The China Analyst - April 2014

September 2013 І www.thebeijingaxis.com/tca
Features
China’s Increased Presence in the DevelopedWorld
The Growing Global Influence of Chinese Consumers
China’sTransformation: Implications for Global Supply Chains
Chinainthe
DevelopedWorld
Chinainthe
DevelopedWorld
April 2014 І www.thebeijingaxis.com/tca
International Advisory and Procurement
Features
Feeding a Billion: China’sTransforming Agricultural Sector
Chinese Mining Firms in theYear of the Horse: aTrot, a Canter or a Gallop?
Chinese Super Majors:Tilting the Global Oil and Gas Playing Field
China’s Continued Quest
for Natural Resources

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With slower economic growth of 7.7% in 2013, the story of China’s contribution to global demand for commodities is still far from over. In
March 2014, China unveiled its long-awaited plan to have approximately 60% of its more than 1.3 billion people living in urban areas by 2020
in a bid to boost economic growth and efficiency. These new urbanites will demand greater quantities of disposable goods, electronics and
white goods to furnish their new dwellings – ushering in a new wave of consumption.
China will undeniably experience some growing pains as it begins to rebalance, yet the country will continue to grow – and from a larger base
than when GDP was expanding at a double-digit pace. Multinationals who have not yet entered (or succeeded in) the Chinese market should
note the scale of the opportunity in the Middle Kingdom and readjust their long-term strategy accordingly.
The Middle Kingdom’s Growing Appetite
children are born
every day in China
54,720
50%oftheworld’spork
iseateninChina
vehicles
registeredby2012
240mn
billionaires
in2013,comparedto0in2000
122
ofChina’spopulation
consumes25%
ofgloballuxury
goods
2%
metrictonsofgold
wereimportedin2013,
theworld'slargest
1,066
China’s%ofglobalresourceconsumption
OilGoldCopperAluminumSteelCoal
increaseinurbandwellers
2000,highestglobally
197mn
mobilephoneswerein
circulationinChinain2013
1.2billion
wastheoverallmarket
valueofChina'se-commerce
marketin2013
$1.6trillion
Chinesetraveled
abroadin2013
97million
GOLD
GOLD

At the Highest Level
Underscoring China’s commitment to sustained economic reform, Chinese
Premier Li Keqiang mentioned the word “reform” a remarkable 77 times in
his opening speech at the National People’s Congress, China’s annual rubber
stamp legislative assembly held this past March in Beijing.
The
China
Analyst
April 2014
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Advisor
William Dey-Chao
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Senior Manager
Barbie Co
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Editor
Daniel Galvez
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Associate Editor
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Qing Lei
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DISCLAIMER
This document is issued by The Beijing Axis Ltd. While all reasonable care has been taken in preparing this document, no
responsibility or liability is accepted for errors or omissions of fact or for any opinions expressed herein. Opinions, projections
and estimates are subject to change without notice. This document is for information purposes only, and solely for private
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of likely future movements or events in any form. Some investments discussed here may not be suitable for all investors. Past
performance is not necessarily indicative of future performance; the value, price or income from investments may fall as well as
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The delegates of the National People’s Congress
revealed a GDP growth target of“around”7.5% for
2014 while prioritising
other key socio-
economic issues. Over
the past year, Beijing
has repeatedly pledged
to tackle corruption,
reduce production
from key polluting
industries – aluminium,
cement, glass and
steel – and increase
consumer spending
levels.
The Chinese government also hopes to continue
implementing reforms by opening state-
dominated industries up to private, and even
foreign investment, coerce banks into becoming
more market-sensitive and further ease exchange
rate controls. Beijing hopes these structural and
financial reforms will unlock additional sources of
economic growth and improve the efficiency and
market-sensitivity of the Chinese economy.
In line with China’s increase in consumption,
China’s agricultural sector will undergo structural
changes starting in 2014. China’s State Council
recently announced plans to abandon the
country’s 95% grain self-sufficiency policy, which
has been in place since the days of Maoism.This is
expected to result in rapid growth in the amount
of imported foods consumed locally. Moreover,
the population’s continued shift toward a more
protein-rich diet will further strain global food
supply chains. Genetically modified foods, greater
mechanisation and market-oriented central
policies can lead to greater efficiency in China’s
agricultural sector.
Increasing consumption at all levels in China
will also lead to growth in demand for oil and
minerals. Though China has recently become the
world’s largest importer of oil, China’s per capita
oil consumption lags well behind the levels of
the developed world, which demonstrates room
for further growth. As China’s consumption of oil
has ballooned, China’s state-owned oil and gas
enterprises have developed into global players
representing key collaboration opportunities for
international firms, especially in areas such as
tapping unconventional resources. China has also
hinted at opening up the Chinese market to more
foreign participation.
China’s interest in advancing its climb up the
global value chain will assure steadily rising
demand for mineral products and advanced
mining technologies. As the mining industry
cools from its 2012 boom, resource nationalism,
an increase in price volatility, higher operating
costs and declining mineral grades will increase
risk and complexity in the global mining sector.
As resource constraints continue to arise, Chinese
mining firms will continue their trek into deeper
mineral deposits domestically and abroad.
Trends in China’s finance and banking sectors will
be instrumental in demonstrating the direction
the Chinese economy will take. The rapid growth
of shadow banking, along with its inherent risk,
demonstrates the Chinese economy’s need for
a more transparent and accountable financial
system.
It is against this backdrop that China’s
policymakers will continue to dictate the pace
of change through their policy of coordinated
reform, which will continue to initiate remarkable
opportunities both in the Chinese market and
abroad.
In the April 2014 edition of The China Analyst, we
outlinetheimplicationsofChina’scontinuedquest
for natural resources as the country redefines itself
once more through the implementation of key
economic reforms.
I trust that our readers will enjoy this edition of
The China Analyst and, as always, I welcome your
feedback.
Kobus van der Wath
Founder & Group Managing Director
The Beijing Axis
kobus@thebeijingaxis.com
4 І The Beijing Axis

REGIONS
Regional Focus: CHINA-AFRICA
China-Africa trade and investment analysis and a
focus on China’s relations with the South African Development
Community (SADC)
REGIONS
Regional Focus: CHINA-AUSTRALIA
China-Australia trade and investment analysis and
‘Australia State Watch’on Queensland
REGIONS
Regional Focus: CHINA-LATIN AMERICA
China-Latin American trade and investment
analysis and a special focus on China’s relations with Costa Rica
The Beijing Axis News
The latest news from The Beijing Axis Group
FEATURES
Feeding a Billion: China’s Transforming
Agricultural Sector
Opportunities resulting from the shift in China’s agriculture
market
FEATURES
Chinese Mining Firms in the Year of the
Horse: a Trot, a Canter or a Gallop?
An analysis of how Chinese mining firms will develop during
the mining industry’s expected recovery in 2014
FEATURES
Chinese Super Majors: Tilting the Global
Oil and Gas Playing Field
Implications of China’s sustained increase in overseas
production of oil and gas
MACROECONOMY
Macroeconomic Monitor: Balancing
Reform with Growth
China executes on its plans to reform the world’s second-largest
economy
PROCUREMENT
How to Procure from China #13
In this edition, we focus on the thirteenth stage of
the procurement process: Installation and Commissioning
INVESTMENT
China Capital: Inbound/Outbound FDI &
Overseas Resource Investment
Analysis of the latest on FDI in China and OFDI by
Chinese firms with a focus on overseas resource investment
STRATEGY
Mapping China in the Global Production
and Consumption of Oil and Gas
Global patterns in the consumption and production
of oil and gas
STRATEGY
CNOOC: Expansion into Unconventional
Expertise
A focus on China’s third-largest oil and gas
company to demonstrate trends in Chinese overseas
investment in this strategic sector
Table of Contents
April 2014
12
9
6
18
22
19
24
28
26
16
30
32

Feeding a Billion: China’s Transforming
Agricultural Sector
As China’s agricultural sector struggles to keep up with the country’s growth in demand, many
opportunities are arising for companies interested in capitalising on this challenge. China’s struggle to
consistently secure adequate food supplies of a sufficient quality has resulted in its agricultural sector
beingplacedunderincreasingscrutiny.TheStateCouncil,China’shighestdecision-makingbody,released
guidelines in February 2014 that suggest that the country will no longer aim to match demand for grain
through domestic production alone, as has been the case since the days of Maoism. These are the first
public signs that Beijing is coming to terms with the realities facing China’s agricultural sector. China’s
shrinking farming capacity, as well as some of its archaic agricultural policies, will hamper its ability to
achieve food security in the long term. China’s ability to meet the agricultural demands of its population
will usher in a new era off opportunities for agricultural companies. By Dominique Scott
The situation
I
f China were self-sufficient with regard to agricultural products, it
would have to feed 20% of the world’s population with only 10%
of the world’s arable land and 6% of global water resources. In the
past, this situation was manageable due to the fact that Chinese
citizens generally depended on vegetables and grains for energy
with only small portions of meat for flavour. Arguably, these dietary
preferences arose as a consequence of many not possessing the
wealth to buy more expensive food products, as many can today.
However, China’s meat and calorie intakes have climbed in
conjunction with the country’s GDP. In 1980, for example, China’s
average level of protein consumption was a mere 12% of the
average of Japan, Malaysia, Australia and New Zealand, a culturally
diverse sample. By 2009, China’s protein consumption had risen to
56% of the above sample’s average. China’s large population and
the apparent remaining growth in China’s appetite illustrate how
much food will be needed to meet future demand.
One of Beijing’s responses to China’s lack of food security was to set
a 95%‘self-sufficiency’target on key grain products—corn, rice and
wheat—to shape the way land and water resources were prioritised
and insulate the country from fluctuations in global grain prices.
The production of meat is more land and water-intensive than the
production of vegetables, fruit and feed. Putting extra pressure on
already strained resources was thought to be unwise. A pound of
beef requires a staggering 6,810 litres of water, pork 2,180 litres,
soybeans 818 litres, potatoes 450 litres, corn 409 litres and apples
70 litres.
Additionally, the low quality of China’s natural resources is
exacerbating the country’s resource shortage. The Organisation for
Economic Cooperation and Development (OECD) estimates that
70% of China’s arable land is low-yielding, and erosion, salinisation
and acidification are leading to a further reduction in the quality of
China’s soil. Further, these estimates do not take into account the
effect of pollution on China’s arable soil. Some analysts say between
8-20% of China’s arable land is contaminated by heavy metals.
Interestingly though, this ‘self-sufficiency’ target has been
abandoned for a more open policy according to guidelines
released by the State Council in February 2014. Analysts have
proposed that land and water-intensive products, like beef, offer
higher profit margins than vegetables, fruits and grains. Beijing may
be attempting to ameliorate China’s high inequality by allowing
farmers to choose to farm more profitable produce. However, this
policy alone will be insufficient to overhaul China’s agricultural
sector.
Furthermore, food scandals, whether it’s comical glow-in-the-
dark pork chops or melamine-tainted milk, emerge in China
with alarming regularity. Unsurprisingly, China’s growing middle
class is demanding imported food and beverages so long as
there is apprehension regarding the quality of local products.
The apprehension around the quality of domestically-produced
powdered baby milk, in particular, has had profound effects around
the world. Supermarket stores in Hong Kong, Australia, New
Zealand and even as far as the UK have implemented policies aimed
at rationing baby formula due to a surge in demand from China.
Regardless of whether Beijing abandons its‘self-sufficiency’targets,
opportunities for investors lie in the Middle Kingdom’s future
nutritional needs.The Chinese market’s sustained growth will result
in an increase in demand for a wide range of food commodities –
foreign intervention and innovation will help meet this demand.
China’s Milk Powder Consumption by Type
(‘000 tonnes, 2012 vs 2022F)
Note: 2012 refers to an average of 2010-2012.
Source: OECD-FAO Agricultural Outlook; The Beijing Axis Analysis
CAGR5.0%
CAGR2.1%
0
500
1,000
1,500
2,000
184
314
Skim milk powder Whole milk powder
1,438
1,908
2012
2022F

