is a part. This policy also ensures that the Chinese government is viewed as the sole governmental voice for the People’s Republic of China. As such, states seeking to establish diplomatic or commercial relationships with China must, at a minimum, acknowledge the policy.
In contrast to Western nations that have resisted a full acknowledgement of the ‘One China’ policy, the African continent has witnessed little controversy on the issue and has encountered almost no opposition to its acceptance and recognition. The reality is that many of the poor and conflict-ridden African nations are eager to attract Chinese investment, as these business ventures have very few covenants attached on issues beyond the narrow business case at hand and respect a non-interference policy.
Sino-African relations: A brief history
Despite prevalent Western media beliefs, China’s relationships and interactions with African nations are not wholly centred on the regime’s energy security needs. China has been involved on the continent from as early as the mid 1950s. During that era, when many African states sought to establish their freedom from colonial powers, China proved to be a vital ally both from a financial and a diplomatic perspective. The symbolic diplomacy offered by China through its Five Principles of Peaceful Coexistence: (1) mutual respect for sovereignty and territorial integrity; (2) non-aggression pacts; (3) non-interference in international affairs; (4) equality and mutual benefit; and (5) peaceful coexistence, allowed African states to assert their independence in an environment of non-interference and non-alignment. For the Chinese government, at the time led by Mao Zedong, the early support of African states provided an opportunity to differentiate itself from its ideological rival, the former USSR.[xiii]
China did not become an importer of African oil until 1993, and prior to this there was little outward FDI, with the exception of investments in Sudan.[xiv] Over the past decade this pattern of investment has changed significantly, as China is now the impetus for the current construction boom in Africa. In exchange for mining and oil rights, China has undertaken numerous construction projects on the continent, most notably in South Africa, Zambia and Sudan. One example of such investment was the more than US $70 million pledged to assist South Africa in completing the stadium in Ndola prior to the 2010 Football World Cup.[xv] Further examples can be observed in Sudan where Chinese influence supports the nation’s new infrastructure, including the Friendship Hall conference centre, the Chinese school, as well as a plethora of buildings that embody various elements of traditional Chinese architecture. In addition to gaining support for these types of infrastructure programmes, affiliation with China has allowed many African nations access to substantial loans, financial grants and technical support.[xvi]
There have been concerns raised that China only involves itself in African states that possess the raw materials needed for continued Chinese economic growth; however, in the Ethiopian capital of Addis Ababa, a country essentially devoid of the natural resources desired by China, the infrastructure now bears a visible footprint of Chinese influence as an increasing number of Chinese firms take root.[xvii] China likely seeks to establish and maintain its presence in Africa for reasons beyond its energy security strategy, including new markets for finished products, domestic support, development cooperation, alternatives to Western models of governance, as well as a means to emphasize China’s status as a superpower.[xviii]
The Chinese perspective: Internationalization motives
When contemplating the establishment of a presence in Africa from a mere commodity availability perspective, West African oil is particularly appealing to China due to its high quality and low sulphur content,[xix] which translates into lower refining costs. Through their investment in Africa, Chinese oil and gas firms have been able to secure low-cost and reliable energy sources for their nation. This valuable commodity was up for grabs for China due to the void left behind by Western oil companies. The early twenty-first century marked an era of high activist involvement and lobbying in Western nations against Western investment in nations with a poor human rights record, whether in the context of labour rights or broader human rights violations. Due in part to the visibility of the genocide in Darfur, international human rights standards and the abuse thereof were pushed to the forefront of the Western mindset. In response to public outcry and nondemocratic political conditions in Africa’s authoritarian countries, investment in Africa was no longer deemed acceptable, and many Western firms were forced to pull investments from countries at war or with allegedly repressive governments.[xx] At this time, China was evaluating various expansion opportunities in line with its energy security strategy. In March of 2005, CNOOC offered to purchase the California-based petroleum exploration firm Unocal for a reported US $18.5 billion in cash. The issue became highly politicized by several Republican congressmen, and the Chinese offer was brought to the attention of former president George W. Bush on the grounds that such a merger would jeopardize national security. Coupled with the rejection by Unocal’s board of directors and the harsh political reaction that ensued, CNOOC withdrew its bid and, in August of that same year, Chevron acquired Unocal at a lower price. The failed bid revealed to China the hostile political environment in North America and other Western markets. In response, China elected to pursue expansion opportunities available in the southern hemisphere.
Beyond China’s energy security interests, investment in Africa also serves to create new markets for the country’s own products. Further, as Chinese corporations embed themselves in African markets and build relationships with local governments, they secure access to future opportunities.[xxi] China has managed to essentially ingratiate itself to many African populations as a loyal and dependable ally. A platform has been created for many future investment opportunities.
