China’s External Energy Relations: Strategic and Corporate Dynamics

1. China’s External Energy Relations: Strategic and Corporate Dynamics Presentation at 2005 China Symposium WEAI, Columbia University, New York City by FAREED MOHAMEDI Head, Country Strategies April 21, 2006

2. The Age of Energy Insecurity • Growing sense of global energy insecurity • Potential destabilizing force in global economic and political relations: • Industrialized countries question the intentions and capabilities of the major resource holders • The competition for access to energy resources from the newly industrializing countries in Asia • The major resource holders question the sustainability of demand and the new obligations assigned to them • The populations of the major resource holders demand a greater share of the country’s revenues

3. The International Architecture US Hegemony Multilateralism • Bush Admin’s Sole Superpower Policy constrained • Return to full scale multilateralist policies unlikely • Uneasy relations due to constraints and dependencies US US EU China EU China Nationalist Confrontation Nationalist Coexistence US US EU China EU China

4. Global Tensions (1)Global Reallocation of Production Treasury Bonds Investment United States World China Commodities, Other Inputs Merchandise Exports • Accommodating the rise of China and India • Industrialized world fears Emerging Market’s quest for energy

5. Global Tensions (2)National Distribution of Income Governments IOCs/NOCs • Disenfranchised groups want their share • They either capture the state or blackmail companies • Can IOCs/NOCs be promoters of economic development? Lower Returns Social Demands Revenue Sharing Local Disenfranchised Groups

6. Primary Concern: Efficiency Primary Concern: Inputs Primary Concern: Revenue State Types and Implications For NOCs/IOCs Government NOC IOC Role Entrepreneurial Capitalist Privatized & Competitive Open Competition Social Democratic Capitalist Public Entrepreneurs Limited Opening Driving Forces Authoritarian Globalizer Entrepreneurial Bureaucracy Oligopoly Populist Development Statist Bureaucracy Traditional Monopoly Rentier State Façade/No Institution Excluded

7. China Government NOC IOC Role Entrepreneurial Capitalist Privatized & Competitive Open Competition Social Democratic Capitalist Public Entrepreneurs Limited Opening Authoritarian Globalizer Entrepreneurial Bureaucracy Oligopoly Populist Development Statist Bureaucracy Traditional Monopoly Rentier State Façade/No Institution Excluded Oil Sector Gas Sector

8. NOCs: What Happens When the Oil Runs Out? Key Driver: Risk Management / Business Development Skills Key Driver: Risk Management / Business Development Skills Key Driver: Asset Management Skills Illustrative Production Cycle

9. Industrializing States: Choices For Their NOCs Resource Needs Create New Imperatives • Support industrialization • Protect home territory • Go overseas and seek new assets • Move into domestic gas • Reconfigure to accept IOC partnership • Be privatized • Entirely change their function possibly to regulator • Fail

10. China: Attempting to Rise Quietly Dragon Zone(Local) • Security issues prevail • Making conciliatory overtures, but… • …Retains serious military option • US actions evaluated case by case Panda Zone(Global) • Commercial issues prevail • Prefers bilateral deals • No credible military option • General acceptance of US leadership Japan Iran Taiwan Sudan Vietnam

11. China: Regional Preferences For Sourcing Oil #5 #1 Dragon Zone(Local) Panda Zone(Global) #4 #6 #3 #2

12. CNPC Sinopec CNOOC Heritage strength Shengli Not yet With Petrobras Heritage strength Norway Atlantis Assets Sudan, Venezuela and Kazakhstan Discussions with Iran and Iraq Indonesia, Australia; LNG Iran and SA gas North and west Heritage strength Guangdong WEPEC w Total North and west Heritage strength Guangdong Dalian & Guanxi Shandong 6 or 7 projects Likely candidate JV w CNOOC JV w Sinopec Heritage strength Power Gen in Hainan Storage Matrix of NOC Functional Capabilities Sinochem U/S Oil & Gas Onshore Offshore Foreign Pipelines W to E Gas D/S & Chem. Downstream Chemicals LNG Trading Other

13. CNPC: Overseas Leader Algeria— 75.1% of exploration license agreement of Block 112/102a and Block 350 Canada— Oil Sands development interest; partnership with Enbridge; 200,000 b/d interest Russia— In talks over Sakhalin Libya— Block 4 through EPSA IV Kazakhstan— Acquired PetroKazakhstan; 25% acquisition of Aktobe fields Prod Niger— Exploration agreement for Block Bilma Dev Expl Talks Chad— Acquisition of Block H (Encana assets) Ecuador— Exploration activity in Block 11 Sudan— 40% working interest in blocks totaling 440,000 b/d Indonesia— Took over Hess’ holdings; seismic and drilling (21 wells) going on in other blocks

14. Sinopec: Early stages of International growth Algeria— Service contract to increase oil recovery rate at Zarzataine, near Hassi Messaoud oil field Canada— 40% Interest Northern Lights Oil Sands Russia— 25.1% interest in JV with Rosneft to explore Veninskoye block, Sakhalin-3 Prod Dev Oman— Blocks 36 and 38 Myanmar— Onshore Block D Expl Talks Iran— Yadavaran field and LNG imports Saudi Arabia— 40k sq kms exploration contract in Rub Alkhali basin Cote d’Ivoire— 27% interest in Block CI-112 Nigeria— Service contract to develop shallow water OML 64 and 66 in cooperation with NNPC