The outlook
If President Xi Jinping follows through on his commitment to double
China’s GDP per capita by 2020, demand for the more expensive
categories of food, such as animal protein, will rise the fastest.
Most of this increase in demand will be met through an increase
in imports due to China’s aforementioned shortage of high quality
agricultural inputs.
The OECD and Food and Agriculture Organisation (FAO) have
estimated that by 2022, China’s consumption of food commodities
will increase considerably across all categories, as demonstrated
in the chart to the right. Possibly as a result of China’s struggle
with tainted milk, the dairy category holds one of the largest gaps
between domestic production and consumption. Notably, these
projections were made before the State Council announced its
abandonment of the 95% grain self-sufficiency guidelines, which
will expand farmers’ control over which commodities they grow.
Now that these targets will likely be removed, China is projected to
experience a rapid expansion in grain imports.
The solutions
There is little doubt that Beijing faces a challenge in solving the
country’s dramatic mismatch between supply and demand of food
products. While many propose that it is inconceivable for China to
achieve food security due to its scarcity of water and land resources,
Beijing can reduce its dependence on imports in the long term
through the implementation of strategic policies.
Remnants of Maoist collectivism, for example, remain present
in China’s rural land policies and reduce motivation to increase
agricultural production. Providing farmers the opportunity to own,
sell and borrow against land to expand business opportunities
and profits may solve some of China’s food woes. Allowing for
consolidation could create an environment that makes unprofitable
enterprises financially unsustainable and rewards those that are
profitable.Theeconomyofscaleachievedthroughtheconsolidation
of farms will likely achieve higher production volume at a lower unit
cost.
Since 1997, an estimated 8.2 million hectares of arable land, roughly
the area of Austria, has been lost to property developers catering
to a growing urban population. While increasing the size of China’s
urban population is an important step towards shifting China to a
consumption-driven economy, this process has been administered
in a haphazard fashion, which has jeopardised the country’s limited
fertile land. A policy that preserves the most fertile land while using
infertile land for infrastructure could provide for greater efficiency
and productivity in the agricultural sector. China’s urbanisation and
property development also presents an opportunity to increase
productivity in the agricultural sector.
Urbanisation has resulted in roughly 25 million Chinese farmers
becoming defacto urban residents every year, which has led to the
rapid development of labour-saving machines, such as tractors,
produce sorting machines and refrigeration systems, for farms and
food processing factories. According to a report by the Ministry
of Agriculture, only 33% of China’s corn and 69% of its rice are
mechanically harvested every year.The report also stated that China
performs 72% of its post-harvest processing tasks, such as sorting
and packaging, by hand. The opportunity for the mechanisation
of the agricultural sector is evident. Mechanisation may, however,
result in unforeseen consequences related to unemployment
in China’s labour market, so policymakers and the business
community would benefit from a coordinated approach to solving
challenges in the agricultural sector.
Even if new policies could maximise the amount of arable land,
China will continue to suffer from its unproductive use of land.While
China’s agricultural total factor productivity, a measure of a country’s
long-term technological change, has risen in the reform era, it still
lags behind that of developed nations. Advanced agricultural
techniques and technologies for fertilisation and irrigation, for
example,couldhelpwithincreasingproductivity.Graduallyopening
up the agricultural sector to foreign investment, which the central
government currently forbids, is a potentially effective strategy to
transfer such techniques and technologies. Unfortunately, Beijing
may not have the luxury of time if it wants to reduce its reliance on
imports.
Beijing’s‘Going Out’policy, through which the central government
aids firms, private and state-owned, to make acquisitions and
investments abroad with the intention of securing physical assets
and the associated intellectual property, could complement the
reform of the agricultural sector. From 2010 to 2013, Chinese food
and beverage companies made over USD 9 billion worth of deals
overseas according to the National Australia Bank. Deals such as
Shuanghui’s acquisition of Smithfield, the world’s largest pork
producer and processor, in May 2013 and COFCO’s March 2014
acquisition of majority stakes in Noble Group’s agribusiness unit
and Nidera stand out, but there are countless examples from around
the world.With China already having established good relationships
in Africa, Australasia and South America, where some of the most
fertile farmlands in the world exist, the opportunity for increased
OFDI in agriculture is certainly available.
Genetically modified (GM) food may provide a partial solution to
China’s food supply woes as well. GM crops have the potential to
overcome many of the challenges of agriculture in China, such as
low-yielding arable land and decreasing soil quality. Furthermore,
the benefits of lower costs will also aid in keeping inflation in check.
However, GM food is a sensitive topic in China—the public remains
cautious as to whether the government has fully addressed the
potential risks. Nevertheless, the Ministry of Agriculture has taken
the lead in publicly declaring the safety of GM food and is slowly
pushing domestic production ahead. According to Han Changfu,
the Minister of Agriculture, 17 GM products from five plant species
are currently sold on the domestic market: soya beans, corn, oilseed
rape, cotton and tomatoes. Currently, the only GM crops approved
for domestic commercial production are cotton and papaya.
Lastly, firms can mollify China’s food safety fears by exporting from
their home country or by producing strategically within China.
Tyson Foods, one of the world’s largest processors and marketers
of chicken, has shifted from its conventional business model of
China’s Consumption of Selected Commodities
(mn tonnes, 2012 vs. 2022F)
Note: 2012 refers to an average of 2010-2012.
Source: OECD-FAO Agricultural Outlook; The Beijing Axis Analysis
17
30
51
66
102
201
8
22
37
61
86
129
270
Beefandveal Poultry Vegetableoil Pork Othermeat Oilseed Grain
0
50
150
100
200
250
300 2012
2022F
7

sourcing from independent chicken farmers and has built its own
network of farms in China, providing direct oversight over the
production process. In 2010, Tyson did not have any farms in China;
today, they have 20, and they plan to own and operate 90 by 2015.
The opportunity
The problems that lie ahead are not unique to China. Numerous
countries face the prospect of having to rely increasingly on
importing food to meet domestic demand. What magnifies China’s
challenges is the size of its population, which has the potential to
create shocks on global markets. If China cannot meet demand
with domestic supply, global prices of certain food commodities
will undoubtedly rise. Should prices rise too much, affordability will
become a crucial issue around the world.While farmers may benefit
the most from this situation, worldwide consumers will be on the
receiving end. China’s challenge, to a certain extent, will become
the world’s challenge.
China’s growth in domestic food production in the last thirty years
is an astonishing feat, yet the country’s deteriorating quality and
dwindling availability of natural resources mean that this growth is
still not adequate. Pollution must be minimised. Arable land must
not be sacrificed for urban sprawl. Land policies should reward
profitable agricultural enterprises. Together, these actions could
alleviate pressure on China’s agricultural sector.
Companies able to navigate China’s shifting agricultural landscape
will be primed to benefit from this key market. China’s agricultural
players desire advanced labour-saving technology and will
undertake joint ventures to attain it. Agricultural exporters
around the global will benefit from increasing levels of demand
for agricultural commodities and increasing flows of capital from
China.The companies that see the magnitude of China’s agricultural
challenges will recognise the opportunities available.
Dominique Scott, Consultant
dominiquescott@thebeijingaxis.com

L
ast year was particularly challenging for the mining sector
by many measures – a falling number of M&As, a record low
number of IPOs in both the Toronto and Australian stock
exchanges (traditionally the hot-bed of global mining financial
activity) and the headwinds experienced by many junior miners.The
sector felt both the global economic crunch and China’s economic
slowdown. As China transitions from an investment-driven
economy to a consumer economy, less fixed-asset investment will
result in a reduction in the demand for minerals. China will continue
to be a key demand centre, but consumption growth will slow.
The development of the central and western regions of China will
contribute to commodity demand, but the boom-time levels seen
from 2003 to 2008 are unlikely to return.
Chinese Mining Firms in theYear
of the Horse: aTrot, a Canter or a
Gallop?
The global mining boom created a sense of euphoria in the sector – mining firms could export what
was produced at record profits as the world underwent sustained economic growth. As a result, mining
companies de-emphasised cost-control practices because commodity prices were high enough to cover
lingering inefficiencies in the sector. In today’s market, mining companies must reduce expenses and
explore alternatives to traditional mining processes and equipment as costs increase and mineral grades
decline. Further, resource nationalism and regulation have resulted in increasing risk and complexity for
mining firms operating internationally. Though the Year of the Horse has brought signs that this year
will be easier on Chinese mining firms than in 2013, it is unclear how far the recovery will go and how
Chinese mining firms will respond to the changing environment. By Walter Ruigu
of the Belinga iron project. In fact, Wang Jiahua, Vice Chair of the
China Mining Association (CMA), a juridical association approved by
the State Council that acts as a bridge between the mining industry
and the government, suggested that up to 80% of China’s overseas
mining investments since 2005 have failed.
Most firms remain reticent and are seeking ways to curtail the risks
of overseas mining investments. Beijing has increased pressure
on the industry to reduce the number of risky ventures overseas,
which has resulted in increased prudence amongst Chinese firms,
particularly SOEs, a trend which is expected to continue.
Nevertheless, China still recognises the strategic importance
of acquiring overseas mineral assets. For instance, in order to
reduce reliance on the ‘Big 3’ iron producers – Vale, Rio Tinto and
BHP Billiton – China plans to increase its imports of iron ore from
Chinese-owned overseas assets, primarily those operated by SOEs,
from 40% in 2015 to 50% in 2020. While the viability of achieving
these targets within the stated timeframe is debatable, Beijing’s
ambition is clear – despite an unfavourable global investment
environment, China will continue to seek overseas iron ore targets
for strategic purposes.
Similar strategies are in place for other non-ferrous and precious
minerals. For example, as China’s central bank seeks to diversify its
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Beijing abolished
quotas on the purchase
of foreign exchange for
overseas investment
SASAC
tightens
regulations
onSOEs
overseas
investments
China’s OFDI in Mining (USD mn, 2004-2013E)
Source: MOFCOM; China Mining Association; The Beijing Axis Analysis
Chinese firms moving up the learning curve: A trot
Chinese companies interested in investing overseas have not
been spared from the sector’s unfavourable conditions. Since
2005, when Beijing abolished quotas on the purchase of foreign
exchange for overseas investment, Chinese mining firms have been
eager to‘go out’to acquire assets needed to fuel the growth of the
world’s second-largest economy. Nearly a decade later, much of the
optimism has faded. China’s initial overseas mining ventures have
been marked by some large-scale setbacks, such as the infamous
MCC-CITIC Sino-Iron project, Zijin’s inability to acquire Indophil
Resources’copper and gold project and, most recently, CMEC’s loss
42% of Chinese
mining deals
unsuccessful
Chinese mining
firms still face
challenges overseas
32% of global
mining deals
unsuccessful
0%
Worldwide China
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Success* Rate of Mining Deals (USD bn, 2008-Q2 2013)
*Note: Success refers to a completed transaction only.
Source: Reuters; Various; The Beijing Axis Analysis
180
45
62
382
Success Failure