There have, however, been numerous occasions where Chinese policies of non-interference have not led to the desired outcomes, e.g., when 29 Chinese employees were kidnapped in Sudan in January 2012. On several occasions, China’s diplomatic errors have led to some degree of alienation by African governments.
The Chinese government cannot be said to have entirely removed itself from peacekeeping efforts in Africa. In 2007, China encouraged Khartoum to accept UN peacekeeping forces. By 2008, Chinese contributions to the UN peacekeeping force accounted for 3 per cent of the total amounts dedicated to the mission – more than many European states.[xxii]
Having entered the market for oil imports less than 20 years ago, China is essentially a novice in the industry, with the related level of inexperience. This knowledge deficit may have resulted in Chinese management‘s improper assessment of risks and costs associated with particular projects, and consequent purchasing of overpriced assets and shares, whether in Africa or elsewhere, e.g., Sinopec’s 2008 US $2.8 billion takeover of Syrian-based Tanganyika Oil, which later turned out to have no proven reserves. However, such overpayment is often (wrongly) perceived in the West as a demonstration of cash flow usage to assert China’s rise to superpower status with no need to respect the conventional rules of capitalism (whereby poor investments lead to market punishment of the firm involved, with ensuing bankruptcy as the worst case scenario).
The African perspective: The good and the bad of Chinese investments
Several African countries have clearly benefited from Chinese investments through the establishment of strong diplomatic ties with China and the construction boom associated with Chinese FDI. African nations have historically tended to engage in bilateral deals, due perhaps to the unwanted complexity associated with multilateral agreements.[xxiii] This penchant makes African nations ideal trading partners for the People’s Republic of China, which also favours bilateral agreements. A shared preference for bilateralism simplifies the political aspects of relationship building and reduces associated costs for participants.
Chinese investments have become instrumental to the recent economic development of the African continent. The construction industry has not witnessed such progress since the independence movements of the 1950s, and many nations out of favour with Western powers have been awarded business opportunities otherwise unavailable to them. Through interactions with Chinese oil and gas firms, African governments have been encouraged to reflect and adopt policies that best address the challenges associated with globalization.[xxiv] For some states, notably Angola, Chinese interests have actually allowed more diversity in trading relationships. China’s investment reduced Angola’s reliance on Western European markets and increased competition, thereby allowing Angola to gain more equitable pricing of its imports.[xxv]
Despite the positive impact Chinese oil money has had on African development, one of the major drawbacks has been the lack of African, skilled labour associated with projects: most, if not all, positions are occupied by Chinese labour.[xxvi]
It has been estimated that over 50,000 Chinese workers are responsible for the reconstruction of infrastructure in Angola.[xxvii] Many of the Chinese-backed ventures also use materials imported from China – a strategy that is unlikely to encourage development of local manufacturing and agriculture.[xxviii] In fact, Angola is perhaps the only African nation to currently have a positive trade balance with China. All other nations have import levels higher than the value of their exports.[xxix]
The above concerns notwithstanding, many African states continue to view Chinese investment as an opportunity among equals[xxx] and avidly encourage oil and gas ventures on the continent.
The Western perspective: China’s legacy in Africa and its impact on international trade policies
Chinese oil and gas development in sub-Saharan Africa has been a source of growing concern in the West. The catalyst for this concern was the close ties established between China and the government in Khartoum (capital of Sudan).[xxxi] Many Western states are concerned that China’s continued investment in Sudan perpetuates the authoritarian regime and its flagrant human rights abuses. The continued source of income and support for infrastructure development coming from China has allowed states such as Sudan to ignore and even undermine Western sanctions and embargoes.[xxxii] Chinese policies of non-intervention, coupled with this country’s own record of human rights violations, are feared to condone silently the extensive abuse of vulnerable peoples on the African continent. China is seen in the West as a neo-colonial power that has become so desperate that it heedlessly invests billions of dollars in poor and war-torn nations, e.g., Mozambique.[xxxiii] China’s environmental policies and their impact on the global environment also cause concerns. The resulting fear is that the Chinese legacy will be one of exploitation, corruption and pollution.
Western media have drawn attention to the trade deficits between Africa and China. There is now a perception in the West that Chinese firms are destroying local industrial capacity and are actively discouraging African nations from developing industries beyond natural resources exploitation. By not fully diversifying, many African countries are inherently increasing their level of risk as they rely solely on one industry and, most often, extensively on one trading partner.
The West’s final and overarching concern is China’s motivation to provide alternatives to Western economic models and to consolidate its status as a superpower. There are numerous examples of Chinese firms having eclipsed, and even impeded Western investors in the African market.[xxxiv] Many African nations would prefer to engage in business with Chinese firms, as these firms appear to worry little about domestic host country policies and practices beyond those affecting narrow business operations (a reflection of China’s Five Principles for Peaceful Coexistence). There is also the potential for African nations to obtain substantial financial grants and loans from China – opportunities typically not available when these countries engage in trade with Western states.
