Slim West Asia pickings seen for Chinese firms

Beijing, Nov 27: It should be a match made in heaven, China's vast market of energy-thirsty factories and gas-guzzling cars paired with the enormous crude reservoirs of the Middle East.

But although Beijing buys nearly half its oil imports from the region, and is working to flesh out its diplomatic role there, energy firms have struggled to establish a presence.

Chinese and Middle Eastern producers, used to leveraging market access and crude supplies for favourable terms, are sparring over the kind of cooperation they want and how to split the vast potential profits that are at stake.

China's consumers are Beijing's main assets, but officials are wary of opening to foreign competition a sector it considers strategically crucial and key to domestic stability because of the economic impact of energy prices.

But Chinese firms are no longer willing to pay large premiums to secure oil supplies, and they do not have the technological expertise that Western firms use to woo producers.

For their part, Middle Eastern countries are worrying less about finding outlets for their oil while global demand is booming, prices are high and export refineries are sprouting across the region.

So although both sides are good at signing preliminary deals, ranging from upstream projects in Iran to refinery and petrochemical complexes in China that will process Kuwaiti and Saudi crude, few of them have gone beyond the initial phases.

BALANCE SHEET MOTIVES

Chinese economists admit that China's firms are not driven only by the balance-sheet demands shaping multinational competitors like Exxon.

''Of course for the companies themselves, the most important motive is boosting their own profits,'' said Niu Li, at the State Information Centre, a government-funded think-tank.

''There is another aspect we cannot ignore though ... these companies are state-owned and also have a certain responsibility to Chinese society to guarantee secure oil supplies,'' he added.

The days are gone when Chinese firms would pay huge premiums to secure oil reserves, although with government backing they may sometimes be willing to shell out a little more than competitors.

''Things aren't how they used to be anymore, it doesn't matter how good your relationship, they always need to see where the profit is coming from,'' said one senior Beijing-based diplomat who negotiates energy issues with China.

Beijing has smoothed its way to several deals with sweeteners like the $3 billion of loans it offered Angola in the last two years, but this is government money.

The companies themselves, increasingly sensitive to balance sheet performance after their listings, are not as willing as Beijing officials to shell out cash.

''At the end of the day, Chinese companies are out to make money. If they just wanted oil they would have signed more 'buy backs','' said Gavin Thompson, Beijing-based consultant at energy analysts Wood Mackenzie.

''Buy back'' deals, which are standard in Iran, reward investment in developing a field with a share of production for a period before the state repurchases the field. However, foreign companies often complain the compensation period is too short.

The large producers do not need Beijing's cash anyway, some analysts say.

''Saudi Arabia has the money to afford advanced Western technology. They may make a show of interest in Chinese products, but ... they prefer Western goods,'' said Guo Xiangang, senior research fellow at the China Institute of International Studies.

INEVITABLE RELIANCE

Beijing has made more headway in Africa, where challenging reservoirs, political instability and poorer regimes mean there are more deals up for grabs, and more interest in Beijing's technology and government financial incentives.

Chinese firms have made so much headway in Africa that CNOOC Ltd., China's third-largest oil company that specialises in offshore production, is largely ignoring the already-packed Middle East to focus on African deals, industry insiders say.

But Beijing clearly recognises that as domestic demand for oil grows, so must its dependence on the Middle East.

It is exploring pipeline plans to cut the time and cost of sea journeys, stepping up its diplomatic engagement and promoting investment where there are still assets it can afford.

''What you have seen is China investing in more peripheral Middle East countries like Yemen, Oman, the UAE (United Arab Emirates) and Syria,'' said Thompson.

One of the strongest drivers for cooperation could be China's strategic reserves buildup. The country has opened discussions with Aramco to provide it with a strategic reserve.

''They want a degree of understandable non-transparency and the only way they can do it is having a partner who is a huge player in the oil world,'' said U.S.-based analyst Paul Ting.

Indeed, Saudi Arabia has made more progress than any other Middle Eastern nation in efforts to break into China's market, last year flaunting a preliminary deal with Sinopec for a refinery and petrochemical complex in Fujian province.

Negotiations for a final agreement have since floundered on disputes about pricing and export controls -- but the potential rewards are so huge that the two companies are still expected to set a pattern for tough but profitable deals.

REUTERS