Asian Rivals Put Pressure On Western Energy Giants

In a String of Recent Deals, China, India Display Clout, Funds and Stomach for Risk

By ANDREW BROWNE in Hong Kong, BHUSHAN BAHREE in New York, PATRICK BARTA in Bangkok and JOHN LARKIN in Bombay

Staff Reporters of THE WALL STREET JOURNAL
January 10, 2005; Page A1

Major Western oil companies, already feeling squeezed as
easy-to-exploit oil and natural-gas fields become scarcer,
have brash new rivals to contend with in Asia.

As a flurry of proposed and completed deals attest, energy
companies in India and China want bigger slices of the
global oil patch. They're aided by the political and
financial might of their government backers and spurred by
the need to keep their billion-person economies racing
ahead and to ease their dependence on oil and gas imports.

The companies have other advantages. They don't shy from
oil-rich countries like Sudan deemed too dangerous or
politically unsavory in the West. They settle for
less-favorable commercial terms that scare away Western
competitors cowed by demanding shareholders. And they're
more prepared to risk losses drilling holes that come up
dry.

On Friday, India signed a 25-year agreement to import
liquefied natural gas from state-owned National Iranian Gas
Export Corp. starting in 2009. It also agreed to develop
three oil fields in Iran, the second-largest exporter after
Saudi Arabia in the Organization of Petroleum Exporting
Countries.

China and Canada could be ready this month to sign a
general agreement on Chinese investment in Canadian oil
resources, including so-called oil sands in the province of
Alberta, although details are still sketchy.

India's state-owned Oil & Natural Gas Corp. said it had its
eye on a stake in Yuganskneftegaz, the key oil-production
unit of troubled Russian oil giant OAO Yukos. Yugansk, as
it is known, produces 1% of world crude output. Just a few
weeks ago, Russia said it would offer a minority stake in
the same asset to China. There has been no official Russian
comment on either deal.

And in the most eye-catching evidence so far of these
global ambitions, China's third-largest oil-and-natural-gas
company, China National Offshore Oil Corp., may be
interested in buying Unocal Corp., the ninth-largest U.S.
oil company in terms of reserves. Investment bankers in
Hong Kong confirmed the Chinese company's interest. (See
related article1.)

"Over the next 10 years, Chinese and Indian oil companies
will emerge as major players in the global oil industry,"
says Daniel Yergin, oil historian and chairman of Cambridge
Energy Research Associates in Cambridge, Mass. "It reflects
the reality of economic growth and the scope of China and
India in the world oil market."

A key reason the Chinese and Indian oil companies have a
chance to challenge the U.S. and European giants is that
the Western majors are losing their stomach for risk.
Investors in the majors insist on high returns on any
drilling or exploration project into which the companies
pour their dollars, a practice the industry dubs "capital
discipline."

The obsession with returns derives from the 1990s, when the
high-technology sector sucked in capital and the oil
industry was seen headed the way of steel and coal, mature
industries faced with low prices and dim financial
prospects. The oil-price crash of 1997-1998 reinforced this
view, and the more successful oil companies gobbled up
weaker ones.

"At the end of the day, [Chinese and Indian companies]
don't have shareholders," says Rick Mueller, an analyst at
Energy Security Analysis Inc., a Wakefield, Mass.,
consulting company.

There isn't a Chinese Exxon Mobil Corp. on the horizon.
Indian and Chinese companies lack the technology and
know-how offered by their Western competitors. Some
analysts question the commercial merits of China's interest
in Unocal, and it would be a huge swallow for China
National Offshore Oil. Politically, it might prove
impossible for China to buy one of the biggest U.S.
companies, even assuming any were for sale.

Nor does the growing economic might of China and India
guarantee that they will spawn energy giants as mighty as
Exxon Mobil or BP PLC. Japan, Asia's first economic
superpower, tried in the 1970s and '80s to create a
national oil powerhouse but failed.

