NYSE Delistings Will Nudge Forward China-US Decoupling

DID THEY JUMP, or were they pushed? Whichever, the coordinated announcements by five large Chinese state-owned companies that they are to delist voluntarily from the New York Stock Exchange pre-empt US authorities doing it mandatorily.

The five companies are the oil giants PetroChina and China Petroleum and Chemical (Sinopec), Sinopec’s refining subsidiary, Sinopec Shanghai Petrochemical, Aluminum Corp. of China (Chalco) and China Life Insurance, one of the largest state-owned insurers. All have primary listings in Hong Kong. 

All are also in sectors that Beijing would consider strategic and thus is sensitive to information about them being made available to foreign regulators.

The US Securities and Exchange Commission (SEC) and the China Securities Regulatory Commission have been battling for two decades over incompatible auditing regulations. 

The SEC wants US-listed Chinese mainland-based companies to provide the top US audit watchdog, the Public Company Accounting Oversight Board, with the same access to their financial records that is required of all companies to protect investors from accounting frauds and other financial wrongdoing. 

China refuses to let its companies open their books to foreign regulators for national security reasons.

Last year, there were indications of a compromise being struck, but discussions seemingly have stalled. However, it is possible that voluntary delistings that take the most sensitive Chinese companies out of the equation could be paving the way for an agreement. 

The fundamental problem remains that US rules require listed firms to allow access to information that China bars them from disclosing. 

Under the Holding Foreign Companies Accountable Act passed in 2020, the US Congress has imposed a deadline of 2024 for the NYSE to expel companies that do not comply with US audit requirements. 

Upwards of 200 Chinese firms, Alibaba among them, with an aggregate market capitalisation of more than $1 trillion, are potentially at risk of delisting. The departure of each one would mark another step in the slow walk of economic decoupling between the two countries.

A Map Of The Political Relationships Of China’s State Oil Companies

We noted the growing global reach of China’s big three national oil companies earlier this week. It is tempting to see them as a monolithic arm of state policy, and their overseas acquisitions of oil and gas assets as a centrally directed execution of strategic national policy. Yet both those views miss the complexity of their domestic political relationships. We thought this diagram from the International Energy Agency captured them well.

China’s Oil Production Outside China To Rival Kuwait and Mexico’s

While it is no secret that China’s state-owned oil giants, CNPC, Sinopec and CNOOC, have been on a buying spree of overseas assets over the past three or four years, not much consideration has been given outside the industry to what that means in production terms. Now the International Energy Agency (IES) has done just that. And it is eye opening.

The IEA estimates that by 2015 China will be producing 3 million barrels of oil a day outside its borders, twice what it produces today. Quite what that means is well illustrated by some comparisons. Three million barrels per day is roughly what the United Arab Emirates, Mexico and Kuwait each now produce. They are currently the world’s eighth, ninth and tenth largest producers. It would be comfortably more than Brazil, Nigeria and Venezuela’s output. They are the eleventh, twelfth and thirteenth largest producers. It would also be three quarters of the way to what China already produces; China is the world’s fifth biggest oil producing nation.

This ranking hasn’t come cheap. The M&A consultancy Dealogic (via the Financial Times) says that China’s state oil companies have spent $92 billion since the start of 2009 on oil and gas assets in countries from Angola to the U.S.  There is little to suggest that number won’t pass the $100 billion mark sometime later this year as they continue to buy oil and gas in the ground, be it under water or shale, and the expertise to get it out.

Sinopec Buys Oil Reserves in Nigeria

China Petroleum & Chemical Corp. the state-owned oil company usually known as Sinopec, has reportedly signed a preliminary deal to buy onshore oil blocks in Nigeria from France’s Total. The price is said to be $2.4 billion. Sinopec is seeking to bolster its diminishing reserves of crude, which declined to 2.8 billion barrels at the end of last year from 3.3. billion barrels in 2007. In 2009, it acquired reserves in Nigeria, Cameroon and Gabon when it bought Addax Petroleum. Sinopec’s parent, China Petrochemical, said at the start of this year that Sinopec aims to raise overseas production to 50 million metric tons (366 million barrels) of crude a year. Production was running at 23 million tons last year.

Iran, Oil and U.S. Sanctions: Beijing’s Complex Response

Beijing may be huffing and puffing about the sanctions Washington imposed last week on state-run Zhuhai Zhenrong Corp. for selling refined petroleum products to Iran, but it can scarcely be surprised.

“Imposing sanctions on a Chinese company based on a domestic (US) law is totally unreasonable and does not conform to the spirit or content of the UN Security Council resolutions about the Iran nuclear issue,” foreign ministry spokesman Liu Weimin says.

But it is what Washington does. Zhuhai Zhenron is one of three firms to be sanctioned in this case. The other two were Singapore’s Kuo Oil and the United Arab Emirates’ FAL Oil. Even though the sanctions on Zhuhai Zhenrong are largely symbolic as it does not do much business in the U.S. they could be considered a warning to some larger Chinese energy firms that do.

