What happens when cash-strapped oil companies and cash-rich countries meet? It doesn’t take much imagination to realize that innovative deal-making is the likely result.
The cash-rich country in question is China and the companies in adversity are Brazil’s Petrobras and Russia’s Rosneft and Transneft. The deals will ensure supply of oil over the next two decades for China in exchange for liberal amounts of money to help develop hydrocarbon finds in the two countries. What is interesting about these deals is that they are not only about securing oil rights, but that they make innovative use of adverse economic conditions to advance China’s long-term interests.
As reported by the Financial Times, China signed a landmark deal with Brazil’s state-owned oil company, Petrobras, on Thursday. Under the deal, Petrobras will get $10 billion to develop oil finds and, in exchange, will supply 100,000-160,000 barrels of oil a day to Unipec Asia, a subsidiary of China Petroleum and Chemical Corp. (Sinopec). It will also supply oil to another Chinese company, PetroChina.
Illustration: Jayachandran / Mint
Last week, on Tuesday, China Development Bank signed a $25 billion deal with Russian oil company Rosneft and monopoly oil pipeline operator Transneft for supply of oil from east Siberian oilfields.
These deals are innovative, for they solve two problems in one go. On the one hand, they provide cash to companies that otherwise have few options to secure it from global financial markets. On the other, they secure hydrocarbon resources for China by a different route. Instead of such resources being bid up in a competitive process with many players trying to garner them, the deals have occurred in a barter-like fashion.
To be sure, this sort of deal-making is unusual. More than anything else, it requires a virtual freeze in the world’s financial markets so that efficient allocation of resources becomes difficult, if not impossible.
At the same time, the equation was completed by China’s future needs. China’s actions are consistent with its medium and long-term energy security requirements. In 2006, its reserves-to-production (RPR) ratio for oil stood at 11.6 years. In 2007, this dipped slightly to 11.34 years. Thus, it makes good sense for China to firm up supply contracts of the kind it signed with Brazil and Russia. These will ensure that it faces no discontinuity or demand-supply mismatch in the years to come.
The question to be asked is why India, which also has a tidy pile of cash, did not make use of this opportunity as China did.
China’s oil deals: innovation or inspired opportunism? Tell us at email@example.com