How China is Beating the United States in the Global Oil Game

Email

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Iraq recently signed its first oil deal in 35 years with a foreign company.

And – quite surprisingly to many observers – the company wasn’t one of ours.

Not surprisingly, the U.S. news media barely acknowledged the deal – even though the agreement was major news throughout the rest of the world.

According to reports from Baghdad, the 22-year deal between the Iraqi government and the China National Petroleum Co. involves $55 billion, or 87% of Iraq’s current total revenue at a conservative long-term estimate of $100 a barrel.

The deal is actually a renegotiated version of a 1997 agreement between China and a Saddam Hussein-led Iraq. That original deal included production-sharing rights, but under the new contract China will be paid for its services, but will not share in profits,
The New York Times reported. The payments will be made in cash – and won’t be “in kind” payments of crude oil, the newspaper said.

While this deal, on its face, appears to be just another global oil-services contract, it’s actually a very significant development in the hunt for long-term energy supplies. In fact, it actually demonstrates that – when it comes to nailing down those long-term oil supplies – China is an expert, and is playing a very deep game. And the outcome of that game will certainly have substantial long-term implications for consumers and investors both here in the United States, and in markets abroad. Here’s why:

  • With estimated reserves of 115 billion barrels, Iraq is tied with Iran for the world’s No. 2 position, trailing Saudi Arabia, which has estimated reserves of 264 billion barrels, according to estimates from the Energy Information Administration.
  • In a country where electricity is in short supply, the oil produced from the Ahdab Oil Field will help fuel a planned power plant that would be one of the largest in Iraq. By helping Iraq with this key initiative, China can expect to gain a solid foothold in one of the most oil-rich nations in the world, analysts say.
  • At the end of the day, the deal clearly highlights something that most U.S. investors haven’t focused on yet – namely that the eventual winners in this game may not be such well-known giants as Chevron Corp. (CVX), ExxonMobil Corp. (XOM), or other household names. Deals like this one and the host of others that are undoubtedly close behind suggest that tomorrow’s winners may have names most English-speaking investors can’t pronounce, since they’ll be distinctly Arabic or Chinese in nature. [Two recent installments of Money Morning’s popular new “Buy, Sell or Hold” feature have focused on Chevron. Take some time to peruse the original story, as well as the update.]

China’s Shrewd Long-Term Oil Plan

The important thing for investors to understand now is that oil ownership, as I have said for many years, is an illusion. It does not guarantee price, nor profit. What really matters in the end is having secure supply lines and sources from the Middle East (and other parts of the world).

Under this new contract, CNPC will provide technical advisors, oil workers and equipment to help develop the Ahdab oil field southeast of Baghdad, said Assim Jihad, a spokesman for Iraq’s Oil Ministry.

While China won’t participate in the profits from the oil it helps pump, it is shrewd enough to realize there will be long-term benefits. Analysts who see the bigger picture here agree with our view.

“There are some political profits for China,” Ibrahim Bahr al-Ulum, a former Iraqi oil minister, told The Times. “They need access to Iraq, and when they need oil, at least the Iraqi people will feel that China has done something for them.”

And that’s not all. Before 2003, Iraq had oil agreements with China, Russia, Indonesia, India and Vietnam – three of which included production-sharing agreements, The Times reported. But the big jump in oil prices, the new government and a myriad of other changes that have taken place since that time prompted Iraq to reconsider the terms of those deals, Iraqi officials said.

Iraq continues to negotiate other service contracts with ExxonMobil, Royal Dutch Shell PLC (ADR: RDS.A, RDS.B), Total SA (ADR: TOT), BP PLC (ADR: BP), Chevron, and some smaller oil companies. The deals have been reduced in length from two years to one after Iraq took a lot of flak for not putting the contracts out for competitive bidding.

But China’s contract was the first major one to be completed – and for one simple reason, Jihad, the Iraqi Oil Ministry spokesman, said. CNPC had “wide experience in this field,” and because many foreign oil companies were not willing to come to Iraq.

China has apparently learned how to play the global oil game with a pro’s touch. Ironically, it was the United States that crystallized this vision.

By invading Iraq, the United States dealt China’s central planning commission an embarrassing wakeup call when the second Gulf War summarily wiped out China’s oil interests in Iraq.

When that happened, China’s central planners realized two things:

  • The status quo in the global oil game had changed.
  • And China’s double-digit economic miracle could not be sustained with only a few oil suppliers.

What China fears most is that there will not be enough oil to go around in the very near future and that a U.S.-dominated supply chain could effectively “strangle” China’s growth.

So, it has done what the United States and other great powers have done at other times in history and gone on a buying spree from Darfur to Peru that’s turned heads and ruffled feathers all across the world.

What’s been especially frustrating for hapless Western leaders who do not understand that their actions caused this in the first place, is that China’s not afraid to do business with rogue nations like Iran, Sudan and Burma. It has even gotten chummy with Venezuela and Russia – much to the consternation of our present administration.