currency reserves from US dollars to gold, it has become clear that
the country will require a large physical quantity of gold. Rather
than directly importing bullion, which would alter the global price
of the commodity and result in unfavourable terms for China, the
country has sought to slowly acquire gold overseas while boosting
domestic production. These acquisitions will range from greenfield
projects to operating assets.
projects or publicly-listed assets with extensive feasibility studies
due to government pressure to avoid risky investments. Mid-sized
private firms, which unlike SOEs are not subject to regulations,
such as those set by China’s State-owned Assets Supervision and
Administration Commission (SASAC), will likely set their sights on
non-traditional mining countries in Africa. SASAC’s regulations,
in effect, are opening investment opportunities for private firms.
Given that these private firms have become key players in Chinese
overseas investment deals, this development will be a boon for the
region.
Chinese firms, traditionally known to favour late-stage projects, are
beginningtoconsiderbrownfieldprojectsaswell.InAfrica,forinstance,
theFenxiMiningGroup’srecentinvestmentinagreenfieldcoalproject
in Kenya, Yinfu Gold’s acquisition of a Zambian copper mine and
DingyiGP’spotentialinvestmentinCongo’sbrownfieldpotashproject
illustrate the shifting investment patterns of Chinese firms.
Mining in Africa is no longer focused on Simandou, Tonkolili
or Chambishi and other well-known mega-projects. Mid-sized
projects, such as the scaling up of artisanal mines with high returns,
are likely to be the targets of Chinese mid-sized and private firms.
These‘scaling up’ventures have been seen in an incredible diversity
of projects: tantalum projects in Rwanda; gold projects in Ghana,
including the controversial projects involving Guangxi miners;
iron ore projects in Uganda; copper projects in Congo; and alluvial
gold mining in Zimbabwe. Investors in such projects are usually
subsidiaries of larger firms or nimble private companies capable of
navigating the local environment with the goal of exporting back
to China. Interestingly, these investments are not always in the
form of equity or debt; they are sometimes in the form of capital
equipment imported from China and trainings on how to operate
said equipment. For instance, given the low-grade iron ore available
in China, Chinese processing technology has advanced to process
lower grades, which presents an opportunity for Chinese investors
to integrate the export of capital equipment into the growing
number of African mining projects with a lower mineral quality.
China’s exploration bureaus represent another group of
non-traditional players who are expanding their role in Africa’s
mining scene. Although they have initially focused on government-
backed projects, such as geological surveys, these organisations
are broadening their presence. Once these bureaus understand
a region, they form partnerships with other mainland firms to
develop these opportunities, with the latter investing funds while
the bureaus provide their mining expertise.
Resources will remain a key part of China’s foreign policy as
Private Chinese companies overtaking SOEs in mining
OFDI: A canter
As SOEs lead the pullback in overseas mining investments, private
enterprises have become the main source of Chinese overseas
mining investments. According to CMA data, Chinese overseas
investment in the mining sector reached USD 5.1 billion in 2013
– USD 2.3 billion of which came from SOEs and USD 2.8 billion of
whichwasinvestedbyprivatefirms.Thefigureforprivate firmslikely
represents an underestimation because private Chinese companies
frequently do not report their investments to the central authorities
if the capital originates from Hong Kong or other regions, especially
tax-havens, as is common in the industry.
Concurrently, non-traditional funding sources, such as private
equity firms and firms in the cash-rich real estate sector, are
becoming increasingly involved in overseas mining projects. The
Yuxiao Group, a real estate firm, and Cathay Fortune, a private equity
firm, exemplify this trend. Experienced engineering and project
management firms may benefit from collaboration with these firms
intheirinternationalisationefforts.Thesenewplayers,despitebeing
capital-rich, are at higher risk because they lack industry experience.
Taking note, Chinese authorities have consistently warned firms to
be aware of the risks of investing in overseas markets. Although
these new private actors will likely assume a growing role in the
industry, the overseas mining investment learning curve is steep,
which means there will likely be more failures as the new firms
develop expertise. On the other hand, companies that have already
experienced the industry’s challenges will either continue with their
global ambitions by engaging in new overseas projects, as MCC has
done, or re-evaluate their ‘going-out’ strategy, as many SOEs are
currently doing.
Chinese firms sustained activity in Africa: A gallop
As mining firms continue to dig deeper and assets become
increasingly scarce, risk-averse firms may focus investment in
Canada and Australia, where there are already over 50 Chinese
SOEs in operation. SOEs are likely to focus on government-backed
Chinese Overseas Mining Investment Destinations (%, 2013)
Source: China Mining Association; The Beijing Axis Analysis
Southern Africa
Australia
30%
25%
Canada
10%
North
Asia
4%ASEAN
6%
Latin
America
8%
9%
8%
Western
Africa
Other
Chinese Overseas Mining Investments by Firm Classification
(%, 2013)
PrivateFirms
60%
SOEs
40%

demonstratedinChina’s‘AngolaMode,’whichfinancesinfrastructure
construction with natural resource development. This strategy will
remain a core method of government-to-government cooperation.
It will also ensure that the mining sector remains a central part of
China’sdevelopmentpolicyandakeytargetforChineseinvestment.
Large public projects will most likely see SOEs take the biggest slice
of the cake, but SOEs’participation in new investments, particularly
in unfamiliar mining environments, will continue to decrease.
Looking ahead in the Year of the Horse
With the mining boom long gone, firms around the world have
reformulated their strategy as profit margins have decreased. As
many junior miners struggle to raise the necessary capital for their
projects, they will increasingly rely on debt markets. Given the
high-risk and temporary nature of this solution, the financing gap
will continue to be a challenge for these firms. Mid-sized Chinese
firms will continue to play a key role in project financing, albeit with
increasing scrutiny from experienced players.
Going forward, private Chinese firms will continue to be key players
in the global mining scene, and despite being newcomers, they will
likely be quick learners and operate on market principles similar
to other global companies. Meanwhile, resource nationalism will
continue to constrain Chinese mining firms operating abroad. A
focus on corporate social responsibility, community relations and
stakeholder engagement will remain the most effective methods
for addressing this challenge.
Chinese Overseas Mining Investments by Mineral (%, 2013)
Chinese SOEs will continue to be driven by political considerations,
especially strategic resource acquisition, in addition to profit.
Chinesecompaniesarelearningfromtheirfailures.Manycompanies
will continue to be reticent about investment in foreign mining
projects. If international companies hope to increase cooperation
with China’s key mining players, they will have to come to China and
convince cash-rich firms that their projects are profitable and that
they have implemented adequate risk-control measures.
Walter Ruigu, Consultant
Manager: Eastern Africa Desk
walter@thebeijingaxis.com
Copper
32%
20%
Gold
10%
Steel
7%
Aluminium
4%
Lithium
18%
Other minerals
19%
Coal

S
tarting from a mere 767 kg per capita in 1990, China’s energy
consumption has nearly tripled to 2,029 kg per capita in 2013
withapparentoilconsumptionat10.1millionbarrels/day(b/d).
This rate, however, still remains far lower than that of developed
countries, such as the US, who consumed 7,069 kg per capita in
2012. This phenomenal increase in demand is fuelled by China’s
sustained economic growth, rapid industrialisation and widespread
urbanisation. As domestic oilfields age and domestic reserves‐to‐
production ratios remain low, China’s rapid rise in demand for oil
has also led the country to increase its reliance on imports. This is
underscored by the fact that China surpassed the United States to
become the largest oil importer on a monthly basis in September
2013.
With a push to secure and diversify China’s energy needs, Chinese
national oil companies (NOCs) embarked on an all-out effort to
acquire upstream oil and gas (O&G) assets overseas in the early
1990s. Since then, they have invested approximately USD 180
billion to expand their overseas oil equity production from a mere
0.15 million b/d in 2000 to a staggering 1.6 million b/d by the end
of 2013. These investments have bolstered China’s importance in
Chinese Super Majors:Tilting the Global
Oil and Gas Playing Field
Buoyed by the country’s sustained economic growth, and its resulting need to secure stable energy
supplies, Chinese national oil companies have been expanding their international reach by competing
and partnering with foreign counterparts. The Chinese government has set a clear target of achieving
China’s overseas oil equity production of 2.8 million barrels/day by 2020, indicating that Chinese
national oil companies will continue to structurally shift the overall industry landscape with far reaching
implications for global peers, EPCMs and oilfield service providers. By Ankit Khaitan
the global O&G industry, making it the world’s second-largest oil
consumer, largest oil importer, and fastest-growing overseas O&G
investor. This also catapulted the three largest Chinese players:
Sinopec, China National Petroleum Corporation (CNPC) and China
National Offshore Oil Corporation (CNOOC), to the global stage
among the super majors, who today control roughly 27% of global
reserves.
Chinese NOCs ‘go global’ – emerging dynamics and
variability
On June 15, 1993, when CNPC acquired a 15% operating interest in
China’s first overseas oilfield in Canada’s North Twining project in
northern Alberta, critics referred to this acquisition as an audacious
manoeuvreandraisedquestionsregardingChineseNOCs’supposed
inability to identify quality assets, overcome challenges in pursuing
deals independently and the tendency to pay above market values.
Today, with more experience in foreign markets and deep pockets,
ChineseNOCs have establishedasuccessfultrackrecord inacquiring
and managing assets of increasingly high-quality in complex and
risky environments such as Angola, Niger and Sudan.
Map of Selected Chinese Oil & Gas Investments Overseas by Country and Value (1993-2013)
20,000
10,000
500
100
2,500
Total Value of
Deals (USD mn)
12
Australia
Syria
1
12
Canada
2
Chad
Mongolia
2
UK
3
Argentina
2
Brazil
2
Singapore
Azerbaijan
2
Norway
6
Angola
5 US
Ecuador
2
Thailand
2
2
Mexico 1
1 Venezuela
4
1
Yemen
1
1Peru
UAE
3 Colombia
13 Indonesia
1
Mozambique
1Niger
Nigeria
4
Iraq
17 Kazakhstan
5
Numbers mentioned
in circles indicate
total number of
deals
3
InvestmentsinAngola,
NigeriaandSudan
accountforthemajorityof
investmentsinAfrica
Sudan

