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The China Syndrome, Part 4
The India Effect
by Joe Duarte, MD
Joe-Duarte.com & IntelligentForecasts.com
March 13, 2005

Editor’s Note:

China has recently shifted its economic focus, raising bank reserve requirements and has clamped on the brakes with regards to its free-wheeling lending prices. But, despite these efforts, and rumors that the Yuan’s peg to the Dollar is going to be altered, little has changed, with regards to China’s thirst for crude oil. This installment of the China Syndrome deals with the key role India plays in China’s oil situation.

Part 1 of The China Syndrome concluded that China is not just a power to be reckoned with in the future, but rather that China is a major player in the world now.
Part 2 of The China Syndrome set forth evidence for irregularities in the way China does business, and how the world is looking the other way.
Part 3 of The China Syndrome explores the implications of China's activities on the Asian region.

Today’s Analysis: India, China, And The Oil Markets, Part 1
December 28, 2004

India and China are rapidly becoming major players in oil exploration and the global oil market in general. The rivalry between the two has yet to be acknowledged by the mainstream as a significant factor in the marketplace. At the center of the emerging relationship between the two is the controversial war torn African nation Sudan.

According to the Financial Times: if we were to “Pick almost any unstable part of the world” we would likely “find China and India competing head to head for the rights to explore for oil and gas. But though China has been pursuing overseas energy sources for years, India's emergence is recent.

But even though India is getting a late start, it is aggressively pursuing an expansionary strategy. “During the next few months, India's Oil & Natural Gas Corp., or ONGC, the country's biggest company, will step up its investments in Russia, Sudan, Angola, Vietnam, Myanmar, West Africa and elsewhere.”

And as with other industrial powers, India’s aggressive behavior in the oil markets, and its expansion “reflects a restless quest for national energy security that will increasingly shape India's diplomacy. ["Energy security is of critical importance to India,"] Manmohan Singh, India's prime minister, said in a recent interview. ["It is second only in our scheme of things to food security."]”

India’s expansion is modest for now. According to the Times: “ONGC has invested $3.5 billion in overseas exploration and development since 2000. This is still much smaller than the estimated $40 billion spent by China National Petroleum Corp. But it is a taste of what is growing into a titanic competition between two of the world's most rapidly growing economies.”

India’s economy has hit critical mass at a difficult time in the equation of supply and demand in the oil markets: “with just over 1 billion people, has 16% of the world's population and just 0.4% of global oil reserves.” Meanwhile “average economic growth projected at a minimum of 6% a year in the next two decades, plugging the energy gap is increasingly urgent.”

Yet, India is not alone. Indeed, it faces a very challenging situation, with the U.S., Japan, and China competing globally, along with Europe and emerging countries, where oil is crucial to daily survival, if not rapid economic growth. “Unlike the situation with food, of which India is now a net exporter, the energy deficit has worsened sharply since May, when Singh became prime minister. Oil prices have eased in the last three weeks, but India imports more than two-thirds of its consumption, and its demand is expected to triple in the next two decades. ["Whichever way you look at it, India could not possibly meet its energy needs through domestic production,"] said Subir Raha, chairman of ONGC. ["Our only choice is to do what France did in the 1950s or China is doing now, which is to secure our energy sources overseas."]”

Africa And Other Unstable Regions Beckon

With much of the world being locked in to contracts with U.S. and International oil majors, India faces a unique set of problems. It has to go to increasingly dangerous places to find its oil. “Much of India's small but growing overseas aid budget has been spent on African countries, where ONGC and China National Petroleum are in competition for exploration rights. Securing ["equity oil"] in such areas enables ONGC to import it at cost, about $8 to $10 a barrel after royalties and license fees, compared with open-market prices of $40 a barrel or more.

Yet, “the biggest diplomatic challenge is in India's backyard — in the temptations offered by big natural gas reserves in Iran, Myanmar and Bangladesh.”