It’s a virtual certainty that China will maintain this policy going forward. My contacts in China and Africa have told me point blank that China’s leaders “don’t care about human rights or nukes or hostile governments. What matters is anyone who provides oil to China no matter what the rest of the world thinks.”

So, in as much as the U.S. media has dismissed this deal as only one in a long string of recent Chinese oil purchases, it’s arguably the most important deal yet. The reason: It suggests that China will go to extraordinary lengths to obtain the oil it wants and needs.

To add to its stable of captive oil suppliers, China will pay far more money, endure limitless criticism for ignoring human-rights issues and endure harsher business conditions than our companies can or will undertake. While U.S. firms must worry about sanctions, bad publicity or simply security, China worries about one thing, and one thing only – getting oil.

It’s a lesson initially learned from us. Then they refined it. Perhaps it’s time we re-learned this lesson from China.

[Editor's Note: With the U.S. financial markets in such disarray, Money Morning is looking for profit opportunities beyond U.S. borders: For instance, just check out this new report on a Wisconsin-based company we've discovered that's posting quarter after quarter of earnings surprises - while the rest of Wall Street tanks. Not only does this company have a lock on China - the fastest-growing market on the planet - this corporate gem is also riding the profit wave of the most-powerful global trend that we're following right now. If you act on this opportunity now - as an added bonus - you'll also receive a free copy of investing guru Jim Rogers’ best-seller, “A Bull in China,” which includes research reports on that country’s key profit plays.]

News and Related Story Links:

Join the conversation. Click here to jump to comments…

About the Author

Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs The Geiger Index, a reliable, emotion-free guide to making big money and avoiding losses, and Strike Force, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.

Read full bio

  1. H. Craig Bradley | October 16, 2008

    What is going to happen to America when its people wake up and figure out one day that alternative energy won't heat their homes or run their cars and trucks?

    By the time our leaders wake up there probably won't be any free or available oil reserves left. Who will be strangled then? In the past, these kinds of economic conflicts have lead to wars. I fear the next war because we can't win without oil, and plenty of it too.

    General George Scott Patton was forced to stop ALL his tanks, and the allied advance, in Italy when he temporarily ran out of diesel fuel.

  2. Rick R. Pelley | October 16, 2008

    If the lesson to be re-learned from China is an oil-aggressive one, and “that China will go to extraordinary lengths to obtain the oil it wants and needs”, then the “game” is just now heating up.

    Add to the mix, the currency “valuation” regime problems, one wonders whether there be enough prevailing “cool” heads.

  3. David Synnott | October 16, 2008

    I find it interesting that the article does not include the 180 billion barrels of oil which are currently recoverable from Alberta's (Canada's) oil sands. Note that the amount quoted when discussing the Athabasca tar sands always includes the phrase "economically recoverable using current techniques". Further, the estimates indicate a total of over 2 trillion barrels of oil within the tar sands. There is a considerable amount of research going on to increase recovery rates.

    I believe it is fair to say that Canada has the second place position in terms of the number of recoverable barrels of oil.

  4. France Clement | October 16, 2008

    Mr.Bradley
    Don'tforget that Canada is the largest country who produce
    bituminous sand and our FIRST customer is USA,for many many many year"Read about Suncor(SU-T)

  5. ZigZag | October 17, 2008

    Whereas the people holding the important influence over the politics and economy of the US are focussed only on short-term personal gain (which is why the US is in its current distress, and why their country is, right now, very rapidly, and big-time, in the process of losing its position and influence in the world), it is well known that the politicians, bankers and the general population in China are focussed on very long term strategy. If even I, as an unemployed single mother know that, it can only be the personal greed of the US leaders which allows them to wilfully ignore that. So much for their self-professed Christian values.

  6. Zhoufriend | October 18, 2008

    I think that yours comments are right and value.

  7. Dave | October 19, 2008

    Perhaps what isn't so obvious is that it is in our best interests that China have a vested stake and major commitment to the stability of Iraq. Moreover, the sooner we focus on our own existing resources and their development, the better off (economically, militarily and politically) we will be. "Drill here, drill now" and do "all of the above" now. Let's heavily promote what's technically deliverable in the near term at the same time that we encourage what's technically feasible for the longer term. The politicians who are ensuring that their benefactors are paid off while existing resources remain untapped are morally and ethically criminal.

  8. JOhn Heeckt | October 19, 2008

    We face two hugh problems going forward. The first is that large American corporations are American in name only. These corportations are essentially internation corporations with no particular loyalty to the U.S. or any other individual nation. It’s been said that ’tis better to have bad morals than no morals at all. Sadly, these corporations have no morals at all. Profit is their entire preoccupation …no matter how or where it comes from.
    Our second problem is that from the presidency through Congress, relative to the challenges we face, our government has never been populated by a more genuinely ignorant group of people. And, particularly if the polls hold, it will get measurably worse.