Over the years, Chinese O&G investments have begun to shift
from being concentrated in a handful of developing countries –
largely Sudan, Venezuela and Kazakhstan – to becoming a global
phenomenon (see map on p. 12). Central Asia (Kazakhstan), the
Middle East (Iraq and Yemen), Latin America (Argentina and Brazil)
and Africa (Angola and Nigeria) continue to remain prominent, but
more mature and stable destinations such as the US and Canada
have recently started to gain traction as destinations for Chinese
NOCs’ O&G investments. In fact, in 2012 alone, North America
attracted more than 70% of the total value of deals pursued by
Chinese NOCs, the largest share of any region around the globe.
The nature of investments in the US and Canada differs from deals in
other regions. The US and Canadian markets have seen some of the
largestdealsvettedbyChineseNOCs.Ontheotherhand,developing
markets across Southeast Asia, Africa and the Commonwealth of
Independent States (CIS) have seen the highest participation from
Chinese NOCs in terms of number of projects invested.
At the same time, rising uncertainty over new oil discoveries, largely
in unfamiliar or ultra-deep territory (i.e. hard to extract, expensive,
and politically unstable), limited foreign acreage and increasing
competition from other emerging NOCs and super majors means
that the era of ’easy‘ O&G period has ended. In light of evolving
market dynamics, Chinese NOCs are adapting their overseas
strategy to overcome these challenges.
Firstly, Chinese NOCs have become less risk-averse and more willing
to invest in early-stage exploration projects and fields with no
proven reserves, albeit with a more prudent approach and certain
risk-management practices. Traditional exploration, production
and stand-alone investments have become less viable options
due to Chinese NOCs’ lack of experience in dealing with complex
geological assets, oil fields with complex chemistry and, at times,
complexity emerging from energy geopolitics. These restrictions
have opened the door for various multi-level cooperation platforms.
The recent partnership model pursued by Chinese NOCs involve
the forming of joint ventures (JV) with super majors and local NOCs
to jointly develop projects and, in some cases, even form Chinese
NOC consortiums to avoid head-to-head competition and allow
for better competition in the international market. Chinese firms
have invested in an estimated 140 O&G projects overseas, over
one-third of which took place in the last five years. More than 50%
of these projects have been in the form of JVs with oil majors or
other NOCs. For example, China’s CNPC and India’s NOC, the Oil and
Natural Gas Corporation (ONGC), recently collaborated to develop
the Greater Nile Oil project in South Sudan. In another project, CNPC
and Sinopec jointly invested USD 2.5 billion to acquire the private
Peruvian O&G driller, Petro-Tech Peruana.
Secondly, market conditions have encouraged a major adjustment
in their approach to ownership of such assets. Chinese NOCs have
increasingly sought minority, passive stakes investments in strategic
‘learning’ assets, which contrasts with their historical practice of
paying above market prices to own controlling equity stakes in
projects to lock-in supply.
Lastly, Chinese NOCs have expanded from their traditional focus
on upstream assets and begun to develop pipelines and refineries.
NOCs now view strategic investments in mid-downstream as a
mechanism to unlock access to key upstream resources, particularly
in risky and politically unstable countries.This strategy is also driven
by China’s need to diversify the supply routes of its petroleum
reserves. Chinese NOCs are actively investing in transnational
pipelines to diversify supply routes and reduce their dependence on
the Strait of Malacca; this will alter the dynamics of regional energy
supply patterns and future investments.
Fomenting China’s own shale gas revolution
Atthesametime,Chinahopestodevelopitsownuntappeddomestic
source of energy, i.e. shale gas. According to the International Energy
Agency, China holds reserves of at least 26 trillion cubic meters of
recoverable shale gas, more than any other country in the world.
Beijing has previously announced that it aims to produce 6.5 billion
cubic meters (cm) of shale gas annually by 2015 and an ambitious
100 billion cm by 2020. However, China only achieved half of its
announced 2010 target of 8 billion cm due to limited exploration
success, drilling a fewer than expected number of wells and having
a narrow focus on only the most attractive shale gas locations.While
progress has been slow thus far, there are signs that a spike in shale
gas production is on the horizon.
Stage of Investment for Identified Chinese O&G Investments
(%, 1993-2013)
Value Chain Focus of Chinese O&G Going Overseas (%,1993-2013)
84%
11%
5%
Upstream Mid-downstream Integrated
Total Number of Projects Analysed: 121
Investmentinmid-
downstreamassetshas
beenusedprimarilyto
unlockaccessto
upstreamassetsinrisky
countries
9%
19%
23%
49%
Early Stage Post-feasibility Exploration Operational
Most early-stage
investments have
been focused on
unconventional
O&G assets
Total Number of Projects Analysed: 121

Chinese NOCs have invested billions of dollars in North America
to acquire the hydraulic fracturing technologies that are driving
the unconventional revolution. NOCs have established partnerships
through JVs and acquisitions to gain access to these technologies.
For example, CNPC recently announced a new joint venture with
Encana, Canada’s largest producer of natural gas, to develop some
of their holdings in Canada’s Montney Shale Formation and Horn
River Shale Formation.
Leading the pack on the domestic front is Sinopec, which stated in
March 2014 that its first commercial shale-gas field, in the Fuling
district of Chongqing, will produce around 1.8 billion cm of gas in
2014, 5 billion cm in 2015 and 10 billion cm by 2017 – all ahead
of schedule. Overall, far fewer than 100 shale-gas wells have been
drilled in China, compared with around 40,000 wells in the US,
underscoring the long road ahead before China realises its own
shale gas revolution.
The development of China’s shale-gas industry has moved forward
over the past few years, but far more remains to be done than has
been accomplished if the nation’s ambitious production targets are
to be met. The country must build-up its still nascent, countrywide
feeder lines and pipeline network. Moreover, complex geology,
water resource constraints near major shale fields and local
exploration and drilling companies’ lack of adequate capabilities
remain major hurdles. Whereas the development of PetroChina’s
first shale gas exploration project in the Sichuan basin took 11
months, a similar-sized project in North America usually takes only
two to three weeks.
China’s recent decisions to boost private-sector participation and
implement reforms are expected to help the shale-gas industry,
although a lot more needs to be done. NOCs will need to open the
upstream and downstream to private capital in order to expedite
the timeline for shale production.
Implications for global peers, EPCMs and oilfield
service providers
The implications of China’s growing role in the global O&G market
are profound. The synergies drawn from complementary needs (i.e.
strategic capital, equipment from China and technological skills to
venture into new markets and optimise recovery in mature fields
back home) has opened up opportunities for further cooperation
between international oil companies (IOCs) and Chinese companies
to learn from, partner with and complement each other across core
competencies. Additionally, China recently opened its domestic
resource market to some of the world’s major oil and gas producers.
Forexample,RoyalDutchShellformedashalegasJVwithPetroChina
to participate in a 15-well drilling program; ConocoPhillips signed
a joint study agreement with Sinopec to explore, develop and
produce shale gas at the Qijiang block in the Sichuan Basin;Total has
firm plans to commence drilling this year for shale gas with Sinopec
in Anhui province; and Chevron is exploring shale gas deposits in
Qiannan Basin with an unidentified Chinese partner.
At the same time, cooperation with Chinese NOCs is spreading
across the value chain. For instance, Saudi Arabia’s state-owned
Aramco formed a joint venture with PetroChina for the construction
of a refinery capable of producing 200,000 b/d in the south-western
Chinese province of Yunnan while China’s Sinopec took a 37.5%
stake in Saudi Arabia’s USD 10 billion Red Sea Refining Company.
Moreover, Chinese NOCs often tend to seek EPCM services from
foreign players for their overseas projects. For example, in 2009,
WorleyParsons was awarded the conceptual design, initial FEED
contract and later integrated project management contract for the
Rumaila oil field in Southern Iraq, the world’s second-largest oil field
and jointly owned by BP, CNPC and Iraq’s State Owned Marketing
Organization (SOMO). However, Chinese investors prefer foreign
EPCMs to use cost-effective engineering capabilities available
through their high-value engineering (HVE) centres in China/Asia,
as well as procurement services out of China, in overseas projects
in order to sustain a favourable cost profile. Most foreign EPCMs
have only started to develop such capabilities, indicating that only
a handful of them are likely to receive contracts from Chinese NOCs
for overseas projects.
Furthermore, the Chinese market has been historically closed off
to western service companies for the most part. Service activity is
done primarily by the service entities of Chinese oil companies, but
shale and deep-water projects demand the experience of traditional
western services companies as many Chinese oilfield service
providers lack the necessary capabilities. Foreign oilfield service
providers, such as Schlumberger, Halliburton and Baker Hughes,
have already announced cooperation plans with their Chinese
counterparts, such as Anton, and Honghua. These collaborative
efforts will allow Chinese companies to gain access to high-end
technology and experience in integrated project management.
Looking ahead
Today, investments by China’s big three oil majors remain small in
comparisontothoseofIOCs.Upstreamendeavours,suchassecuring
a diversified energy supply, will remain high on the agenda for these
companies in the next decade. CNPC announced that it would seek
to derive 40% of its crude oil from overseas by 2015 and 60% by
2020, which represents rapid growth from its current ratio of 28%.To
achieve this goal, the firm plans to invest more than USD 60 billion
in global oil and gas assets by 2020. At the same time, a number of
private oil & gas companies in China have been quietly carrying out
overseas asset acquisitions as well. For example, Zhenghe Group, a
company based in Shandong province, acquired a Pre-Capsin basin
block in Kazakhstan late last year for USD 526 million.
China’s funding capacity and consumption appetite paired with
IOCs’technical know-how and project management skills, especially
for unconventional sources, presents the greatest potential
for a valuable complementary relationship. Relationships and
collaborations with Chinese NOCs will become even more crucial,
complex, challenging and largely unpredictable for IOCs. The
determinant then should not be whether or not to embrace shared
resource ownership with Chinese NOCs, but how best to pursue
an integrated strategy that captures the opportunity of China’s
integrated position as a global consumer, importer, source of capital
and supplier of equipment.
Ankit Khaitan, Manager
ankitkhaitan@thebeijingaxis.com

