China and Africa Cooperate in Petroleum Industry

A Chinese worker from CNPC Great Wall Drilling Company and his African colleagues at a drilling rig in Nairobi, Kenya. Xinhua

Expanding Oil Market in Africa

Competition is sharp in the African petroleum market. Western oil giants like Exxon Mobil and Total enjoy technological supremacy in offshore oil production, while Chinese companies have established footholds in some emerging oil producers such as Sudan. Many of them also have advantages in capital and human resources. With its 30,000 technicians and RMB 140.8 billion net profits in 2013, CNPC, for instance, is highly competent in Africa.

To further cooperation between Africa and China in the petroleum industry, Chinese companies should make medium- and long-term plan for developing an oil and gas market in Africa, and outline explicit goals and guidelines for market development. They must attach equal importance to cooperation with the five major oil producing countries – Egypt, Algeria, Libya, Nigeria and Angola. New markets in emerging oil producers, such as Chad and Equatorial Guinea, should not be neglected. There is much a more potential to find big reserves in these emerging countries. For risk control, Chinese companies may choose oil producing countries with a more stable political situation, such as Gabon and Niger.

Cluster bidding should be applied in some African countries, which means oil companies have to make both upstream exploration and downstream petrochemical industry investment. These will enable Chinese companies to increase their investment in petroleum downstream industry in Africa.

As prices of WTI (West Texas Intermediate) and Brent crude fluctuate more than African oil prices, African petroleum market, an important supplier, is helpful to maintain a stable oil price. The cooperation between African oil companies and their international peers and among international oil companies in Africa can contribute to this goal.

Chinese companies could get a larger share in African petroleum market through merger and acquisition. It is a good choice for Chinese companies to develop an African market by cooperating with African private companies. Chinese companies have had long relationships with many African countries. Rich service experience, strong technical support and high reputations enable Chinese companies to bid for power in the African petroleum market. Meanwhile, China has promising partnerships with Russian and Indian enterprises in the continent.

Loan-for-oil is a good way to secure oil supply and reduce political risk. China has signed a loan-for-oil agreement with Angola. Such deals help adjust and diversify foreign exchange reserves, as well as reducing financial risk. Loan-for-oil is acceptable to oil producing countries in Africa since it is deemed a solution to deficient cash flow, which plagues many such countries.

Following Chinese Premier Li Ke-qiang’s African visit in May 2014, cooperation between China and Africa has entered a “golden period” thanks to cooperative agreements signed during his trip which will benefit both sides. Some of the most promising opportunities for continued Sino-African cooperation will flow from the continent’s rich oil reserves.

WANG WEI is a research fellow at the China Africa Research Society.