Oil as a strategic asset

Oil as a strategic asset. In contrast, those who consider oil and gas as strategic assets assert that nations will seek wellhead control for national interests and ignore market norms. They also believe that many countries have mercantile attitudes toward oil and gas; that they must acquire and control these limited resources for national security. China, via CNOOC, has demonstrated a mercantile attitude by using the firm to acquire oil for its national interests. Several facts demonstrate this point.

First, as of June 8, 2005, CNOOC--a Chinese state-owned enterprise (SOE) without the "Ltd"--owned 70.64% of CNOOC Ltd, which makes the latter an arm of the Chinese government. Second, according to company by-laws, the Chinese government gets a share of oil from every CNOOC Ltd. production sharing contract. Third, the Ministry of Commerce must approve all CNOOC Ltd. export crude sales.

Fourth, some of the world's most experienced investors believe that Chinese officials have used CNOOC Ltd. for mercantile purposes. For example, in July 2005, CNOOC Ltd.'s biggest non-governmental shareholder, Chicago-based investment firm, William Blair & Co, sold all of its CNOOC Ltd. shares (worth $160 million), because it felt that $18.5 billion was too much to pay for Unocal. It said that such a move represented Chinese governmental interests, not sensible, organic growth.

Chinese energy goals are to obtain as many production contracts as possible from as many sources as possible, to feed an increasingly hydrocarbon-hungry population. If this policy tails, Beijing believes its domestic stability might become precarious. As William Blair & Co indicated, this policy might not always adhere to market fundamentals. And even CNOOC Ltd. admits on page 13 of its 20-F that the government controls the company, and might not always act in shareholders' best interests.

However, China is not the only Asian country to leverage politics against oil and gas. For example, Bangladesh refused to let Unocal produce and export domestic gas to India, even though Bangladesh's economy was not modern enough to consume it. Why? Because Bangladesh is an intense rival of India, and it did not want to forfeit natural resources to its nemesis, even in the face of hefty profits. Moreover, it wanted the hydrocarbons for itself at a later date and is now using them.

In another case, Indonesian state oil company Pertamina is fighting with ExxonMobil over control of operations and cash flow at Cepu, the country's largest, untapped oil field. Although Cepu has an estimated 500 million bbl of oil and would increase Indonesian output 18%, officials have delayed the project for four years over what is essentially a dynastic dispute.

This ignores the "oil as a fungible asset." Pertamina wants joint decision-making in all operations, or rotating ownership every five years. The government wants the two firms to rotate control every six months. ExxonMobil, citing Pertamina's chronic cash flow problems, wants to manage Cepu on its own and share the rewards.

So, as China and other countries demonstrate, the fungible and strategic asset philosophies exist simultaneously in Asia. "Political interference in the oil and gas industry in Asia is not new," says Jim Williams of WTRG Economics. "But it has grown on a dramatic scale because of increased competition.

"And throughout history, there have been many times when fungibility didn't matter," he adds. "Take for instance, the pre-World War II years, when the Allies sought to deny Germany access to Middle Eastern oil. And during the war, a key Allied strategy was to keep Axis powers from seizing and controlling oil fields."

Adds Bernard Cole, author of Oil for the Lamps of China-Beijing's 21st Century Search for Energy, "Oil is a national security concern. Energy is a national security concern. It's not a pure capitalist decision." But, he posits, "The big question is, will this create friction, competition, or cooperation?"

On Nov. 30 2005, Senator Joe Lieberman (Dem.-Connecticut) addressed this question at a forum titled, "China-US Energy Policies: A Choice of Coopera tion or Collision?" He said that China and the US need to collaborate on energy concerns or risk possible war in the future. "Let's recognize this problem before it becomes an intense competition which can actually lead to military conflict," said Sen. Lieberman. "We ought to add joint energy research and development projects to that dialogue, and then begin to see if we can work together."

The trend is obvious, especially in Asia. While oil is fungible, many countries and SOEs don't treat it as such, because it directly links to their national interests. And higher demand and seemingly fewer resources will fuel this trend as the 21st century continues. This will make corporate governmental affairs and competitive intelligence divisions linchpin players, not just for E&P, but also for downstream activity.

JEFF MOORE, CONTRIBUTING EDITOR, SOUTHEAST ASIA

editorial@worldoil.com

Jeff Moore is a strategic consultant in Arlington, Virginia. He is author of the book, Spies for Nimitz, which depicts America's first modern intelligence agency. He has also written numerous articles on energy, mining, and security in Asia for such publications as World Refining, Asia Times, Asia-Inc, and Jane's.

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