But the Unocal idea indicates that China may have learned
from Japan's mistakes. Japan invested heavily in
exploration; China is more focused on buying existing,
producing assets. And while those fields don't come close
to meeting China's demand, they give its oil companies an
opportunity to pick up the technical expertise they need to
become more formidable competitors to Western rivals in the
years ahead. India, too, is going for existing oil and
natural-gas assets abroad.

China, long self-sufficient in oil, is now becoming one of
the world's biggest importers, and accounted for more than
half of world oil-demand growth in 2002 and 2003. The IEA
expects China to be importing 82% of its oil by 2030. Right
now, China's biggest oil companies have massive reserves
but aren't nearly as productive as the Western majors. What
is more, it now appears that predictions of an oil bonanza
in China's offshore fields and in its remote far west have
been overblown, giving added impetus to China's overseas
shopping expeditions.

India has the world's fastest-growing car market, which is
driving oil consumption and imports. The International
Energy Agency forecasts oil demand in South Asia will grow
by 3.3% a year between 2000 and 2030, the highest of any
region in the world.

The Western majors and the Asian energy companies all face
the same big problem: a lack of easy-to-tap oil. The vast
oil reserves of the Persian Gulf states, some two-thirds of
the world's total, are mostly off-limits to foreign
companies. International oil giants jealously guard choice
assets elsewhere, and have already picked over the best of
the smaller oil companies on sale. China was rebuffed in
2003 by Western majors when it tried to grab a stake in an
enormous field in Kazakhstan.

At the same time, the growing obsession of China and India
with owning oil and gas assets for energy security means
they are likely to pay high prices.

The Chinese, despite their famed negotiating skills, "are
noted for overpaying" in the commodities sector, says David
Hurd, a Hong Kong-based energy analyst with Deutsche Bank.
Japan discovered how costly miscalculation can be when it
tried to develop its own energy giant: A state-owned
Japanese oil-exploration company ended up as a black hole
for taxpayers and was disbanded last March with debts of at
least one trillion yen, or about $9.5 billion, and little
oil to show for its 300 exploration projects. Japan now
buys its oil on global markets.

Another problem for the huge Asian neighbors may be their
own rivalry. Distrust runs deep between them. ONGC Videsh,
the Indian unit dealing with equity oil purchases, has
spent more than $3.5 billion since 2000 in its global hunt
for energy. Most of this has gone to stakes in blocks in
Syria, Angola, Russia and Sudan. But the Chinese regularly
outbid India for the juiciest leases. As a sweetener to a
deal last year in Angola, the Chinese extended a $2 billion
loan to help the nation build infrastructure after three
decades of civil war. While the deal has yet to be
completed, industry observers say India seems to have been
left out in the cold after offering substantially less in
credit.

"They get beaten by the Chinese on almost every important
deal nowadays," says Madhu Nainan, editor in chief of
Petrowatch, an online petroleum-industry newsletter in
India. "Maybe the Indians aren't willing to play the game
the way the Chinese are."

China is worried that most of its oil is shipped on sea
lanes that run close to the Indian subcontinent, says
Mikkal Herberg, director of the Asian Energy Security
Program at the National Bureau of Asian Research in
Seattle. Partly to counter this, Mr. Herberg says, it is
projecting its navy into regional waters. That, in turn,
has India worried about the security of its own sea lanes.
"There is the potential in broad terms for rivalry between
China and India," he says.

China and Japan are already scrambling for resources in
Russia. Beijing felt bitterly betrayed this month when
Moscow opted to build an oil pipeline from Siberia to the
Pacific coast, a jumping-off point for Japan, instead of to
China's oil heartland around Daqing in the northeast.

When China pitches for energy business in countries from
Angola to Ecuador it can offer a wealth of inducements --
everything from interest-free loans to help building phone
networks, plus political benefits that flow from its role
as a permanent member of the United Nations Security
Council.

Some oil strategists see this kind of broad state-to-state
cooperation as a potential threat to the current energy
giants in the private sector. Indian and Chinese oil
companies often act less as commercial entities and more as
extensions of government policy. In the future, some oil
experts say, big oil-producing countries will increasingly
cut deals directly with big oil-consuming countries,
leaving state companies to ink in the details.

--Martin Fackler in Tokyo contributed to this article