Macroeconomic Monitor:
Balancing Reform with Growth
As forecasters around the world scour China’s latest statistics for clues regarding the direction of
China’s economic performance in 2014, China’s policymakers seek to steer the world’s second-
largest economy on the road to reform and wean the economy off its decades-long reliance on
ofteninefficientstate-driveninvestment.Inasimilarmannerinwhichasuccessfulbusinessregularly
tweaks its business plan to stay ahead of the competition, China already has its master plan for
change in place and the focus is now on execution. ByDanielGalvez
2014. Industrial production, retail spending and the housing
market have all shown signs of weakness in the first quarter of
2014. All this translates into more volatile Chinese demand for
a wide range of commodities. Moreover, China’s first corporate
bond default in March sent a clear signal that the era of cheap
credit is coming to a close. However, ahead of the release of
first quarter GDP figures, China’s State Council did unveil a
mini-stimulus package including additional spending on
railways, housing for low-income households and tax relief
for small businesses.
Macroeconomy
Anticipating a hairpin turn around the corner, President Xi
Jinping and company have gently applied the brakes on the
infrastructure-building boom to move the economy into a
more consumer-oriented growth model. However, to depict
just how hard this transition will be for China, capital formation
actually accounted for 54% of China’s economic growth in
2013, exceeding consumption’s 50% contribution rate. Net
exports detracted 4.4% from overall growth, sustaining a
trend which began in 2009.
Growth has marched steadily downward over the past two
years as Beijing clamped down on a spending boom which
has pushed local government debt to now highly-publicised
dangerous levels. Investment in fixed assets, which has been
losing steam over much of the past year, will continue to
decline in line with the government’s 17.5% growth target for
Contribution to China’s GDP Growth (%, 2003-2013)
Source: China National Bureau of Statistics; The Beijing Axis Analysis
140
120
100
80
60
40
20
0
-20
-40
03 04 05 06 07 08 09 10 11 12 13
Consumption overtakes
gross capital formation
as largest contributor
Effect from
stimulus package
Net exports become
a drag on growth
Source: China National Bureau of
Statistics; The Beijing Axis Analysis
Source: China National Bureau of
Statistics; The Beijing Axis Analysis
Y-o-Y Growth of China’s
Monthly Retail Sales
(%, 2011-Feb 2014)
25%
20%
15%
10%
5%
YTD Growth of China’s
MonthlyFixedAsset
Investments (%, 2011-Feb
2014)
Fixed asset investment
growth target for 2014: 17.5%
Retail sales growth
target for 2014: 14.5%
J-F11 J-F11J-F12 J-F12J-F13 J-F13J-F14 J-F14
30%
25%
20%
15%
10%
5%
0%
T
oday, the world is focusing on the implications of slower
growth in China. Companies around the globe have
been sluggish to adjust to China’s decline in economic
growth and are scrambling to cope with constant changes
in the global economic environment. Over the past decade,
China poured money into building new factories, highways
and apartment buildings, which propelled double-digit
growth at home while giving commodity exporters favourable
investment returns. Now the story is changing as China has
targeted a modest growth rate of‘around’7.5% for 2014, with
many analysts interpreting the word ‘around’ as giving the
government leeway if China does not meet its intended target
by a few percentage points.
China’s Quarterly Y-o-Y GDP Growth Rate (%, 2009-Q1
2014F)
2009 2010 2011 2012 2013 2014
6%
8%
10%
12%
4%
2%
0%
Q1 Q1 Q1 Q1 Q1 Q1F
5-year(2009-2013)
average:8.7%
Q4 2012 rebound
2013 y-o-y GDP: 7.7%
2012 y-o-y GDP: 7.8%

Reform is real and here to stay
While three decades of breakneck economic growth has
lifted hundreds of millions of Chinese out of poverty, it has
Competitive forces take hold
China’s total annual trade in 2013 reached over USD 4 trillion
for the first time ever, overtaking the US to become the world’s
largest trader. While first quarter figures are always difficult to
interpret due to distortions caused by China’s weeklong Lunar
New Year holiday, the latest economic indicators suggest that
China is experiencing growing pains as it weans itself off
of investment in order to attain more balanced long-term
growth.
Tightened pollution regulations have made it harder for steel
mills to use China’s low-grade iron ore reserves and for power
plants to burn China’s low-quality coal. With the increasing
focus on the environment and high costs in some industries,
China is importing more of the key commodities they need.
also inflicted grave damage on the environment; China is
now changing its strategy and aiming towards higher-quality
development. Although the rate of economic growth slowed
in 2013, business is still booming in China, and the new
government is taking various measures to ensure that this
continues.
Thegovernmentannounceditsblueprintforchange following
the Third Plenum in November 2013, which promised
sweeping changes to the economy and the nation’s social
fabric – leading many to label it as China’s most ambitious
reform plan in 30 years. Some of the hardest reforms, however,
will require the government to break ranks with some of its
traditional political allies, such as large SOEs.
Tackling pollution remains high on the agenda for the new
administration. In 2013, China’s Ministry of Environmental
Protection vetoed as many as 32 projects with a total
investment of USD 19.5 billion and is feverishly working
to improve its environmental assessment capabilities and
strengthen its ability to monitor and punish polluters. Some
other important economic issues that will be closely watched
in 2014 include:
• Banks following through on soldier’s orders to cut off
financing to sectors plagued by excess capacity such as
steel and cement
• Management of shadow banking activities and
local government debt levels before they can inflict
widespread damage to the economy
• Continued rollout of Shanghai Free Trade Zone policies
aimed at attracting a new wave of FDI
• Enforcement of property sector controls and the
management of subsequent fallout if prices do
eventually fall from their astronomical levels
• Accelerated liberalisation of China’s capital and foreign
exchange markets, including the recent widening of the
Chinese Yuan’s daily trading band, aimed at turning the
Yuan into a major reserve currency
• The rise of private and online banking channels aimed
at raising the overall competitiveness of China’s financial
sector
The road ahead
While the emerging labour shortage and subsequent increase
in wages are cutting into profit margins, investment returns
and export competitiveness, it has increased household
income. Higher wages improve income distribution as
low-income households rely on wages and high-income
households rely more on investment returns. Consumption’s
share of GDP will rise as household income grows faster than
national income. But this is only the beginning. Completion of
this transition depends critically on Beijing’s implementation
of the reforms announced at the Third Plenum.
If only a portion of the proposed Third Plenum measures are
implemented, China will be well on its way towards becoming
the world’s largest economy and boasting a thriving consumer
market. Based on China’s success in navigating its economy
through new territory, China’s performance for the whole of
2014 should be a cause for optimism.
Daniel Galvez
Consultant; Editor: The China Analyst
danielgalvez@thebeijingaxis.com
Macroeconomy
While seeking to avoid overcapacity, Beijing will continue
to encourage investment in innovative industries and
infrastructure. Also, private capital is set to play a larger
role. In a nod to Beijing’s latest efforts to reform SOEs and
encourage a mixed-ownership economy, Sinopec, China’s
largest oil-refining company, announced plans in February to
open up its domestic marketing and distribution operations
to both social and private capital.
Source: China National Bureau of Statis-
tics; The Beijing Axis Analysis
Source: China National Bureau of Statis-
tics; The Beijing Axis Analysis
China’s Monthly Consumer
Price Inflation (%, 2011-Feb
2014)
8%
6%
4%
2%
0%
Jan11 Jan12 Jan13 Jan14
China’s Official Purchasing
Managers’Index (2011-Mar
2014)
60
55
PMI
50
45
40
Room for mild
stimulus
Inflation target for
2014: 3.5%
18 straight months
of expansion
China’s Monthly Exports and Imports (USD bn, %, 2011-
Feb 2014)
40%
60%
20%
0%
-20%
240
220
200
180
160
140
120
100
80
60
40
20
0
Exports Imports
ExportGrowth(rhs) ImportGrowth(rhs)
Import growth outpacing
export growth

Beijing Axis Procurement Guidelines for Installation and
Commissioning
In large procurement projects, installation and commissioning is
a key process that involves various partners—designers, project
managers, consultants, subcontractors, and suppliers—across many
countries. Coordination and communication are of vital importance
during this phase. In these complex, multinational projects, The
Beijing Axis (TBA) provides key project management oversight,
which is comprised of the following activities:
1. Technical clarification. Though our team attempts to resolve all
technical questions before the contract is signed, questions may
still arise. TBA’s team of engineers will assist installation partners in
deciphering documents received from the suppliers. We provide
an effective communications platform to ensure that all parties are
kept abreast of each other’s status.
2. Project planning. Prior to shipping, TBA will assist with project
planning communications to ensure a prompt delivery timeline.
Though several factors may impact the project’s timeline, TBA will
do all within its power to minimise any delay.
3. Logistics. With over ten years of procurement experience in
China, TBA staff are familiar with the requirements for handling,
shipping and warehousing goods. Further,TBA’s recent partnership
with Imperial Logistics expands the efficiency of TBA’s logistical
management of goods.
4. Quality control. During the installation process,TBA will manage
athird-partysupervisorysuppliertooverseeprogressontheground.
Because minor quality concerns may impact the installation and
commissioning process,TBA will liaise with the supplier to minimise
delays and recoup cost claims.
5.Meetingcoordination.Furthertoitsroleasthekeycommunications
interface, TBA will remain actively involved in day-to-day activities to
mediate misunderstandings before they arise.
6. Documentation management. TBA can assume a hands-on
documentation management approach during the installation and
commissioning phase to ensure that all parties are kept up to date.
7. Translation. From written documentation to on-site
interpretation, TBA will leverage its engineers and other technical
staff to provide understanding on the technical documents of large
procurement projects.
TBA also accommodates the admin requirements of the installation
and commissioning process by ensuring the timely preparation
of invitation letters and housing arrangements. Our team
also frequently manages an onsite office and arranges on-site
accommodations depending on our client’s needs.
By The Beijing Axis Procurement
HowtoProcurefromChina#13–InstallationandCommissioning
The Beijing Axis Procurement Services Flow Chart covers every stage in the procurement process, from
the first enquiry to the post-transaction services. In this edition, we focus on the thirteenth stage of the
procurement process: Installation and Commissioning.
The Beijing Axis Procurement and Service Delivery Flow Chart
Strategic Procurement Facilitation
Supplier Analysis
Understanding product
specifications
RFQ, RFP and RFT process
Contract
administration
Site visit and
supplier audit
Commercial and
technical evaluation
Logistics
coordination
After sales
service support
Negotiation Contracting
Supplier identification
and universe list
compilation
Quality management
(QA/QC) and
expediting
Installation and
commissioning
Supplier evaluation
and long list
RFI, supplier
pre-qualification
and shortlist
Supplier Engagement
Supplier Process Management
SupplierProcessManagementAnalysis
1
5 6 7 8 9
2 3 4
10 11 12 13 14

