Wednesday, September 30, 2009




LONDON -- China's search for large stakes in some of Nigeria's richest oil blocks comes against a backdrop of problems in other African countries where the Asian giant has oil operations.

Some countries are preventing China from expanding its interests, criticizing it in terms of technical matters and social development.

On Tuesday, Nigeria's oil minister and a presidential spokesman said state-owned China National Offshore Oil Corp. Ltd. is in advanced talks with Nigeria to take over blocks that are owned by Royal Dutch Shell PLC and other companies, but are underutilized.

An official with Nigeria's state oil company said the number of onshore blocks on offer was about 20 and that negotiations were at a late stage with some companies, including Cnooc. He said he wasn't sure exactly how much crude Cnooc was vying for, but that targeted investment would run into several billion dollars.

Cnooc officials couldn't be reached to comment.

The news of the Nigeria talks followed setbacks this month on deals in Angola and Libya. On Sept. 8, Libya vetoed a $462 million bid by China National Petroleum Corp. for Libya-focused Verenex Energy Inc. Days later, Angola's state-owned Sonangol said it wanted to block the sale of Marathon Oil Corp.'s 20% oil-field stake to Cnooc and China PetroChemical Corp., or Sinopec.

Even in Nigeria, deals have run aground. Companies such as Shell have been at loggerheads with the Nigerian government because the oil concerns haven't fully utilized some drilling licenses.

The companies counter with complaints that the government isn't securing operations, exposing them to militant attacks on pipelines and other infrastructure. Analysts say Nigeria's policy of paying militants to lay down arms has generally failed because the causes of the militancy -- poverty and lack of education and life opportunities -- haven't been tackled.

The threat of a setback in Angola -- China's largest African partner -- is in stark contrast with the enthusiastic reception it found there five years ago, when China was launching a quest for African resources to feed its economic boom. It made a spate of resource acquisitions in the form of oil-for-infrastructure deals.

In 2004, Sonangol chose Sinopec over India's Oil & Natural Gas Corp. for the sale of an oil-field stake by Shell. The deal came just after China's Export-Import Bank had granted Angola a $2 billion loan, which broke off talks with the International Monetary Fund over transparency of government finances.

In the first half of 2008, Angola became China's largest oil supplier, covering 18% of its needs. China's commerce ministry reported Sino-African trade hit a record $106.8 billion for the year, up 45% from 2007.

But some in Africa are starting to find the Chinese embrace too tight. The formula of bartering oil for infrastructure initially had given China's oil concerns a competitive advantage against Western companies, whose investors were largely unwilling to fund such projects. But those same projects have become a key factor in China's setbacks. In particular, the insistence of China state companies on keeping local hiring to a minimum has brewed resentment.

"Chinese construction companies are notorious for their highly criticized labor practices -- recruiting their own professionals and laborers," the Centre for Chinese Studies, based at South Africa's University of Stellenbosch, said in a March report on Angola's $3.5 billion plan to build 20,000 apartments in a suburb of the capital, Luanda.

And in August, riots erupted in a suburb of Algiers, capital of Algeria, after Chinese immigrants working on infrastructure deals were accused of not respecting Muslim customs and of taking jobs from locals.

In light of such experiences, Chinese companies may have a hard time expanding in Nigeria. In 2006, Cnooc bought a 45% stake in Total SA's Akpo field for $2.3 billion. The field is now the company's biggest overseas asset with a production capacity of 175,000 barrels per day.

But more than $10 billion of contracts with Nigeria signed in 2006 -- including renovation of a railway, the refurbishment a refinery and the launch of a satellite -- didn't produce results. That is partly because of a change of administration the following year but also because of commercial and technical pitfalls.

Chatham House, a U.K. think tank, this year published a study on how deals by Asian oil companies with the Nigerian government in 2004-2005 in exchange for bankrolling infrastructure projects had generally failed. It concluded that the main reason was the Nigerian government's lack of "follow-up mechanisms to enforce the deals."

It is unclear whether Cnooc is offering to fund and build more non-oil projects in the latest round of contract negotiations.

The International Energy Agency in Paris estimates that about 500,000 barrels a day, on average, of oil production capacity has been shuttered in Nigeria over the past several years due to militant attacks and the agency expects those outages to continue. Getting that capacity back into service has been hobbled by security problems. Nigeria currently pumps around 1.8 million to 1.9 million barrels a day.

The Nigerian government is hoping a recent lull in militant violence in the country's main oil-producing Niger Delta region will continue so producers can restart operations in various areas.

In Angola, Chinese pressure could force the government to "step back" from a refusal to sell the oil-block stake, said U.S. risk consultancy Eurasia Group. A Cnooc spokesman acknowledged Sonangol may use its right to block its acquisition, but declined to comment further.

The Angolan government and Marathon, which is selling the stake, also declined to comment. But even if the deal moves ahead, "the coziness and preferential terms that have characterized the relationship in the last five years may dissipate," Eurasia said.

Angola may not need China as much as it used to. On Tuesday, the IMF signed a tentative agreement with Angola that could lead to new loans from Western banks. And when Sonangol sought $1 billion of financing this month, the loan was 50% oversubscribed -- thanks mostly to European banks.

The U.S. -- through Chevron Corp. and a visit by Secretary of State Hillary Clinton -- has promised to ramp up investment in both oil and agricultural projects. As a result, China will likely have to pay more for its African oil push.

"China and African nations are now in the process of tailoring the high expectations raised over the last few years to the realities of any maturing relationship," said Christopher Alden, senior lecturer at the London School of Economics.