http://news.ft.com/cms/s/25b30866-83a4-11da-9017-0000779e2340.html

Quote :

"China and India forge alliance on oil China and India, the world’s two fastest growing energy consumers, on Thursday set aside long-standing rivalries and agreed to co-operate in securing crude oil resources overseas. The agreement, aimed at preventing the two nations’ competition for oil assets pushing up prices, symbolises their increasingly assertive role in global energy politics. In an age of growing energy insecurity “it makes sense for India and China to co-operate [rather] than compete .?.?. the time of access to easy oil is in the past”, said Jim Steenhagen, managing director at PFC Energy, the US consulting firm. The agreement came as fears over a serious threat to oil supplies from Iran began to rattle the market yesterday. Prices rose above $65 a barrel on the New York Mercantile Exchange as Tehran’s nuclear ambitions threatened instability at the centre of the world’s main oil-producing region. The Sino-Indian agreement was signed in Beijing by Mani Shankar Aiyar, India’s petroleum minister, and Ma Kai, the head of the National Reform and Development Commission, China’s chief economic planning and energy ministry. The agreement comes after India’s Oil and Natural Gas Corp lost out to Chinese rivals in the race to acquire fields in Angola, Nigeria, Kazakhstan and Ecuador. But a recent joint purchase of a stake in a Syrian oilfield by ONGC and the state-owned China National Petroleum Corp could set a pattern for future deals. Mr Aiyar hailed this as a model. Oil executives said co-operation between China and India could benefit international energy companies by reducing the ferocity of the bidding. Under their agreement, Chinese and Indian oil companies will establish a formal procedure to exchange information about a possible bid target, before agreeing to co-operate formally. Their memorandum of understanding also covers possible co-operation across the energy industry, from exploration to marketing. But India and China’s national oil companies could still compete in third countries. Sceptics say Chinese companies are unlikely to share their real business plans with Indian rivals, especially as they have mostly been able to outbid them. “Governments like to sign pieces of paper, but it often doesn’t amount to much,” one analyst said. India is more dependent on oil imports than China. Mr Aiyar believes India’s import dependency will increase from 70 per cent of consumption this year to about 85 per cent in 15 years. China imports about half its oil. Li Zhaoxing, China’s foreign minister, this week started a trip to Africa that will underpin Beijing’s search for energy security."

*phew*

Snark, the implications?

[Edited on January 13, 2006 at 12:55 AM. Reason : ...]

1/13/2006 12:55:05 AM

interesting

and yes, i also want to know what Snark thinks...

1/13/2006 10:33:57 AM

Wow, people are actually asking for my opinion by name... Feels odd

Best I understand the past year has seen Chinese and Indian efforts to acquire overseas oil deposits grow far in excess of reasonable economic expectation. The politicians in the two countries have been energized by the rise in oil instability, so they have given blank checks to their respective oil companies to acquire supplies regardless of the cost.

The result, of course, is that China and India have been paying way above the market price for oil fields in countries that it may not make sense. This is very similar to the dramatic oil purchases by US and British oil companies back in the 1950s. Most of the time, after the firms have developed the fields and become profitable the host governments simply nationalize them (this is currently happening in Venezuela).

As the article states, China has been more willing to outbid India for two reasons, I suspect. First, China has better financial backing due to more urgent needs. Secondly, the Chinese firms feel more confident against nationalization by the host country because of China's growing military and political capabilities (the threat of invasion is a good deterrent against such behavior, just ask Mexico about its 19th century dealings with France).

As for this particular agreement, it makes sense for China and India to get together on this one because they are the only ones bidding. Nevertheless, the salesmen in this case know how badly the buyers want the oil fields, so barring a price collapse I suspect the sellers will demand similar compensation to prior auctions and will get it. So the collusion may not work, and even if it does it could only serve to bring the price paid more in line with rational expectations. There is no risk of China and India cornering the energy market because they will still be net energy importers, just like America, will the same interest in increased production and lower prices.

As for the effects on the world at large, this cycle of acquisition is not "good news" because although the goals are high production, they are acquiring fields far in excess of their capabilities to develop them. So, for years to come the acquisitions will result in a net loss of capacity for the world unless certain US restrictions against Chinese ownerships of US oil companies is lifted so they could purchase a few smaller US companies with the experience and equipment just waiting to be deployed to such holdings.

Ultimately, the price will collapse and China and India will be left holding the bag, so to speak, having paid several times what they should have. Or even worse, if the price does not go down before the oil fields reach capacity, they risk being drawn into a "war for oil," and all that implies, to prevent a domino effect of nationalizations by host countries, such as was experienced by American and British companies in the 1960s.

[Edited on January 13, 2006 at 5:20 PM. Reason : .,.]

1/13/2006 5:08:06 PM

Note to self: Let the next car be a hybrid (years away).

1/13/2006 7:15:26 PM