The sanctions followed Beijing’s rejection earlier last week of visiting U.S. Treasury Secretary Tim Geithner’s request that China use its economic clout as Iran’s largest oil export market to press Tehran to rein in its nuclear ambitions. Recent tightening of U.S. and EU sanctions won’t mean much if Tehran can still ship lots of oil eastwards. Tehran depends on crude oil exports for 60% of revenues and 80% of its hard currency.

Beijing’s argument was that China depended on Iranian oil for its economic development. Up to a point, but meanwhile, Prime Minister Wen Jiabao is in Saudi Arabia for the signing of an agreement between Sinopec and the Saudi energy giant Aramco to build an oil refinery Yanbu on the Red Sea with the capacity to refine 400,000 barrels of oil a day. Along with Angola, Saudi Arabia is already one of China’s top two suppliers of oil, ahead of Iran, which the number three. Wen would like to be assured China can get more oil from Saudi Arabia if necessary. Qatar and the United Arab Emirates are also on Wen’s itinerary.

Tensions are likely to remain high in the Strait of Hormuz for the foreseeable future. Iran is dependent on a break-even price for oil of $90 a barrel, so tension, if not hostilities, may suit it. Even if China and India follow Japan in reducing their purchases of Iranian oil, and even if that cut was by as much as 25%, Iran will get by. Meanwhile, China will continue to seek alternative sources of oil, and not be too sorry if Washington is diverted from its new geo-political pivot towards the Asia-Pacific region by a reminder of its interests in the MidEast.

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Shifting Sands Of China’s Relationship With U.S.

Reuters’ report that China’s three big state-owned energy companies, CNPC, Sinopec and CNOOC, have had their arms twisted by the U.S. to suspend new investments in Iran causes this Bystander to raise an eyebrow. CNPC has reportedly delayed work on a 4.7 billion dollar deal; Sinopec has postponed a 2.0 billion dollar oil development, and CNOOC has halted a gas venture according to the news agency after U.S. officials threatened sanctions against the SOEs’ U.S. investments. This they apparently did by bypassing official diplomatic channels and going directly to the companies.

Now, Washington has not had much success in getting Beijing to go along with its efforts to thwart Iran’s nuclear programme. Beijing opposes proposed UN sanctions, which would jeopardize the oil supplies it buys from Tehran, it’s third biggest supplier. Plus there is the general reluctance on Beijing’s part of being seen to be doing anything at Washington’s behest, and a general tendency to stick with old friends, especially those hostile to the U.S., (a policy that is causing some second thoughts, or at least some readjustment, in the light of events in places like Pakistan, Libya and Syria, all of which also have implications for the leadership’s legitimacy at home).

Even if there may be some shifting of the geo-political sands occurring, there is no way that any or all of CNPC, Sinopec and CNOOC would take it upon themselves to undermine official policy without at least tacit approval from Beijing. Which then makes the question, why would Beijing do this now. Is it just letting some of those swirling geo-political sands settle until prospects become clearer, or is using supposedly business decisions as a smokescreen, if we may mix and match our metaphors, for some back-channel cooperation with Washington that it sees to be in its short- or long-term advantage but which it can’t bring into the open? Or is it, as Reuters implies, just part of Beijing’s desire, seen since late last year, to ease tensions with the U.S.as it heads into it’s own leadership transition?

China Cracks Down On Imported Power Kerosene Tax Dodge

One consequence of high oil prices has been a resurgence of the smuggling of oil products such as gasoline, diesel oil and kerosene. 21st Century Business Herald (via Caijing) reports that staff from the Beijing operations of two Swiss-based commodity traders, Kolmar and Glencore, have been investigated in connection with what is said to be China’s largest oil smuggling case in a decade. Li Buhua, a Chinese national in Glencore’s Beijing-based trading team, has been detained by local customs officials, while Dou Shenyuan, manager of Kolmar’s operations in China was also detained. Both men have been released on bail.

Nearly 1 billion yuan ($150 million) of taxes are said to have been evaded in the course of the alleged smuggling of 800,000 tonnes of imported refined oil products, mostly power kerosene, between August and December last year. Power kerosene can be mixed with gas oil to produce a fuel for rural vehicles and generators as an alternative to diesel which is in short supply. The cargoes in question are said to have been imported from Singapore as being for chemical use, a category exempt from fuel consumption tax. Imports of power kerosene surged last year. Reports say the investigation was prompted by complaints from Sinopec, China’s largest oil refiner, following an unusual surge in imports.

One cargo has been acknowledged by Glencore which says it sold 120,000 tons of mixed kerosene and power kerosene to Guangdong Zhenrong Energy ‘free-on-board’ at Singapore, which means its responsibilities ended there. Guangdong Zhenrong Energy took the cargo away in four ships over a period of about two months, Glencore says, adding it doesn’t know why its employee was detained.

Chinese customs officials in Zhuhai, where the cargoes were landed, are said to be involved–at very least they would have had to turn a blind eye to the documentation and any test sampling of the cargoes–so further detentions are likely given the current crackdown on corruption. Nor would we be surprised to hear of more trading companies being connected to this illicit trade, which we are told is also flourishing in Vietnam and the Philippines.

