The top executives of major oil companies opened dozens of Chinese companies in the British Virgin Islands, the Cook Islands and other tax havens between 1995 and 2008, according to the database of the International Consortium of Investigative Journalists (ICIJ).
The secretive nature of the system of tax havens and the refusal of the companies to respond to questions in the context of investigative journalism, makes it impossible to know the purpose for which they were established for, however, recent discoveries about massive corruption at the highest levels of the Chinese government indicate that ghost companies were used to conceal assets of those companies or managers and even from the Chinese government, which has since censored internet pages which revealed the secret scheme.
What is certain is that the power of the energy sector is such that some analysts speak of the existence of a “petroleum faction” inside the Chinese Communist Party (CCP), composed of the leaders who have combined senior positions both in business and in the political apparatus. Oil has been the spearhead that apparently sustains the hectic economic growth in China.
The sector is responsible to satisfy China’s enormous appetite for energy. The country was until 1993 an exporter of oil and, 20 years later, is the largest importer in the world. The current energy monopoly is led by China National Petroleum Corporation (PetroChina), dedicated to the exploration and production of crude oil.
It employs over 1.5 million people, with 550,000 who work for subsidiaries. PetroChina is among the five largest in its sector by market capitalization. After PetroChina follows China Petroleum and Chemical Corp. (Sinopec), focused on the business of refining and petrochemicals. It is among the top ten in the world by market-, and China National Offshore Oil Company (CNOOC) specializing in the exploitation of submarine deposits.
The three oil companies have staged some of the largest and fastest international expansion known in the industry. Since former President Jiang Zemin declared the policy of “going outside” in the 16th Congress of the CCP in 2002, Chinese oil companies have landed in more than 30 countries and at least 20 of them have substantial interests in oil production.
The “policy of going outside” was reinforced five years later, in the 17th CCP Congress, by President Hu Jintao. The speech was the final step that China gave towards globalization and a stronger impetus to the internationalization of the energy companies, which were backed more strongly by the Government through the financial support of major public banks, the Development Bank China (CDB), the Industrial and Commercial Bank of China (BICC) and the Export-Import Bank (Exim).
In those years, the so-called “oil diplomacy” made the Chinese foreign service available to energy companies. Many experts believe that this policy shows that the government and the Central Committee of the party are managing the grand strategy of the oil companies even if they have some autonomy and financial management. Others point to the oil companies that are choosing its external objectives and which require the public political and financial apparatus to seek ways to ease their way.
Going large and going far
Part of the expansion determined by the energy triad, especially in the early days included Petrochina’s acquisitions in Peru in 1992 and Sudan and Venezuela in 1996, which were completed without the prior approval of the CCP. The companies decided to acquire new assets and only reported to the Government when the negotiations were nearly completed.
With varying degrees of autonomy, there are situations that make clear the narrow framework of relationship that exists between government and the oil industry. An example is the operation between Sinopec and the Spanish oil company Repsol in Brazil.
When Sinopec suffered a serious setback in its income statement in 2009 due to the impossibility to raise fuel prices by government order, Su Shulin, the boss of the company then decided to take a change of direction with a large international operation. Sinopec starred in one of the largest acquisitions in the sector in 2010 with Repsol, buying 40% of its energy assets in Brazil for a total price of $7.100 billion.
The move not only gave Sinopec a considerable share in one of the most promising oil projects in the South American country, but the Chinese firm was allowed to set foot in that market in the hands of a Spanish company already known by the Brazilian government.
After the operation, highly valued by the Executive of Beijing, Su Shulin was appointed deputy party secretary and governor of Fujian Province, one of the most prosperous in the country. Promoting Su shows how the CCP leadership maintains control over senior managers of public enterprises and rewards the leaders who know how to combine business success with the party’s interests: Su did not have to raise fuel prices internally, which would have increased popular discontent, but he also managed to meet the goal of “going out” with a good acquisition considered a priority area by the Executive.
Given the difficulties to buy oil assets in countries like Russia, Canada and the Arabian Gulf, the Chinese oil industry has focused on regions more open to investments such as Latin America and Africa. The strategy to surround these markets has had three prongs: direct purchases of energy assets, credits for oil, and tours given to the Chinese leadership by countries producing oil and gas.
Investments and contracts signed by Chinese companies abroad exceeded $780,000 million in 2013, of which $370,000 were allocated to the energy sector, according to the database of the Heritage Foundation. It is not easy to track these investments because the bulk of disbursements comes from large Chinese oil companies in Hong Kong or Caribbean tax havens like the British Virgin Islands.
Moving the money out, getting the oil in
Despite the obscure nature of the financial transactions, the Heritage Foundation has proof of increased flows of Chinese money into resource-rich Latin American countries such as Brazil, Argentina, Ecuador, Bolivia, Colombia, Venezuela, as well as Sub-Saharan African nations like Nigeria, Niger, Tanzania, and in Central Asian countries like Kazakhstan and Turkmenistan.
China wants to drastically reduce its energy dependence on Middle East producers, as more than half of its supply comes from that area. One reason for this is that the transport route from these points to China passes through the Malacca Strait, an area under American military surveillance.
To ensure this route, the Beijing government has designed a strategy of building naval bases and observation posts in Pakistan, Sri Lanka and Myanmar, which will allow the Chinese Navy to protect offshore tankers. Added to this, China plans to increase crude imports from Latin America through the Pacific and expand the network of pipelines connecting the autonomous region of Xinjiang with Central Asian countries that are rich in hydrocarbons.
In parallel with the acquisition of energy assets, China has developed the strategy of “loan for oil”, a mechanism that has worked well in producing countries that remain outside of the traditional circuits of international funding.
Beijing gives these governments of developing countries what they call ‘soft loans’ in exchange for assurances of supply. Venezuela, Ecuador and Sudan are committed to deliver huge quantities of oil to the Chinese during the coming years to repay the debt.
Loans and investments often materialize after a tour of the Chinese President, who is usually accompanied by senior officials from the three major oil companies. Between 2009 and last year, successive presidents Hu Jintao and Xi Jinping performed five major tours of Latin American and African countries.
The objective of the trio and the CCP remains the Asian country’s energy security. With this end always in sight, the political system has never failed to keep an eye on business management though has given some leeway to oil companies in the last few years.
Signatures are a true reflection of the duality of the system. On one hand, companies are responsible for their profits and losses, developing investment strategies, and even listing on stock exchanges in Hong Kong and New York. On the other hand, unlike Exxon or BP, they are not pressured to pay dividends to its shareholders and their boards elect their leaders.
The appointment of the heads of the oil companies is the exclusive power of the CCP and often climbs and downgrades in those companies respond to the need for the party to remind the “petroleum faction” who’s boss.
The “oil faction” within the CCP has evolved from the executives of the planned economy in the eighties, when they had only worked with their counterparts in the former Soviet Union. Now, managers have been educated in Western universities and have accumulated international experience.
Many observers believe that the increased presence of these professionals, in both public and private positions, tend to strengthen its influence on the economy and pluralize the monolithic CCP.
Luis R. Miranda is the Founder and Editor of The Real Agenda. His 16 years of experience in Journalism include television, radio, print and Internet news. Luis obtained his Journalism degree from Universidad Latina de Costa Rica, where he graduated in Mass Media Communication in 1998. He also holds a Bachelor’s Degree in Broadcasting from Montclair State University in New Jersey. Among his most distinguished interviews are: Costa Rican President Jose Maria Figueres and James Hansen from NASA Space Goddard Institute. Read more about Luis.