  9. Michael | October 19, 2008

    I really enlightened myself.Please do send similar mails in future regularlly
    Hats off to you

  10. Alan | October 20, 2008

    Why is your article 'How China is beating the US in the Oil Game' totally misleading, instead of telling how and why the SECRET MASTERS have manipulated this matter?

    Am I to believe that you, as someone who participates in the Financial Fields like I do, don't understand WHY China was 'handed' this Iraq Oil Production contract, and WHY it's being paid in DOLLARS instead of OIL?

    Am I to believe that someone who participates in the Financial Fields like I do, knows absolutely NOTHING of how the SECRET MASTERS manipulate Nations?

    If so, then you're words aren't worth reading – by anyone who needs to know how and why political and economic life is 'controlled' by the SECRET MASTERS, or by anyone who wants to enjoy a writer who can 'tell it like it is'.

    First, we both know that China was handed this contract as a 'token' payment in return for its continued participation in financing a Bankrupted US.

    Second, China is being paid in 'losing value' US Dollars instead of 'increasing value' Oil, and it's being 'told' to LIKE it.

    Third, Oil is a 'fossil' from the old, now dead Industrial Age. It's the 'old technology' TOY that's being handed down to the 'new kid on the block' while the rest of the older kids get to play with the NEW stuff (ethanol, solar, wind).

    In this piece on CHINA, you take what REALLY happened, cover it in misleading facts, and use it to bash the US because it's moving into a new Energy direction. This piece is so misleading and hurtful to people who are looking to read socially insightful material that's relevant to their future and the future of their children (and by extension, the future of the human race).

    As for your investment advise, I see that you're still in 'sales', a bird dog for the brokers, and not someone who is truly concerned with the financial well being of people. Peddling Stocks and Bonds to people is a 'sales' job designed to 'sell' fish instead of showing them HOW and WHY to fish. This too is an act of misleading people for self gain. For what, to make a buck?

    I'm a Futures Options Writer. I write 30 day Call & Put Options in all the most liquid markets. This technique enables investor's to hedge their contract positions. It provides me an excellent business while providing an excellent liquidity service to the markets. I create win-win situations. I make a buck honestly and respectfully.

    The more I read you, Keith, the more I realize you're still trapped in the old 'self-interest' mindset that plaques most of the other 'street' people who salivate over making a buck more than producing a quality product.

    Take a hint from what's now happening to them. Start explaining political and financial occurrences truthfully. Don't fear the SECRET MASTERS – kick 'em in the groin!

    Do it for the good of people, and who knows, you just might wake up a good number of them, gain a whole lot of respect, and 'earn' a nice income too!

  11. George Baily | October 25, 2008

    "Perhaps it’s time we re-learned this lesson from China." …hmmm hopefully instead of this becoming a desperate, competitive, and destructive scramble for the last oil, it's time to learn the obvious lessons that proponents of long-term sustainability have been talking about ever since I was in school.

  12. JDsg | November 11, 2008

    @ David Synnott (#4):

    I believe it is fair to say that Canada has the second place position in terms of the number of recoverable barrels of oil.

    The problem with the oil sands inflating the amount of proved reserves in Canada is in the very nature of the oil sand itself. These are heavy oils that most North American refineries simply aren't able to process. Most N.A. refineries are set up to process light sweet crude, and are not able to process the oil sands concurrently. Separate refineries must be created for the oil sands, such as Royal Dutch/Shell is proposing to do in Alberta.

    I'm not saying that the oil sands aren't an important oil reserve, and certainly the Canadian oil sands in particular are getting the attention they deserve; however, I think it's better to create a separate category for oil sand/extra heavy oil reserves, rather than to lump them into the proved reserves of conventional crude oil.

Trackbacks

  1. [...] 16Oct08 "How China is Beating the US in the Global Oil Game" How China is Beating the United States in the Global Oil Game By Keith Fitz-Gerald Investment Director Money Morning/The Money Map Report "Iraq recently signed its first oil deal in 35 years with a foreign company. And ? quite surprisingly to many observers ? the company wasn't one of ours. Not surprisingly, the U.S. news media barely acknowledged the deal ? even though the agreement was major news throughout the rest of the world. According to reports from Baghdad, the 22-year deal between the Iraqi government and the China National Petroleum Co. involves $55 billion, or 87% of Iraq's current total revenue at a conservative long-term estimate of $100 a barrel. The deal is actually a renegotiated version of a 1997 agreement between China and a Saddam Hussein-led Iraq. That original deal included production-sharing rights, but under the new contract China will be paid for its services, but will not share in profits, The New York Times reported. The payments will be made…" Read the full article" How China is Beating the United States in the Global Oil Game [...]

  2. [...] How China is Beating the United States in the Global Oil Game [...]

Leave a Reply

Your email address will not be published. Required fields are marked *


5 × = twenty five

Some HTML is OK