The Times reported: “New Delhi will have to look closely at building a gas pipeline from Iran that would cross neighboring Pakistan. Until recently, that option was unthinkable. But Singh's government has indicated a willingness to discuss it with Islamabad, despite the obvious insurance risks.” Citing past history, Indian oil experts told the Times: "All through the worst stages of the cold war, France's pipeline from Siberia was never threatened. Energy cooperation can transcend diplomatic problems."

In other words, citing “a sense of urgency and an awareness that this is a strategic priority,“ India is chucking caution to the wind, and, while aggressively increasing its domestic search “in the Bay of Bengal on India's east coast and the Bay of Cambay on its west coast– on its northern onshore basins and in an arc from the deserts of Rajasthan across the Gangetic plains to the foothills of the Himalayas,” while “showing no hesitation in bidding for exploration blocks in parts of the world that Western energy firms would not touch, such as Sudan, where it is investing $1.5 billion. India is also looking at a gas pipeline from Myanmar.”

Conclusion

India is aggressively expanding its global search for oil. But, in doing so it is venturing onto a dangerous global stage where even the most inexperienced participant, China, has developed relationships and staked claims to key territories.

Both China and India are searching for a dwindling, or at least an increasingly difficult to obtain resource in unstable areas of the world where sectarian violence and lawlessness are the rule, not the exception.

The combination of cultural, political, and different stages of experience on the global stage for these two emerging players sets up a unique set of problems for the U.S., Europe, Japan, and Russia.

On the positive end, it does have the potential for a continuing boom to the U.S. oil service sector.

As this dynamic advances, it has the potential of causing one of two things: significant disputes between China and India, or even more dangerous from a political standpoint for the U.S., cooperation.

The creation of a China-India coalition in oil is unlikely. But, if it were to come about, it could create a significant amount of potential surprises for the rest of the world.

Today’s Analysis: India, China, And The Oil Markets, Part 2
December 29, 2004

The Chinese are flexing their muscles in the oil markets. But their methods, the high costs and the ill will being engendered could lead to consequences that could hamper the country’s growth and their global standing.

China’s frantic search for oil may have played a major role in the Darfur disaster. According to The Sudan Tribune.com: “one of the biggest obstacles to achieving peace in Darfur is the government of China. Sudan, a relatively poor country, is currently indebted to the International Monetary Fund (IMF) for nearly 2 billion dollars. In order to obtain the military equipment needed to continue its genocidal rampage, the government of Sudan has looked to investors in Beijing.”

China’s investment in Sudan is estimated to be at least $2 billion, and includes the building and maintenance of a 1000 mile pipeline in Sudan, which links the oil fields with the Red Sea. The Sudan Tribune reported: “For several years Beijing, along with its state-owned China National Petroleum Corporation and subsidiary PetroChina has invested over $2 billion on oil infrastructure in Sudan and owns 40 percent of Sudan's Greater Nile Petroleum Operating Company Projects (GNOP), which produces an estimated 150,000 barrels of oil a day.”

According to the Washington Post: “China's largest energy company is pumping crude oil, sending it 1,000 miles upcountry through a Chinese-made pipeline to the Red Sea, where tankers wait to ferry it to China's industrial cities. Chinese laborers based in a camp of prefabricated sheds work the wells and lay highways across the flats to make way for heavy machinery.”

The flip side of this vision of idyllic industrialism, is that “only seven miles south, the rebel army that controls much of southern Sudan marches troops through this sun-baked town of mud huts. For years, the rebels have attacked oil installations, seeking to deprive the Sudan government of the wherewithal to pursue a civil war that has killed more than 2 million people and displaced 4 million from their homes over the past two decades. But the Chinese laborers are protected: They work under the vigilant gaze of Sudanese government troops armed largely with Chinese-made weapons; a partnership of the world's fastest-growing oil consumer with a pariah state accused of fostering genocide in its western Darfur region.”

The Sudan Tribune fills in the gaps: “Investment has allowed the government of Sudan to fill its coffers and use its oil revenues to purchase the latest military equipment. Recent reports by human rights organizations marks China as Khartoum's main military supplier. At a time when the violence in Darfur continues and an arms embargo against Khartoum is justified, the Sudanese government instead is allowed to update its military. Amnesty International recently reported, [" The Government of Sudan has used increases in oil revenues to fund a military capacity that has in turn been used to conduct war in Darfur, including carrying out violations of international human rights and humanitarian law."]”

