The slight problem with North America calling itself the 'New Middle East', is that overseas investors will treat it as such. Cue China. The latest $15.1bn offer for Canadian based Nexen, at a whopping 61% premium over its share price, follows a long line of Chinese resource investment in North America. CNOOC has form, holding a stake in MEG Energy and outright ownership of Opti Canada. Its Chinese partner in resource acquisition, Sinopec, has just snapped up international stakes in Talisman, having acquired Addax Petroleum in 2009. The ambitious Chinese outfit holds stakes in Syncrude and Devon Energy, with bids on the table for Daylight Energy - not to mention a white knight bid to help Chesapeake out of a deep shale gas hole. To complete the set, PetroChina has sunk $4bn into Canadian oil sands and British Columbia gas plays. China has even pumped $17bn into American markets since 2010 to keep the donkeys nodding. You get the picture: ‘Seven Sisters’ has become ‘Three Chinese Brothers’ as far as North America is concerned.
But it’s not just in the US and Canada where Beijing has been strutting its stuff in the Americas. They are serious players in Venezuela, Bolivia and Colombia, not to mention Brazil, where China is set to be one of the biggest overseas investors in pre-salt developments. It’s already extended $10bn cash for oil loans to Brasilia, while Sinopec took large stakes in Galp Energia in 2011. Sinopec swept up Repsol’s Brazilian holdings for $7.1bn in 2010, alongside Sinochem’s purchase of the Peregrino oil field from Statoil. It was no coincidence that Premier Wen Jiabao dropped in on Argentina in June 2012 with a view to plugging Ms. Kirchner’s hydrocarbon gaps. The list could go on (and on), but it’s the overall strategic point that needs to be made: China sees the Americas as a vital place to do business to grow (and hedge) its stake in the global energy game.
Making big ticket investments in Canada will make Washington DC look very stupid if they keep erecting protectionist barriers of course, especially when you consider the enormous reserves America now sits on. But when you strip out all the hype around on Chinese resource strategies, you get three underlying aims: Reducing price risk exposure, security of supply and diversity (of transit) and source of energy. That can be seen in Central Asia, Africa and Australasia, albeit with some more extreme markets being put into the mix along the way. Beijing is now better placed than any other consumer to maximise its arbitrage potential across producer states, especially because it’s deadly serious about developing its own unconventional resources as well. Ask anyone working for Gazprom – the Russian gas giant has been trying to sell gas into Eastern China for years. If Russia wants access to the Chinese market it’s going to be on Beijing’s terms.
But it’s the Middle East – the epicentre of global energy production – where China is most keen to avoid a long term dependency trap. China knows that OPEC supplies are the only credible way demand can be met over the next twenty years, but it’s aware that MENA domestic consumption is growing fast, while unconventional resources have doubled the global resource base over the past decade. That could end up being five times larger than conventional supplies; if nothing else, the 8 to 10 ratio of 80% of oil and gas sitting in OPEC and Russia with 10% in OECD states and 10% in China has been smashed. But while we’re busy working out what this new energy order might look like, China is actually doing it, actively rebuilding and reshaping the contours of the international energy system. Cue North America, the self-proclaimed ‘new Middle East’.
Prolific Chinese investment in Washington’s backyard not only offers Beijing a tactical hydrocarbon hedge against traditional petro-states as dependency ratios explode in the East, it has a serious strategic angle given US energy independence might start looking a more credible prospect in the next twenty years. Assuming the US finally matches its energy rhetoric with political practice, China would have the mother of all ‘swap agreements’ to put on the table. Beijing would concede all its assets across the Americas with West Africa put into the mix, helping to ease the US out of its historic energy ‘global guarantor’ role. In return, the US would cede the Middle East, Caspian, East Africa and Australasia as a pure play Chinese energy concern. You’d basically split the world in two using the mid-Atlantic ridge as a proxy border.
The more likely (and indeed constructive) outcome is that things are never made that clear cut. Rather than leaving some of the core energy producing regions to geopolitical chance, everyone’s interests are far better served by sharing the geopolitical costs of energy transition to the East between the US and China, by continually bringing Beijing into the global energy fold. On-going Chinese investment across the Americas is the perfect way of ensuring Western oil keeps flowing East, promoting oil and gas as globally traded and fungible goods. Not commodities that need to be fiercely fought over for chimerical gains. Letting North America become a Chinese lake is the way of the future: it also puts a new spin on the ‘Chimerican’ relationship, and not one that involves tonnes of debt and even more credit. North America as 'The New Middle East'? You betya…
