Originally published by Energy Tribune ,7 Apr 2010

By R. Dobie Langenkamp

China is much in the news and on the minds of those of us in the West.

There is concern over China’s human rights posture, its treatment of Tibet, its monetary policy, its massive trade surplus, its burgeoning defense budget, its contribution to global warming, and its impediment of internet freedom.

But there is one aspect of Chinese policy which causes unneeded concern when it is actually beneficial to the world economy and a win-win situation: China’s aggressive efforts to develop oil and gas reserves.

With a relatively flat 3 million barrels per day of production, and a sky rocketing economy, it is natural for China to be concerned about access to the oil it needs to move the country forward. Think of how concerned the US has been with oil production even though its production is almost twice that of China’s. And now remember that the US has the benefit of being nestled between two substantial oil producing states. (Three if you count Venezuela.)

China has not only recognized the problem of adequate oil for its future, it, unlike the US, is doing all it can to remedy the problem. Instead of simply using its huge reserves to buy oil and drive the price ever higher, China is stepping out to develop oil reserves in China and wherever else they may be found. The result, of course, will not be merely to reduce the Chinese pressure on world prices, but to push back the much talked about date of “peak oil.”

What is it that the Chinese are doing that we should support?

   1. China is making a substantial portion of its domestic oil and gas resources available to foreign exploration. (The difference between the Pacific off the US East and West coasts and the South China Sea is that US and British companies are drilling in the South China Sea.)

 2. Dealing with the Chinese in regard to petroleum exploration has been a relatively good experience contrasted to many other countries (e.g. Russia, Nigeria, Mexico). Corruption and nationalization have not been experienced. China takes a 50% carried interest after production is proved—a strong but not debilitating requirement. Furthermore, the level of political harassment and corruption is not excessive.

3. China has not –as the US has—cordoned off production from high-potential areas of exploration.

  4. China has not used oil production as a political tool. As a result, investment is being made to develop oil and gas for the international market in Sudan, Syria and Myanmar to the benefit of all consuming nations. If worldwide energy security is to be found in the form of free and untrammeled oil and gas markets. Given that stance, the US should likewise resist the temptation to politicize oil.

 5. China is pursuing other energy sources from wind to nuclear.

The concern in western eyes is that China is “locking up” all the oil. This stance ignores several facts. First, it looks as if the gap between the oil that China produces – directly or indirectly – will never catch its rapidly increasing needs.

Second, Chinese-controlled oil is not “locked up.” Instead, it is a part of an international commodity pool and additional supply merely moderates the price. Can anyone imagine that China would gain control of the world’s oil and then shut it in to deprive the world of this needed resources?

Third, Chinese oil companies have every right to go forth to develop reserves. US, UK, Russian, Italian, Canadian, Australian and Malaysian companies, to name just a few, are doing the same. One can’t applaud Exxon’s initiative in West Africa and then dismiss CNOOC’s efforts as somehow menacing. There is more than a little of the “how dare they!” in the alleged concern over Chinese activism.

Fourth, the complaint about China has been that it is insular, inward-looking, state-dominated, devoted to exports only and, although not articulated in this politically correct world, it is “inscrutable.” China’s oil initiatives tend to ameliorate these stereotypes. China is leaving the cosseted world of its well-protected manufacturing industries and venturing out onto the world scene. It is competing (albeit with government backing) in the rough and tumble world of petroleum. Major IOC’s with long histories of exploitation around the world (with more than a little help from their governments) are at least somewhat estopped from complaining. Consumers the world over should be grinning from ear to ear.

There is an issue of commercial nationalism here. From a position of national strength, GDP, shareholder value and the like, it is preferable for Americans for oil to be found by Exxon rather than CNOOC. Just as the US benefits from autos built in Detroit rather than Beijing, so it benefits from the success of its petroleum industry abroad. But that is not a petroleum issue. That is a mere balance of trade and national wealth issue which exists with regard to all products. The thinly veiled hostility of US toward the petroleum industry seems to have ignored this reality.