Is anything likely to change in the near future? Not if business is the dominant motivation. According to the Washington Times: “While the Bush administration is seeking via the United Nations Security Council strong action against the genocide in Darfur, Sudan and Iran for its nuclear programs, the reality is that China will most likely veto any U.S. initiative, as it currently receives 14 percent of its energy exports from Sudan and an additional 8 percent from Iran.”

Here are some sobering details about the depth of China’s involvement with “rogue” nations, according to the Washington Post: 1) “Sudan is China's largest overseas oil project. China is Sudan's largest supplier of arms, according to a former Sudan government minister. Chinese-made tanks, fighter planes, bombers, helicopters, machine guns and rocket-propelled grenades have intensified Sudan's 2-decade-old north-south civil war. A cease-fire is in effect, and a peace agreement is scheduled to be signed. However, fighting in Sudan's Darfur region rages on, as government-backed Arab militias push African tribes off their land.“ And 2) “China in October signed a $70 billion oil deal with Iran, and the evolving ties between those two countries could complicate U.S. efforts to isolate Iran diplomatically or pressure it to give up its ambitions for nuclear weapons. China is also pursuing oil in Angola.”

The problem for China is multifold. As we have noted here before, it is paying too high a price in most cases for less than top notch oil properties. Aside from the politics of the Security Council, and the U.S., during the process of setting up its ventures, China is ruffling the feathers of its competitors, and in many cases its neighbors, as it has ongoing disputes with Japan and Vietnam with regards to offshore drilling.

According to Hong Kong’s The Standard: China recently “rejected Vietnam's request to halt exploration in Beibu Bay, straddling its border with Vietnam,“ and “is also at loggerheads with Japan over exploration in the Xihu Trough in the East China Sea, just west of the line Japan claims as the boundary of its exclusive economic zone. The trough, 400 kilometres east of Shanghai, contains large gas deposits.”

China is also not managing its properties well, as it is not extracting as much as it has expected from its projects. The Standard reported that according to the International Energy Agency “China's offshore production is not as prolific as five years ago because the discoveries in recent years have lagged earlier expectations.”

The Standard sums it up in grim fashion: “It is increasingly difficult for Chinese oil companies to find good assets overseas as the good ones are already taken by western companies, says a source from China Petroleum Economics and Information Research Centre, a subsidiary of China National Petroleum Corp (CNPC).”

Conclusion

The dark side of China’s rapid growth and industrialization is becoming increasingly apparent, and the rubber band between its yin and its yang may be getting thin enough to have developed a crack or two.

By going to fringe nations, paying too high a price for oil, and by railroading anyone who gets in its way, Beijing is building a large Karma debt.

In other words, when an entity, in this case China, can manage to upset the United States, Amnesty International, the governments of Japan and Vietnam nearly simultaneously, the situation is not just a blip.

At some point, Beijing’s heavy handed oil drilling is going to go one well too far. And the consequences will almost certainly not be benign.

Editor's note: The above reports appeared on www.joe-duarte.com and www.intelligentforecasts.com

© 2005 Joe Duarte, M.D.
Dr. Duarte's Bio and Archive

Joe Duarte, M.D.

Joe Duarte M.D. is founder and Editor in Chief of Joe-Duarte.com. Dr. Joe Duarte's Daily Market I.Q. is a premium service that provides daily intelligence, trading strategies, and technical analysis at www.joe-duarte.com. Duarte offers free analysis and news coverage at www.intelligentforecasts.com . Dr. Duarte is a board certified anesthesiologist, a registered investment advisor, and President of River Willow Capital Management. He is author of "Successful Energy Sector Investing" and "Successful Biotech Investing" (Prima/Random House). Duarte's analysis appears regularly in major outlets including CBS MarketWatch and Investor's Business Daily.