Sinopec Chairman Su Shulin Said To Be Next Fujian Governor

The Financial Times reports that authoritative sources in Beijing are telling it that Su Shulin (left), chairman of state oil giant Sinopec, is to become governor of Fujian province, a plum post Xi Jinping, the assumed successor to President Hu Jintao, held in 2001-02.

Su, 49, has long been tagged as a potential political leader. A spell at the top of one of the big state-owned enterprises is regarded as a rite of passage for such rising-star technocrats. Su comes from a farming family in northern China and qualified as a petroleum engineer, making his career at CNPC before being drafted in as chairman of Sinopec in 2007. He has been an alternate member of the Party’s Central Committee since 2002 and was a member of the Party committee in CNPC from 1997 until leaving for Sinopec, where he was Party secretary as well as chairman of the company. He has also been a member of the Party’s standing committee in Liaoning province, all of which underlines the close connection between state-owned industries and the Party.

CNPC Confirms Attacks On Libyan Operations

China National Petroleum Corp. has confirmed that its facilities in Libya have come under attack. CNPC says that it has repatriated a first group of 24 its 391 Chinese staff across its five facilities in the country. CNPC did not give details of the attacks, which are among many being reported on Chinese owned business operations in the country. As of Thursday, the company says, 47 of its staff have been evacuated.

CNPC has been working in Libya since 2002 when it won a pipeline construction contract to take oil and natural gas from a desert field 1,000 kilometers inland to the coastal terminal at Mellitah. In 2005, the company signed an offshore exploration contract with Libya’s National Oil Corporation. It also provides oilfield services and engineering and construction services to other multinational oil companies working in Libya. It is not, however, an oil producer there. (Sinopec buys 6 million barrels of crude a month from Libya, the backbone of the $6.6 billion a year in two-way trade between the countries.)

In all, Xinhua says, China has so far evacuated 4,600 of its 30,000 nationals working in Libya, mostly in energy and construction. The operation is being said to be the country’s largest overseas civilian evacuation and is being seen as a test of the competence of the government to protect its citizens abroad, tens of thousands of whom now work in politically volatile countries around the world.

Where China Put Its Big Bucks In 2010: Down South America Way

South America dominates the list of the biggest overseas acquisitions by Chinese companies this year. The two biggest to date: Sinopec’s $7 billion purchase of 40% of the Brazil assets of the Spanish energy group, Repsol; and the $5.6 billion CNOOC is spending in two phases for 50% of Bridas Corp., the investment vehicle of the Argentine vertically integrated energy group, Bridas. Bridas Corp.’s primary asset is Pan-American Energy (PAE). The partners are buying out BP’s 60% stake in PAE as BP raises cash to put in a piggy bank for any obligations arising out of the Deepwater Horizon accident, turning what looked in March like an iffy investment by CNOOC into something much more promising by the end of November.

Sinopec has since also picked up the U.S. oil company Occidental’s production and development assets in Argentina for $2.5 billion, the fourth biggest overseas investment by a Chinese company this year. The third biggest was Sinochem’s $3.1 billion purchase of a 40% stake in Statoil’s Peregrino subsalt field off the Brazilian coast. Add in a couple of smaller deals in Venezuela and Chinese firms have secured this year stakes in six projects that will eventually be producing upwards of 570,000 barrels of oil a day.

China’s state oil companies have long had a toe-hold in the region, but this year represents a big step forward, including diversifying China’s energy dependence on Venezuela. These deals have not only secured future oil supplies, they are also piecing together a vertical supply chain that includes refining, trading and storage — and further downstream power generation and distribution. State Grid, the world’s largest power utility and another state-owned behemoth, spent nearly $1 billion to acquire seven power distributors in Brazil as part of a deal it has won to be operate the power distribution system in densely populated southeastern Brazil.

Taken together those seven acquisitions would make a list of the ten largest overseas acquisitions by Chinese companies in 2010. As well as securing energy supplies for China’s own fast growing economy, Chinese companies will be well positioned to profit from the domestic growth of the emerging economies of South America.

In comparison the other big overseas acquisitions of the year seem small beer. PetroChina spent $1.6 billion to acquire Arrow, an Australian coal seam and power distribution company, in a joint bid with Royal Dutch Shell valued at $3.2 billion overall. Chinalco spent $1.3 billion to buy 45% of Rio Tinto’s Simandou iron ore business in Guinea through its Chalco subsidiary. China Huaneng Group, the country’s largest electricity producer, paid $1.2 billion for GMR Infrastructure’s 50% stake in InterGen, a U.S.-based utility that runs power plants in Britain, the Netherlands, Mexico, Australia and the Philippines.

The biggest industrial foreign acquisition was Geely’s $1.8 billion acquisition of Volvo from Ford Motor, the largest piece of business done by a company not state owned. The next largest industrial acquisition was the purchase of Nexteer, a parts-maker bought from GM by Pacific Century Motors, a joint venture between Tempo Group and the investment arm of the Beijing municipal government, a deal valued at less than $500 million.