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An opportunity to outmuscle China in oil

China’s dominance over India in overseas oil has been on clear display, but there is reason to believe that the competitive landscape may be changing

The race between China and India for global oil resources was over before it started. From Central Asia to Africa, China’s large and powerful national oil companies outmuscled their smaller Indian counterparts.
But the recent plummet in international oil prices, from a peak of $115 per barrel in mid-June to below $70 in early December, presents a rare opportunity to India. If lower oil prices are sustained throughout next year, Indian national oil companies will find the cost of overseas mergers and acquisitions more affordable. They may also discover Chinese competition to be less severe. China’s oil giants have slowed down their international activity of late and become preoccupied with developments at home.

Advantages
It was not long ago that China’s dominance over India in overseas oil was on clear display. Last year, in oil-rich Kazakhstan, India’s Oil and Natural Gas Corporation Videsh (OVL) was closing in on a coveted stake in the Kashagan project, which contains some of the largest oil discoveries made in the world in the past 40 years. But before it could seal the deal, China National Petroleum Corporation (CNPC) entered the scene and outbid OVL. CNPC came out in front thanks largely to billions in loans from the China Development Bank and the China Export-Import Bank.
Drawing on sizeable capital from China’s policy banks is one of the biggest advantages of Chinese national oil companies abroad. But even without Beijing’s deep pockets, China’s national oil companies have had plenty of cash to spend overseas.
Although China is known for its enormous appetite for overseas energy resources, it remains the world’s fourth largest oil producer at over four million barrels per day in production. CNPC alone controls half. India’s leading company, the Oil and Natural Gas Corporation (ONGC), produces a fraction of that amount at home, with slightly over 5,00,000 barrels in daily production. While fuel price controls and subsidy burdens drag down the earnings of both Asian oil giants, CNPC’s profits were six times higher than ONGC’s last year.
India’s oil firms also do not have the same political power as Chinese national oil companies wield at home. In China, oil executives are often high-ranking members of the Communist Party. They have political clout that matches or surpasses government ministers and have been known to deviate from official government policy in making overseas investments.
Unlike China, India has a Ministry of Petroleum and Natural Gas, which offers a bureaucratic buffer between oil executives and political leadership. The Indian cabinet must approve any large overseas deals. While New Delhi has generally been supportive, at times it has stepped in to block bids when it deemed the risk too great.
If lower oil prices are sustained throughout next year, Indian national oil companies will find overseas mergers and acquisitions.
Finally, Chinese national oil companies command a large variety of oil service and construction subsidiaries within their corporate groups. They engage in everything from well drilling to road construction to even catering services. This comprehensive approach has given China a leg-up on the competition. CNPC has been able to make such a deep-imprint in Africa because it is able to offer refinery and pipeline construction and infrastructure development that African oil producers crave, alongside its exploration and production work. Even when they band together, Indian national oil companies can only offer a limited scope of oil infrastructure.
Changing landscape

But there is reason to believe that the competitive landscape may be changing. After years of leading the pack with tens of billions of dollars in annual investments, Chinese national oil companies are now shouldering high debt levels and engaged in fewer international ventures in 2014. Their focus is now squarely on profitability and consolidation, not new big and bold deals. In hopes of repeating the shale oil and gas revolution of the U.S., China’s national oil companies are also increasing their domestic investment.
There is a political dimension to this decline in international activity among Chinese national oil companies. On top of a weakening economy in China, President Xi Jinping’s widespread anti-corruption campaign has discouraged all Chinese state-owned enterprises from making large overseas acquisitions. During the first three quarters of 2014, overseas investment from Chinese companies dropped by 23 per cent compared to last year.
China’s national oil companies are some of the main targets of the corruption probe. Along with dozens of CNPC executives and managers, former CNPC boss Zhou Yongkang was detained earlier this year for ‘serious disciplinary violations.’ Early this month, after being sacked from the Communist Party of China, he was arrested for corruption. President Xi could be reining in the political power of Chinese national oil companies in an effort to push forward systematic reform. There are few things that India has that China’s political leadership wants, but greater control over its national oil companies may be one.
Even when it comes to oil infrastructure, China’s well-oiled machine is experiencing some difficulties. Oil producing countries across the globe are becoming increasingly concerned with the investment method of Chinese national oil companies in terms of service contracts and employment. They are pushing forward stronger local content regulations to counter the Chinese crush.
Regardless of the extent of China’s retreat, there is a fair deal of risk in plunging into overseas oil. Falling prices will hit the bottom lines of Indian national oil companies, which will have to increase borrowing from domestic and international financial institutions to make new, large overseas deals. But if Prime Minister Narendra Modi’s promise of a more muscular diplomacy is true, he could instruct Indian state-owned banks to lend a hand to promote Indian foreign investment. As China looks inward, it may be a ripe time for India to reinvigorate its global oil quest.
(Luke Patey is the author of The New Kings of Crude: China, India, and the Global Struggle for Oil in Sudan and South Sudan, 2014.)

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