Notable Chinese FDI Deals in Q4 2013 – Q1 2014
• In March 2014, SBI Group, a Japanese financial services firm and
formerdepartmentofSoftbank,acquiredaShanghai-basedonline
education firm,TutorGroup, who is backed by Alibaba Group
• In March 2014, Unilever, an Anglo-Dutch consumer goods firm,
acquiredacontrollingshareinQinyuan,aChinesewaterpurification
company. Without stating the size of the deal, Unilever stated that
this is the largest acquisition it has made in recent years
• In February 2014, Danone, a French food producer and the world’s
largest yoghurt producer, more than doubled its stake in Mengniu,
China’s largest dairy producer, from 4% to 9.9% for USD 663
mn. Danone has taken an aggressive approach in China, having
acquireda51%stakeinWahaha,China’slargestbeverageproducer
in 1996
• In November 2013, German automotive corporation, Daimler
AG, acquired a 12% stake in BAIC Motor, one of the top Chinese
automotive manufacturers, for approximately USD 84 mn
• In September 2013, Indofood, an Indonesian food processor and
subsidiary of Hong Kong-based holding company, First Pacific,
acquired a 3.9% stake of China Minzhong Food for approximately
USD 23 mn
Chinese Outbound Foreign Direct Investment
Summary of China’s OFDI
• In 2013, China’s non-financial OFDI amounted to USD 90 bn, an
increase of 17% y-o-y
• In 2013,The Beijing Axis tracked 117 overseas investment activities
by Chinese companies, including on-going transactions and
the conclusion of previously announced deals. Among these
ChinaCapital:
Inbound/Outbound
FDI&Overseas
ResourceInvestment
In 2013, China’s total FDI amounted to USD 118 bn,
and China’s OFDI reached USD 90.2 bn, representing
increases of 5.6% and 16.2% year-on-year,
respectively. FDI continued to be largely sourced
from Asian nations, while China’s OFDI continued
to spread across the globe. MOFCOM data indicates
that future levels of China’s OFDI are likely to exceed
the current level of FDI. By Beijing Axis Capital
Foreign Direct Investment into China
Summary
• In 2013, FDI into China amounted to USD 118 bn, an increase
of 5.6% y-o-y. Calculated on a monthly-basis, FDI into China fell
sharply in the second half of 2013 but bounced back to 12 bn in
December 2013
• According to the Ministry of Commerce (MOFCOM), FDI into the
services sector reached USD 61 bn in 2013, representing over half
of China’s total FDI for the first time
• Though eastern China received the majority of FDI with 78%,
central and western China received increasingly shares in 2013
• In 2013, 86% of FDI into China originated from other parts of Asia.
Traditionally the hub for investment into China, Hong Kong is still
the largest source of capital for China, contributing USD 78 bn or
67% of total inward FDI, while Japan and Singapore were second
and third with USD 7 bn (6%) each. The US, the largest non-Asian
source of FDI into China, provided USD 3 bn (3%) in 2013
• In 2013, the number of newly-established foreign-invested
enterprises reached 22,773
Source: MOFCOM; The Beijing Axis Analysis
140
120
100
80
60
40
20
1
2005 2006 2007 2008 2009 2010 2011 2012 2013
Annual Inbound FDI in China (USD bn, 2005-2013)
FDI in China by Country (%, 2013)
Hong Kong
66%Japan
6%
Singapore
6%
Taiwan
4%
Other
7%
France 1%
UK1%
Holland1%
Germany2%
S.Korea 3%
US3%
0
J A S O N J F M A M J J A S O N DD
14
12
10
8
2
4
6
16
-20%
20%
15%
10%
5%
0%
-15%
-10%
-5%
25%
Monthly Inbound FDI in China and y-o-y Growth Rate
(USD bn, H2 2012-2013)
FDI FDI Growth (rhs)

transactions, 41 were resource-related investments and 76 were
non-resource investments
• MOFCOM reported rapidly increasing flows of OFDI from China
into the US (USD 4.2 bn), Russia (USD 4.1 bn) and Australia (USD
3.9 bn) in 2013
• Private Chinese companies accounted for 37% of the total
non-financial OFDI in 2013, while state-owned enterprises
accountedfor63%,demonstratingtheprimaryroleofstate-owned
enterprises as Chinese overseas investors
• An overwhelming 90% of Chinese OFDI falls into the following
sectors: business services, mining, wholesale and retail,
manufacturing, construction and transportation. Construction
and culture, sports and entertainment present the fastest growth
in investment, with increases of 129% and 102%, respectively;
mining, wholesale and retail trade, manufacturing, and real estate
also achieved rapid growth
• Looking forward, Chinese OFDI in natural resources, such as
agriculture, will continue to increase due to increasing domestic
demand
Notable Chinese OFDI Deals in Q4 2013 and Q1 2014
• COFCO,China’slargestfoodprocessorandgraintrader,announced
ajointventurewithmainlandprivateequityfirm,HopuInvestment
Management, in March 2014. The new venture will acquire a 51%
ownership of Hong Kong-based agricultural commodities trading
operation,NobleGroup.ThisannouncementcamedaysafterCofco
announced a USD 250 mn acquisition of a 51% stake in Dutch
grain trader, Nidera. These deals exemplify China’s rapid overseas
expansion in the agricultural sector
• In March 2014, Fosun, one of China’s largest privately-owned
conglomerates, invested USD 1.26 bn to develop 3.5 sq. km of
Greek coastline, which was previously home to Athen’s Hellenikon
airport. This deal marks a“buy low”strategy at a time when many
investors are avoiding the unsteady Greek economy
• In February 2014, Wanxiang, China’s largest automotive group,
acquired American electric automobile manufacturer, Fisker
Automotive, for USD 149 mn
• In January 2014, Lenovo purchased Motorola Mobility, the
cell phone division, from Google for USD 2.9 bn. Google had
purchased this division of Motorola in 2011 for USD 12.5 bn but
has experienced challenges in making the division profitable
• In December 2013, Henan Civil Aviation Development &
Investment announced plans to buy a 35% share of Cargolux
AirlinesInternationalforUSD231mn.ThisdealwillgiveHenanCivil
Aviation Development and Investment veto power on decisions
madebytheCargoluxexecutivecommitteeandsupervisoryboard.
This deal also established a “dual-hub strategy”comprised of four
weekly flights between Zhengzhou and Luxembourg
• In December 2013, Belgian KBC Bank agreed to sell its subsidiary,
the Antwerp Diamond Bank, to the Chinese Yinren Group for USD
270 mn
• InDecember2013,HepalinkPharmaceuticalacquiredtheScientific
Protein Laboratories (SPL) for USD 338 mn. SPL is an leading
producer and supplier of active pharmaceutical ingredients, with
over 40 years’experience in drug marketing in Europe and the US
• In November 2013, the Sinopec Group purchased a 33% stake in
the American Apache Corporation’s Egyptian oil & gas assets for
USD 3.1 bn
• In October 2013, Beijing-based Sinoma International Engineering
purchased a 59% stake in German mining equipment firm,
Hazemag & EPR Gmbh, from the Schmidt Kranz Group for USD 140
mn, which will help Sinoma expand its reach in mining equipment
• In September 2013, Zhongjin Lingnan (Hong Kong) Mining China’s
number three zinc producer, proposed purchasing the remaining
47% of Australia Perilya, which operates metal mines in Australia
and the Dominican Republic
Trends in China’s Overseas Resource Investment
• During the Third Plenary Session in November 2013, Beijing
announcedthatitwillcontinuetoexpandthescaleofChina’sOFDI.
Large overseas resource investments will remain concentrated in
the oil and gas sector and the mining industry
• Reinforcing China’s growing role in Latin America, in November
2013, PetroChina purchased the Peruvian subsidiary of Brazilian
PetrobrasforUSD2.6bn.ThePeruviansubsidiarywillhandovertwo
oil and gas fields, which currently produce 800,000 metric tonnes
of oil equivalent a year, and a 46% stake in recently discovered Lot
57, a gas field. This deal comes a month after CNPC and CNOOC
each purchased 10% stakes in Brazil’s largest oilfield, Libra, which
is estimated to hold between 8-12 bn barrels of recoverable oil for
USD 700 mn
• Though growth in China’s investment in the African mining sector
hadstalledoverthepasttwoyearsduetodepressedmetalpricesand
tight credit, Chinese representatives attending the Mining Indaba
conference in Cape Town indicated that they would be seeking
to make investments offering financial returns and raw materials.
Recent deals, such as China National Nuclear Corporation’s USD
190 mn purchase of a 25% stake of the Australian-owned Langer
Heinrich uranium mine in Namibia demonstrate interest. Further, a
recent document from China’s National Development and Reform
Commission stressed that China needed more imports of iron ore
to balance steel prices
• In September 2013, China significantly expanded its involvement
with Central Asia and Russia by making large investments in securing
energyresourcesfromRussiaandKazakhstan.PetroChinaandRussian
state-owned oil giant, Gazprom, agreed on the basics for a deal that
would send roughly 38 bn cm annually at a price of USD 10-11 at the
Chinese border. The deal will require the construction of a pipeline,
which is predicted to be finished in 2018, and the gas would benefit
Chinesepolicymakersinterestedinreducingemissionsresultingfrom
coal combustion. China also signed a USD 5 bn deal with Kazakh
state-ownedKazMunaiGasforan8%stakeinitsmassiveKashaganoil
projectintheCaspianSea
China’s Annual Outbound Non-financial FDI and y-o-y
Growth Rate (USD bn, 2005-2013)
100
80
60
40
20
0
100%
120%
140%
80%
60%
40%
20%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Non-financial OFDI OFDI Growth (rhs)
CAGR33%

