China and India: A Rage for Oil

http://www.businessweek.com/bwdaily/...4692_db016.htm

8/25/2005

With their growing economies thirsty for fuel, the two rising powers are tussling with each other over energy resources all over the world

American attention has lately been focused on China's emergence as a competitor for dwindling oil supplies -- witness the uproar over CNOOC's failed bid for California's Unocal. But a different, yet equally intense, energy rivalry sure to have a dramatic effect on geopolitics has been playing out on the far side of the globe. Advertisement

Asia's other emerging powerhouse, India, is just as hungry for supplies as China. The two are battling each other in oil patches from Sudan to Siberia as they try to secure the resources to fuel their growing economies. So far, the Chinese have the upper hand in the competition.

SOARING CONSUMPTION
The latest skirmish came on Aug. 22, when the board of PetroKazakhstan, a Canadian-owned company with oil fields in Central Asia, accepted a $4.2 billion takeover bid by state-owned China National Petroleum Corp. CNPC beat a $3.6 billion offer from India's own state-owned giant, Oil & Natural Gas Corp.

ONGC has said it may make a counteroffer, but the competition has already pushed the price into the stratosphere. CNPC's bid was a 21.1% premium on the price of PetroKazakhstan's shares. And it values the company's proven reserves at $10.26 per barrel -- 20% more than the market valuation of CNPC's own reserves, according to United Financial Group, a Moscow investment bank.

Both of Asia's rising powers desperately need energy. China today imports roughly half its oil. Consumption rose by 15% last year and is forecast to jump by an additional 9% this year. By 2025, China will burn through 14.2 million barrels a day, double this year's level, the U.S. Energy Dept. predicts. India's oil imports are expected to rise to some 5 million barrels a day by 2020, from around 1.4 million barrels at present.

THE UPPER HAND
The Chinese are gaining ground in Russia. Last December both New Delhi and Beijing negotiated with Moscow as it sought financing for its $9 billion renationalization of Yuganskneftegaz, the core production subsidiary of the troubled oil major Yukos. Although neither Asian rival walked away with equity in the Russian company, the Chinese ended up lending the Russians $6 billion in return for guaranteed oil supplies at a bargain price. And in Angola last year, China Petrochemical Corp. (better known as SINOPEC) beat ONGC in bidding for an oil exploration block being sold by Shell Oil.

That's largely because China has greater financial muscle. In the past five years, CNPC has invested $45 billion in new energy sources, compared with ONGC's $3.5 billion. Another problem, some grumble, is India's democratic -- and therefore slow -- political system, which may make it harder for ONGC to jump at investment opportunities abroad. "Whenever we've seen the Indians and Chinese tussle, the Chinese have been faster and more aggressive in attaining their objective," says Stephen O'Sullivan, head of research at United Financial Group.

But don't count India out yet. The country's hopes of international expansion are being kindled by Delhi's energetic Petroleum & Natural Gas Minister, Mani Shankar Aiyar. And despite China's deal with Russia after the competition for Yuganskneftegaz, India holds some strong cards with regard to Russia, which is rapidly emerging as a key source for Asia's energy needs.

SUPPORTING AUTHORITARIAN LEADERS
Moscow has a friendship with Delhi that dates to the Cold War -- while the Kremlin has long viewed Beijing with mistrust. India and Russia have been busy bolstering their extensive military and scientific ties, most recently through Delhi's Aug. 16 purchase of 250 Russian engines for use in a new Indian military jet trainer. India has already invested $1.7 billion in Sakhalin-1, a major oil-and-gas field off Russia's Pacific coast, and recently committed an additional $3 billion for investments in other projects.

China, meanwhile, is emerging as a player in Central Asia. Beijing has signaled its support for the region's authoritarian leaders, who face criticism in the West and the threat of unrest at home. And Kazakhstan has a strong economic incentive to look to China, the closest and most obvious major market for its oil. PetroKazakhstan has proven reserves of 535 million barrels and produces 150,000 barrels a day. Much of that will probably be processed at Chinese refineries following the completion of a pipeline between the two countries.

As the global economic balance shifts toward Asia in the decades ahead, China and India may well cooperate in many spheres. Energy, clearly, will not be among them.