15. CNOOC: The LNG Leader Algeria— Various blocks Morocco— 15% interest in Ras Tefelney deepwater permit Offshore China— Bohai Bay Eastern S. China Sea Western S China Sea East China Sea Oil Sands— 16.69% interest in MEG, which holds oil sands leases covering 13k hectares Prod Dev Expl US GOM— Planning to bid on Pioneer’s GOM assets, potential production 40mbbls/d Talks Kenya— Negotiations underway for a PSC for 6 Blocks Indonesia— 39.51% interest in 5 blocks 42 mboe/d production

16. Chinese Energy E & P Interests in Africa Morocco Rogue States Algeria Libya Mauritania Mali Niger Stranded Basin Chad Sudan Nigeria CAR Equatorial Guinea Asset Stakes Through Energy Diplomacy Sao Tome Congo Brazzaville Kenya Gabon Angola Aggressive Overbidding Namibia Legend Holds assets In negotiations/ energy diplomacy Most Extensive Portfolio

17. Chinese Oil Services/Downstream Interests in Africa • Activity is integrated into the overall Chinese goal of energy security • The companies are able to compete on labor, cost, manufacturing, and increasingly, know-how • This may have implications on host government local content policies (ex. Nigeria) Algeria Libya Niger Sudan Nigeria Where Chinese Oil Companies Go, Their Service Companies Follow Legend Holds assets In negotiations/ energy diplomacy

18. China’s Energy Diplomacy in the Middle EastCovering All the Bases • Kuwait: • 8 Agreements • 7 Projects • $1.2 billion trade • Iran: • - 7 Agreements • - 4 Projects • $6.6 billion trade • Sale of 300 cruise missiles, plus other military hardware • Transfer of nuclear technology • Iraq: • - 0 Agreements (post-2003) • - 2 Projects (pre-2003); 662 service projects (pre-2003) • Sale of 150 missiles • Egypt: • - 4 Agreements • - 2 Projects • $1.5 billion trade • Sale of 50 Silkworms • Qatar: • - 8 Agreements • - 0 Projects • $490 million trade • UAE: • - 10 Agreements • 1 Project • $7.7 billion trade • Saudi Arabia: • - 13 Agreements • - 2 Projects • $9.5 billion trade • Sale of 56 CSS-2 missiles • Oman: • - 7 Agreements • - 2 Projects • $7.7 billion trade • Yemen: • - 7 Agreements • - 2 Projects • $2.0 billion trade

19. Who are NOCs? National Asset Holders S. Aramco More adept Entrepreneurial NOCs Gazprom/Rosneft Petronas KPC Pertamina PDVSA EGPC NNPC LNOC Statoil PTT Sonangol Sonatrach Petrobras CNOOC PEMEX CNPC QP Market Seekers ONGC Sinopec NIOC Strategic Resource Seekers Technology Seekers Ecopetrol Less adept Finance and Security Seekers Declining NOCs Diminishing Production Expanding Production Technology Resources

20. NOC-NOC Relations Will they succeed? • Why should the National Resource Holders share their rents? • Strategic Resource Seeking NOCs are in best position to gain access in some areas especially if they improve their technical skills • Unlikely to cooperate on particular deals unless host governments want that • Key Question: Is it going to be material? • Entrepreneurial NOC have the challenge of distinguishing themselves from the IOCs

21. Resource Holder Needs and Asian NOC Advantage Legend: LSPM = large scale project management EOR = enhanced oil recovery IOR = increased iol recovery DW = deepwater Heavy = heavy oil LNG = liquefied natural gas GTL = gas to liquids Asian NOCs now can provide Markets, Money and Political Cover for resource holders…however, Money is the primary advantage Western IOCs used to ensure Technology, Political Cover and Social Infrastructure spending for resource holders… …however, new geopolitical developments weakens the appeal of the US flag, and resource holders are unsatisfied with Western IOC approaches to social infrastructure development

22. NOC-NOC Relations: Broader Initiatives Without IOCs and cooperatively The NOC Forum • 4th NOC Forum in November 2006: • 23 NOC CEOs will attend • Two central themes to be discussed: • How can NOCs meet the HR challenge? • Sharing the best practices of the industry • Considerable progress made by 3 task forces formed at 3rd NOC Forum (July 2005 in Rio) • Environmental challenges • Monetizing natural gas • Technology most needed by NOCs

23. Resource Holder Needs and IOC Opportunities Legend: LSPM = large scale project management EOR = enhanced oil recovery IOR = increased iol recovery DW = deepwater Heavy = heavy oil LNG = liquefied natural gas GTL = gas to liquids Entry opportunities will require substantial above-ground risk tolerance African opportunity set still large, due to relinquished acreage in deepwater; all need technology, money and social development – commitment to social development can be an IOC differentiator