Source: Various media; Company reports; The Beijing Axis Analysis
2014 Mar Noble Group’s agribusiness China (HK) ChinaOilsandFoodstuffs(COFCO) Agriculture USD 1.5 bn 51% Ongoing
2014 Mar Westside Corp Australia Landbridge Group Gas USD 160 mn 100% Ongoing
2014 Mar New Zealand Beijing Capital Group 800 mn 100% Ongoing
2014 Feb Nidera Netherlands ChinaOilsandFoodstuffs(COFCO) Agriculture USD 250 mn 51% Ongoing
2014 Feb ERG Resources US Goldleaf Jewelry Oil USD 665 mn 95% Ongoing
2014 Feb Anadarko Petroleum China subsidiary US Brightoil Group Oil USD 1.08 bn N/A Ongoing
2014 Jan Mundella Foods Australia Bright Food Food N/A n/a Ongoing
2014 Feb Nesko Metal Turkey Jiangxi Copper Copper USD 65 mn 50% Ongoing
2014 Jan Paladin Energy’s Langer Heinrich operation Namibia ChinaNationalNuclearCorporation Uranium USD 190 mn 25% Ongoing
2013 Dec Carabella Australia China Kingho Group Coal USD 60 mn N/A Ongoing
2013 Dec JV with Energy Corporation of America US China Shenhua Shale gas USD 90 mn N/A Ongoing
2013 Nov ExxonMobil’s West Qurna 1 oilfield Iraq PetroChina Oil N/A 25% Ongoing
2013 Nov Petrobras Energia Peru Peru CNPC Oil USD 2.6 bn 100% Concluded
2013 Oct Rosneft’s Taas Yuriakh unit Russia CNPC Oil N/A 49% Ongoing
2013 Oct ACV Solar Technology’s solar farm Romania Astronergy Clean energy N/A N/A Concluded
2013 Sep Tonkolili iron-ore project Sierra Leone Tewoo Group Iron-ore USD 990 mn 16.5% Concluded
2013 Sep NovusEnergy Canada Yanchang Petroleum Oil CAD 230 mn N/A Concluded
2013 Sep Glencore Xstrata copper project Peru China Minmetals Corporation Copper USD 5 bn N/A Pending
2013 Sep Petróleos de Venezuela Junin 10 Block Venezuela CNPC Oil USD 14 bn N/A Ongoing
2013 Aug Apache Corp Egypt Sinopec Oil & gas USD 3.1 bn 33% Concluded
2013 Aug Petrobras’s Block BC-10 Brazil Sinochem Group Oil USD 1.54 bn 35% Concluded
2013 Aug Inova Resources Australia Copper, gold AUD 160 mn 56% Concluded
2013 Jul Rio Tinto’s Northparkes mine Australia China Molybdenum Gold, copper USD 820 mn 80% Concluded
2013 Jun Novatek’s Yamal LNG project Russia CNPC Gas USD 810 mn 20% Concluded
2013 Jun Marathon’s Angola oilfields Angola Sinopec Oil USD 1.52 bn 10% Concluded
2013 May SPAusNet Australia State Grid Energy USD 810 mn 20% Concluded
2013 May BG Group’s Queensland Curtis LNG ProjectTrain 1 Australia CNOOC Oil & gas USD 1.93 bn 50%/25% Concluded
2013 May Stonewall Resources South Africa Gold USD 140 mn 100% Concluded
2013 May Smithfield Foods Inc. US ShuanghuiInternationalHoldings Food USD 4.72 bn N/A Concluded
2013 May Barra Energia do Brasil Petroleo e Gas Ltda Brazil CNPC Oil & gas USD 2 bn 100% Concluded
2013 Apr Joint PE fund with Russia Direct Investment Fund Russia China Investment Corporation Agriculture USD 100 mn N/A Concluded
2013 Apr Sky Energy Holdings Cambodia Sino Bioenergy Corp Agriculture USD 119 mn 100% Ongoing
2013 Apr Oilhub Korea Yeosu Co. South Korea China National Aviation Fuel Oil USD 130 mn 26% Concluded
2013 Apr Ecuador Copper Mine Ecuador Copper USD 2.04 bn N/A Concluded
2013 Apr Ashburton Project Australia Iron, gold USD 2 mn 65% Concluded
2013 Apr ConocoPhillips Kazakhstan CNPC Oil & gas USD 5.3 bn 8.4% Concluded
2013 Apr Elemental Minerals Limited RepublicofCongo Dingyi GP INV Potash AUD 5 mn 4.8% Concluded
2013 Apr Kalgoorlie Mining Australia Zijin Mining Gold N/A 100% Concluded
2013 Mar Sintez Russia State Grid Energy USD 1.14 bn N/A Concluded
2013 Mar Eni SpA’s offshore natural gas field Mozambique PetroChina Oil & gas USD 4.21 bn 20.0% Concluded
2013 Feb Kuantan Port Consortium Malaysia Port USD 650 mn 40% Concluded
2013 Feb ChesapeakeEnergyCorp.’soilandnaturalgasfield US Sinopec Oil & gas USD 1.02 bn 50% Concluded
2013 Feb ConocoPhillips’ explorationassetsinWesternAustralia Australia PetroChina Oil & gas N/A 20%/29% Concluded
2013 Feb Alumina Ltd. Australia Aluminium USD 468 mn 7.8%/5.2% Concluded
2013 Feb African Resources Zambian subsidiary Zambia Yinfu Gold Corp Gold USD 2 mn 65% Concluded
2013 Jan Alumina and Bauxite refinery project Guinea China Power Investment Aluminium USD 6 bn N/A Concluded
2013 Jan Solar Chile Chile SkySolar Clean energy USD 1.36 bn N/A Concluded
2013 Jan Pioneer Natural Resources US Sinochem Oil USD 1.7 bn 40% Concluded
2013 Jan Refineria del Pacifico Ecuador CNPC Oil & gas USD 1.2 bn 30% Concluded
2013 Jan Kichi-Chaarat Closed joint stock company Kyrgyzstan China CAMC Engineering Gold, copper USD 4.8 mn 16% Concluded
2013 Jan St Barbara Southern Cross operations Australia Hanking Holdings Gold USD 23.58 mn 100% Concluded
Shanxi Donghui Coal Coking
& Chemicals Group
Shandong Qixing Iron
Tower Company Limited
China Railway Construction
and China Nonferrous
Shandong Energy and
Shandong Lunan
Guangxi Beibu Gulf
International Port Group
CITIC Resources Holdings
Ltd. and CITIC Group
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
Selected Chinese Outbound Investment Activities In Natural Resources, January 2013 - March 2014
Transpacific Industries Group’s New
Zealand waste management business
Waste
management
Month
Announced Target / New Company Acquirer/Investor(EnglishName) Commodities Value Stake StatusTarget country#

NorthAmerica
China
18.1%
25.7%
26.8%
27.5%
LatinAmerica
andCaribbeanProduction, % of world total (2012)
Consumption, % of world total (2012)
Russia
Africa
AsiaPacific
MiddleEast
32.8%
9.3%
16.3%
12.4%
12.4%
3.5%
17.6%
12.5%
8.5%
7.3%
5.3%
5.0%
11.0%
3.9%
6.4%
3.7%
4.8%
21.8%
11.4%
14.5%
EuropeandEurasia
7.6%
17.1%
13.1%
20.1%
4.8%
11.4%
3.2%
4.3%
Oil
Gas
22 І The Beijing Axis 23 І The Beijing Axis
Map Source: BP Statistical Review of World Energy; US Energy Information Administration; The Beijing Axis Analysis
MappingChinaintheGlobalProductionandConsumptionofOilandGas
The global oil and gas industry has long been closely intertwined with geopolitics. China accounted for one-third of the world’s oil consumption growth in 2013 and is projected to surpass the United States as the largest net
oil importer in 2014. Domestic production of oil falls woefully short of consumption across most of Europe, Eurasia and China, resulting in heavy dependence on outside sources of oil. China has extended oil-for-loan deals
with Russia and select countries in Africa and Latin America to secure favourable terms in future oil supplies. With declining energy consumption per capita at home, the US is eager to cash in on its shale gas revolution by
increasing exports to gas-hungry Europe and Asia. To meet domestic demand for a cleaner burning fuel, China has sought to raise natural gas imports via pipeline and overseas shipment (liquefied natural gas), and is also
feverishly working to foment its own shale gas revolution. By Beijing Axis Strategy

CNOOC: Expansion into Unconventional
Expertise
Background
The China National Offshore Oil Corporation (CNOOC) Group is the
third-largest Chinese state-owned oil and gas (O&G) enterprise
after PetroChina and Sinopec. It mainly focuses on exploration and
production (the“upstream”value chain) of oil and gas onshore and
offshore resources as opposed to PetroChina and Sinopec, who have
a more integrated value chain.
CNOOC was the first of China’s three O&G majors to be created
by the State Council, China’s main governing body, in 1982. It was
granted the exclusive ability to leverage joint ventures with foreign
companies to rapidly expand China’s offshore assets in the Bohai
Bay, the Yellow Sea and the South China Sea, among other sites.
As China’s oil consumption has grown by more than three times in
the past two decades, China’s O&G companies have been acquiring
overseas assets to provide China with greater energy security. This
development has catapulted CNOOC Group, through its main listed
subsidiary CNOOC Ltd., into the top twenty global O&G firms in
terms of production.
China does not only want to purchase O&G assets, it also wants
to explore, extract and refine them. However, the majority of
reserves being discovered today are composed of unconventional
resources, which require advanced technology. Though China’s
O&G companies are expanding their expertise and experience in
this field, their capabilities remain lower than their international
counterparts. Outbound acquisitions are enabling Chinese national
oil companies (NOCs) to close that gap while, conversely, offering
their partners the opportunity to tap China’s recoverable shale gas
reserves, which are estimated to be the world’s largest.
CNOOC global deals
Since the 1990s, CNOOC has maintained a diversified approach to
its overseas acquisitions – gaining majority shareholder status in
some projects while serving a more passive, minority role in others.
The firm continues to diversify its supply of upstream resources to
reduce potential risks and vulnerabilities to its supply chain. In the
first half of 2013, it earned roughly 25% of its profits overseas.
The Beijing Axis has tracked 23 major overseas investments made by
CNOOC in 17 countries over the past 12 years.The deals range in size
from a USD 1 million purchase of an Indonesian Widori Oil Field to
the USD 15.1 billion purchase of Canadian Nexen Energy, the largest
Chinese outbound investment in history.
As a Chinese state-owned enterprise (SOE), CNOOC initially faced
challenges in the international market. Thus, CNOOC Ltd., the
main subsidiary, was listed on the Hong Kong and New York Stock
Exchanges in 2001.The newly created firm was required to adhere to
theregulationsforpubliccompaniesandanswertoprivateinvestors,
providing most foreign investors, regulators and governments an
acceptable level of transparency and accountability. Therefore,
CNOOC Group has subsequently undertaken the majority of its
overseas acquisitions through CNOOC Ltd.
As a result of CNOOC’s focus on upstream activities, the company
has targeted partnerships through which it can attain exposure
to international expertise related to exploring and extracting
unconventional and geographically-complex energy sources such
as deep-water, oil sands, and shale gas.
Though China is not yet a world leader in liquefied natural gas
(LNG), CNOOC, having facilitated over 70% of China’s LNG imports
in 2012, has led the country’s expanding access to overseas gas
extraction and transportation through direct investment and imports.
Correspondingly,CNOOC’sengineering,procurementandconstruction
(EPC) arm, China Offshore Oil Engineering Co. (COOEC), leads China in
the construction of the capital-intensive LNG port facilities.
Through the lens of two CNOOC overseas acquisitions, this article
examines the trend of Chinese NOCs in their overseas acquisitions.
Recent CNOOC deals in Africa and Canada
China has fostered strong political relationships with Canada and
many nations on the African continent for decades. These ties have
facilitated the expansion of Chinese companies into those markets.
Both hold important global sources of energy. For example, Canada
has the world’s third-largest oil reserves and the world’s seventh-
largest recoverable shale gas reserves. Fittingly, China represents
28% (USD ~28 billion) of the foreign investment into Canada’s O&G
sector from 2007 to 2013, compared to the US’s 19% (USD ~19
billion). Similar in importance to CNOOC, the African continent was
the source of roughly 10% of CNOOC’s O&G production in 2013, with
Nigeria, Angola, Uganda, Sudan and South Sudan being production
hotspots.
CNOOC, however, has felt more resistance to its approaches in other
countries, especially the US. CNOOC’s failed attempt to purchase
Unocal for USD 18.5 billion in 2005 (compared to Chevron’s later-
accepted offer of USD 17.1 billion) is a prime example of the
US government blocking Chinese investment due to political
considerations.
Parallel to China’s growth in oil consumption, CNOOC has risen from a relatively unknown player in the oil
and gas industry to one of the largest energy firms in the world. This article focuses on two of CNOOC’s
overseas investments that exemplify both China’s attempt to diversify its energy sources and the benefits
this development will bring to CNOOC and its international partners. By Tim Quijano