According to the Washington consensus, we are “addicted to oil,” we are facing ruinous global warming, we are imperiled by the impending “peak oil” crisis and thus, we’re moving with all deliberate speed into the era of switchgrass and solar panels to fuel our industry and nation.

Is it not ironic that there is concern that China is seeking to develop numerous sources of yesterday’s fuel? How naïve.

By and large, US policy makers do not seem to be concerned with the prospect of the US losing its century-long dominance in the petroleum world. It is planning to make changes in the tax structure which will penalize all exploration companies. It has barred drilling in huge prospective areas from the ANWR to areas in the Mountain States to the thousands of miles of US coastal areas. It has provided a $22 per barrel incentive to a competing fuel (ethanol). It provides a 25% tax credit (.02 per kWh) for wind energy, thus intentionally diverting investment away from hydrocarbons. An energy department official recently testified that in effect we were producing “too much oil” and not enough “renewable” fuels and thus the government’s anti-oil policy is a rational one. (One had to read the testimony over to believe it.)

When we see China fishing in the troubled waters in Nigeria and Ghana, moving aggressively into Iraq (now that’s an irony of ironies), when we see them displacing ENI (the Italians) in Uganda, building pipelines and refineries in Sudan, and increasing their purchases from Saudi Arabia, we see them competing on the age-old turf of the Seven Sisters. They may be playing hard-ball but the problem is not their “locking up the oil” but perhaps their techniques which may not be moderated by the Foreign Corrupt Practices Act. Also the Chinese seem to have the benefit of low-cost government financing. Our answer is to deprive the industry of the tax treatment that has permitted it to prosper for the last century: the intangible drilling cost deduction.

For good measure, the lions of our oil industry are dragged to Washington periodically and hectored. Not for seeking taxpayer bailouts, not for devising diaphanous commercial products which defraud the world, not for enriching themselves with punishing interest rates like the credit card industry. No, the problem seems to be too much success and too little attention to the energy sources that have already claimed billions of dollars in tax payer’s subsidies.

The Chinese aggression on energy is, perhaps unintentionally, rationalizing the world’s petroleum infrastructure. Is not a pipeline from Kazakhstan to China a reasonable way to give that former Soviet country a chance to get a competitive price not dictated by the Russians or the European traders? Is not the pipeline from Russia to China a reasonable alternative for Russia? Is there any problem with the Chinese buying Australian LNG and being forced to compete with the Japanese to do so? Is it not noteworthy that the Chinese and the Taiwanese have entered a Joint Development Zone in the Straits of Formosa?

And China’s companies are not going it alone but are aggressively seeking partnerships.

BP and CNOOC have agreed to jointly develop the world’s second largest field (Rumalia). CNOOC and Total are lined up to develop the new reserves in Uganda. China is teaming up with Canadians to develop a pipeline from the heavy-oil rich areas of Canada to the Canadian west coast. All over the world, they are getting involved in every form of enterprise, joint development, partnerships, long-term purchase contracts, government concessions, and service agreements.

The only respect with which China is working against the international interest is in its gasoline pricing policy. There is no justification for its broad subsidization of the gasoline price domestically

There were decades where detractors of the major western oil companies who bestrode the world complained of their dominance, arrogance and interference with politics in producing countries. The reality is that the massive oil production of the West helped the Allies win World War II and resulted in the most rapid increase in international standards of living in history. For all the defects and problems, this giant industry supplied the world with cheap energy.

When it comes to seeking out new supplies of oil, China’s self interest should be seen for what it is: A positive development in a world facing the challenge of developing ever-more-difficult-to-produce oil reserves. We may be facing peak oil and stratospheric prices, but one thing is clear: China has decided to be part of the solution.

R. Dobie Langenkamp is a Tulsa-based attorney who specializes in oil and gas issues. He served in the Department of Energy in the Carter Administration and formerly worked as a professor of law at the University of Tulsa.

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