China Increases Security of Supply with Energy Deals in Nigeria and Kenya

Coast to Coast

Chinese President Hu Jintao finished his recent trip abroad by making a stop on each side of the African continent. Hu had one theme in mind in both places: increasing China's energy supply. Hu stopped in Nigeria for two days and in this time agreed to invest US$4 billion in the infrastructure of the country in return for first refusal on four oil blocks in the 19 May mini licensing round. When China's president flew into Nairobi, a deal was announced for China to prospect for oil in six blocks mainly off the east coast of Kenya.

The deals further increase the influence of Chinese state players in Africa, which supplied some 38.47 million tonnes of Chinese oil last year, representing about 30 percent of the country's total imports. The deals with Kenya and Nigeria will supplement China’s largest African suppliers, Angola and Sudan, where the CNPC is already the leading foreign producer.

Hu arrived in Africa after visiting the world’s top oil producer, Saudi Arabia, in a bid to link further alliances with suppliers in a high price market. Chinese oil consumption is expected to rise from 6.59 million barrels per day in 2005 to 6.95 million this year.

Billions and Billions

In Nigeria, Hu signed a memorandum of understanding (MoU) that will leave the China National Petroleum Corporation (CNPC) in a highly advantageous position to build a significant presence in Nigeria's oil sector. In exchange for US$4 billion in downstream investment, CNPC will have first refusal on four oil blocks at the mini licensing deal to be held 19 May. Two blocks will be in the Lake Chad basin, one onshore in the Delta and one on the offshore continental shelf (see Nigeria 27 April 2006: Nigeria Gives China Four Oil Licences for US$4-bil. Infrastructure Investment).

In return, CNPC will take a 51% stake in the Kaduna refinery, with a mandate to restore the faltering facility to its 110,000-barrels-per-day capacity. The refinery sector was not maintained during the last years of Nigeria's military rule and has been running at below capacity since that time.

The US$4 billion promised investment is the second multi-billion-dollar deal between China and Nigeria in recent months. Earlier this year, the China National Offshore Oil Corporation (CNOOC) acquired a 45% stake of an offshore oil licence on oil block OML 130. The Chinese firm paid US$2.27 billion, with a further US$424 million due for financial, operating and capital expenses.

The Oil Safari Continues

Hu then flew to Kenya to meet President Mwai Kibaki and conclude a deal for the China National Offshore Oil Corporation (CNOOC) to prospect for oil in mainly offshore areas (see Kenya 27 April 2006: Chinese President Agrees to Offshore Oil Exploration Deal During State Visit to Kenya ).

Fu Chengyu, chief executive of CNOOC Limited, announced last week that its subsidiary, CNOOC Africa Limited, would take on six production-sharing contracts (PSCs) in Kenya. These six PSCs cover Block 1, Block 9, Block 10A, L2, L3, and L4 in three basins of Lamu, Anza, Mandera, with a total area of 115,343 square kilometres. This marks the first time that CNOOC has explored in east Africa.

Kenya has long been thought of as a potential area for hydrocarbons but previous exploration has yielded nothing. The deal was signed on behalf of Kenya by acting Energy Minister Henry Obwocha. The details of the deals are yet to be formally announced but it appears to be a low-risk investment for Kenya, with China taking on all exploration costs. The visit also saw the two countries discuss increasing bilateral trade. Kenya also received a grant worth US$8.7 million from the Chinese government to help fight malaria, while the Chinese will also provide much-needed investment in Kenya’s roads.

The deal with Kenya can be seen as an insurance policy for the Chinese government, which is desperate to protect its investment in neighbouring Sudan, which ships the majority of its oil to Chinese markets. Most of Sudan’s oil fields are in the centre or south of the country and Kenya has recently suggested building a pipeline from these fields to the port town of Lamu, which could protect Sudanese marketing routes in the event that the south decides to succeed under the terms of its six-year interim peace agreement with the Khartoum government.

Kenya has also been keen to strengthen its relationship with the Beijing government and it has only been eight months since President Mwai Kibaki visited China. Many African leaders are forging closer ties with the Chinese government because of the country’s non-interventionist policy towards Africa. Kenya's government has been dogged by corruption scandals, which have seen three senior ministers resign this year and many Western countries suspend financial aid.

Outlook and Implications

The aggressive manner in which China has moved into these proven and prospective oil production centres bears certain hallmarks of earlier upstream forays abroad. Indeed, with coffers flush from strong earnings in 2005, the premium to be paid for exploration assets as a result of international market conditions represents no disincentive. If anything, the need to diversify the supply base of the Chinese market has become more focussed under the pressure of high prices seen over the last two years. Still, it is interesting to note that CNOOC has earmarked the additional capital that will be raised through its forthcoming major share issue to fund the US$2.7 billion Akpo commitment. This represented CNOOC's largest foreign investment to date, but may yet be followed by further activities in Africa, as China moves to bring its financial muscle to bear alongside increasing political engagement. Any success in these prospects is almost certain to increase Africa's importance in China's oil supply balance.

In exchange, Kenya and Nigeria have benefited from much-needed investments into crucial sectors of their economy, which have been less attractive to mainstream energy companies. This new relationship with Beijing also gives the African states increased leverage when negotiating with Western partners who have previously enjoyed a free rein on the continent. In this way it is true to say that China’s energy needs are rewriting the rules for engagement in Africa.

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