OML 130
China’s first investment in the Nigerian O&G industry took place
in 2006 through CNOOC’s acquisition of a 45% equity stake in Oil
Mining Licence 130 (OML 130) from South Atlantic Petroleum for
USD 2.3 billion. With depths ranging from 1,100 m to 1,800 m, OML
130 spans a 2,590 sq. km plot of the Gulf of Guinea in the Niger River
Delta. It is composed of four O&G fields (in order of viability) – Akpo,
Egina, Egina South and Preowei – and a range of other exploration
prospects. Akpo reached a production plateau of 175,000 b/d and
9 million cm of natural gas per day by early 2011. Egina is expected
to come on-stream in 2017.
CNOOC’s interest in the oil block is related to two facets of the
project. First, OML 130 was CNOOC’s first venture into deepwater
drilling, a key focus in China’s overseas investment agenda. Deals
like this have allowed CNOOC to acquire key technology to explore
and develop O&G deposits in the South China Sea. New technology
also meant that COOEC, CNOOC’s EPC subsidiary, learned from and
gained exposure to Samsung Heavy Industries, the leading deep-
water engineering, procurement and construction (EPC) contractor
for the Akpo oil field. Secondly, as CNOOC’s first project in the Niger
Delta, a minority stake in OML 130 provided a unique opportunity
to diversify the firm’s geographical risk and establish a foothold in
Africa that could be leveraged for future projects.
CNOOC successfully secured the bidding process for OML 130
partially due to its access to a USD 1.6 billion loan from China Exim
Bank to develop Akpo. CNOOC also committed to rehabilitate a local
refinery, construct a railway line and build a hydroelectric power
station; however, these three projects fell through due to a regime
change soon after the deal went through.
As seen in the “Angola Model”, Chinese companies frequently
contribute to improving the local infrastructure as part of an
investment. Additionally, the inexpensive financing CNOOC
received for this investment is an example of the unique benefit
Chinese SOEs bring in their overseas expansions.
Opti Canada
Opti Canada, an Alberta-based oil sands developer with a 35%
stake in the Long Lake Oil Sands Project in the Athabasca region,
was seeking a strategic partner after a series of equipment failures
and lower-than-expected production figures. The firm filed for
bankruptcy protection in early July 2011 after suffering from a
shortage of capital for several quarters.
Shortly after their application was submitted, CNOOC Ltd. acquired
Opti Canada for USD 2.1 billion. CNOOC was well matched for
this project mainly because of its deep pockets and access to the
Chinese market. However, from CNOOC’s perspective, this deal was
only the stepping stone to its 2013 acquisition of Nexen, who owned
the other 65% of the Long Lake Oil Sands Project, and other strategic
assets around the globe.
CNOOC management leveraged this project to expand its oil
sands expertise and gain access to Nexen to inform them on their
acquisition intention. Nexen, as of February 2013, became CNOOC’s
wholly-owned subsidiary in a deal worth USD 15.1 billion. Increasing
CNOOC Ltd.’s total oil reserves by over 12%, the Nexen acquisition
dramatically expanded CNOOC’s expertise in deep-water drilling,
shale gas, as well as conventional O&G. Furthermore, Nexen held
strategic assets in the North Sea, offshoreWest Africa and in the Gulf
of Mexico. Nexen, whose management team has remained largely
the same following the deal, now manages around USD 8 billion
of CNOOC’s assets in Central and North America. This strategy of
purchasing a minority stake in a firm before making a majority or
whole acquisition is not uncommon.
Such strategies do, however, have their risks. So far, the Long Lake
Oil Sands Project has only been able to reach half its production
goals. Some analysts suggest that CNOOC’s inability to overcome
rising costs and technical difficulties, and ramp up the project, has
contributed to a decline in CNOOC Ltd.’s share price over the last few
years. CNOOC continues to be optimistic and has further injected
capital into the project. This year will be critical in determining
whether the acquisition of an effectively bankrupt project for access
to a larger target was a prudent strategy.
Key takeaways
CNOOC’s investments in OML 130 and Opti Canada demonstrate
common themes followed by Chinese companies and provide
insights on how international O&G stakeholders, from suppliers and
EPCs to project partners, can benefit from them.
Lack of expertise in unconventional energy resources. CNOOC’s
expansion into unconventional O&G resources demonstrates the
firm’s and China’s forward-looking business and energy security
strategy. However, Chinese O&G companies’lack of experience in the
necessary technologies has constrained its growth. Expect CNOOC
to continue seeking partnerships with firms that have access to
advancedtechnologiesthatitcanimplementinChina’sshalegasand
deep-water reserves, as well as in markets that will provide CNOOC
with a more diversified energy and geographic portfolio.
Access to cost-saving measures. Chinese companies, especially
those with close ties to government, have the ability to borrow at
significantly lower rates than what is otherwise available to their
international competitors. Furthermore, Chinese EPCs can also
leverage, albeit to a decreasing degree, cost-saving avenues, such
as Chinese raw materials and labour, to offer more competitive
service and product offerings than international competitors. In this
manner, the involvement of CNOOC and other Chinese firms can
increase their and their partners’return on investment.
Opportunities for international stakeholders. CNOOC seeks
advanced international firms’expertise and technology in exploring
and extracting unconventional O&G resources. CNOOC can offer its
partners access to China’s underdeveloped domestic market that
may become the world’s largest. In the same way that Nexen has
taken responsibility of managing over several USD billion worth of
CNOOC’s Central American assets, many stakeholders hold valuable
experience operating in key markets without the same level of
scrutiny or political interference faced by Chinese NOCs.
Conclusion
Chinese companies will continue to acquire overseas O&G assets
as the country’s demand for a diversified range of energy resources
and technologies continues to increase and domestic expertise
remains limited. CNOOC and the other Chinese NOCs represent an
evolving opportunity landscape to international O&G stakeholders,
from foreign EPCMs, to oil service providers. These case studies
present examples of a key Chinese company’s strategies and how
international stakeholders could benefit from such a trend.
Tim Quijano
Associate Editor: The China Analyst
timquijano@thebeijingaxis.com

China-Africa Investment
Trends
• The cumulative stock of Chinese investment in Africa has
grown rapidly from less than USD 9.3 bn in 2009 to USD
21.2 bn in 2012. At the same time, the number of Chinese
companies investing in Africa exceeds 2,000, mainly targeting
the finance, mining and manufacturing industries
Regional Focus:
CHINA-AFRICA
Even with a cooling of the Chinese economy,
the total value of China-Africa trade in 2013
reached USD 210.2 bn, an increase of 6.2% y-o-y
– demonstrating the expanding relationship
between the two regions. In this edition, we
report the latest China-Africa trade data, review
major China-Africa trade and investment deals
and spotlight China’s relationship with the South
African Development Community (SADC).
China-Africa Briefing
• In January 2014, Ethiopian President, MulatuTeshome, stated
thatChineseinvestmentistransformingtheAfricancontinent.
Analysts suggest that Africa has the opportunity to capture a
large proportion of the manufacturing jobs China is expected
to outsource as domestic production costs continue to rise
• In December 2013, African Development Bank compliance
and safety experts developed social and environmental
guidelinesforinvestmentprojectswithChinesepolicymakers.
Together, these partners proposed developing institutions
to facilitate regular meetings and coordinate a reporting
platform to demonstrate the value of socially responsible
business practices and avoid adverse impacts of economic
development
• The 2013 Africa-China Commodities,Technology and Services
Exposition took place in December in Addis Ababa, Ethiopia.
This expo marked the first time a China-Africa trade expo
was held in Africa, which demonstrates growing demand
for Chinese business in Africa. More than 150 companies
from across China participated in the event, including major
Chinese firms such as Huawei, Sinosteel Corp and Chery
Heavy Industry
• At the 2013 African Investment Summit that took place in
Hong Kong in November, China Exim Bank committed
to investing USD 1 tn over the next 12 years in a series of
transnational transportation projects including highways and
airports in Angola, Mozambique and other countries on the
African continent
• In late November 2013, Chinese Vice Premier Liu Yandong led
a three-day high-level Chinese delegation to Addis Ababa,
Ethiopia, to discuss health, education and technology with the
Ethiopian President, Prime Minister and Deputy Prime Minister
China-Africa Trade
Total Trade
• Total value of trade between China and Africa reached USD
210.2 bn in 2013, an increase of 6.2% y-o-y
• African exports to China continued to grow faster than
imports from China; China’s trade deficit reached USD 24.6
bn in 2013
China Imports from Africa
• Imports to China from Africa totaled USD 117.4 bn in 2013, a
3.7% increase y-o-y
• Trade data for the first three quarters of 2013 reveals that the
five leading African exporters to China were South Africa,
Angola, Nigeria, Egypt and Algeria
• Leading commodities China imported from Africa in 2013
were oil, platinum, copper and other minerals
China Exports to Africa
• China’s exports to Africa totaled USD 92.8 bn in 2013, an 8.8%
increase y-o-y
• Trade data for 2013 reveals that the five leading destinations
for China’s exports to Africa were Ethiopia, South Africa,
Angola, Nigeria and Tanzania
• Leading commodities China exported to Africa in 2014
include clothing, toys, construction equipment and military
equipment
The China Analyst
China-Africa Trade (USD bn, 2002-2013)
Source: China Customs; UN Comtrade;The Beijing Axis Analysis
Source: China Customs; UN Comtrade; The Beijing Axis Analysis
China-Africa Trade, Ten Largest Partners (USD bn, 2012 vs. 2013)
140
120
100
80
60
40
20
0
2002
2003
2004
2005
2006
2007
2008
2009
2011
2012
2013
2010
China’s Imports from Africa
China’s Exports to Africa
70
2012
2013
60
50
40
30
20
10
0
Angola
LibyaEgypt
Nigeria
Algeria
Ghana Congo
DRC Sudan
South
Africa

The China Analyst - April 2014

The China Analyst - April 2014

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