The totality of the above concerns of Western nations has resulted in the demonization of Chinese investment as a means of destabilizing the current international economic and diplomatic system. Many Western states are concerned that, as China’s influence mounts, theirs will decrease, resulting in a shift of the current ‘global hierarchy of nations’.
The idiosyncratic characteristics of Chinese energy firms
The main idiosyncratic feature of Chinese oil and gas firms is that it is almost impossible to separate strategic decisions made by Sinopec, CNPC and CNOOC from the actions of the Chinese government. As agents of the state, these corporations have secured durable competitive advantages thanks to the funding and access to decision-making bodies in the national, political arena. If it were not for the continuous flow of capital provided by the Chinese government, the poor cost–benefit balance of overseas acquisitions could have led Chinese oil and gas MNEs into a process of economic decline at a minimum, and into bankruptcy in the worst-case scenario.
Even more pressing and controversial is the issue of public policy in relation to state-run enterprises. Western firms must adhere to stringent human rights codes and environmental policies. Those that ignore international conventions may face sanctions and penalties from their home countries, as well as intense public backlash, especially at the downstream end of operations. In the case of state-run firms, however, such sanctions may not exist. How does the business world effectively monitor and react to abuses conducted by state-owned organizations without violating international law? As Chinese firms continue to develop, this will become a fundamental issue to be addressed.
QUESTIONS
- What are the FSAs of Chinese oil and gas firms?
- What are the Chinese firms’ administrative archetypes?
- What are their motivations for expansion into Africa?
- What location advantages exist in African countries where the Chinese firms seek expansion? Are these location advantages readily available to the Chinese firms? Were the Chinese firms able to successfully recombine their FSAs with the location advantages of African host countries?
- Describe China’s CSR issues in Africa. Would a proactive CSR strategy help alleviate concerns from the West regarding the Chinese investment in Africa?
- Discuss the relationship between China’s location advantages and the FSAs of Chinese state-owned firms. Can the two concepts be clearly unbundled in this case?
NOTES
[i] This case was co-authored by Ms Miranda Spensley and Professor Alain Verbeke.
[ii] E. Downs, ‘The Chinese energy security debate’, The China Quarterly 177 (2004), 21–41.
[iii] M. Klare and D. Volman, ‘America, China and the scramble for Africa’s oil’, Review of African Political Economy 108 (2006), 297–309.
[iv] CNPC website: www.cnpc.com.cnlenlaboutcnpcldefault.htm.
[v] Sinopec Annual report (2010).
[vi] Sinopec website: http://english.sinopec.com/about sinopec/our company/20l00328/8532. shtml.
[vii] CNOOC website: http://en.cnooc.com.cnldatalhtmllenglishlchannel 110.html.
[viii] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[ix] E. Downs, ‘The Chinese energy security debate’, The China Quarterly 177 (2004), 21–41.
[x] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xi] E. Downs, ‘The Chinese energy security debate’, The China Quarterly 177 (2004), 21–41.
[xii] Ibid.
[xiii] M. Klare and D. Volman, ‘America, China and the scramble for Africa’s oil’, Review of African Political Economy 108 (2006), 297–309.
[xiv] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xv] N. Ford, ‘Boom time for African construction’, African Business 344 (2008), 38–50.
[xvi] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xvii] N. Ford, ‘Boom time for African construction’, African Business 344 (2008), 38–50.
[xviii] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xix] S. Naidu and D. Mbazima, ‘China-African relations: A new impulse in a changing landscape’, Futures 40 (2008), 748–61.
[xx] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–184.
[xxi] S. Naidu and D. Mbazima, ‘China-African relations: A new impulse in a changing landscape’, Futures 40 (2008), 748–61.
[xxii] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xxiii] Ibid.
[xxiv] S. Naidu and D. Mbazima, ‘China-African relations: A new impulse in a changing landscape’, Futures 40 (2008), 748–61.
[xxv] R. Aguilar and A. Goldstein, ‘The Chinisation of Africa: The case of Angola’, The World Economy 11 (2009), 1543–62.
[xxvi] N. Ford, ‘Boom time for African construction’, African Business 344 (2008), 38–50.
[xxvii] R. Aguilar and A. Goldstein, ‘The Chinisation of Africa: The case of Angola’, The World Economy 11 (2009), 1543–62.
[xxviii] M. Klare and D. Volman, ‘America, China and the scramble for Africa’s oil’, Review of African Political Economy 108 (2006), 297–309.
[xxix] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xxx] Ibid.
[xxxi] Ibid.
[xxxii] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.
[xxxiii] ‘A ravenous dragon’, Economist 386 (2008), 3–6.
[xxxiv] L. Caniglia, ‘Western ostracism and China’s presence in Africa’, China Information 165 (2011), 165–84.