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The continuing presence of China in the market
Posted by Heading Out on September 14, 2005 - 9:01pm
The Chinese purchase of the Encana assets in Ecuador raises some flags in regard to the overall long-term supply from that country to the US.
EnCana Corp. is selling its oil assets in Ecuador to a Chinese consortium for US$1.42 billion in a deal it said reflects more its own plans to focus on North America than the Andean country's political instability, Reuters reported.So that is 75,000 + 0.36 x 450,000 = 237,000 bd.The deal with a consortium led by Chinese giant CNPC leaves rival Indian bidder ONGC out in the cold on a major deal for the second time in less than a month. The two nations are locked in an intensifying battle for oil assets to fuel their booming economies.
. . . . . .
The CNPC consortium will acquire about 75,000 barrels a day of production from five blocks and a 36 percent stake in the OCP pipeline, a new 450,000 barrel a day export line that EnCana spearheaded.The oil fields' proved reserves are pegged at 143 million barrels.
It is a concern since the US imports about half of the Ecuadorian exports. From the EIA we read
Ecuador is the fifth-largest producer of crude oil in South America. In 2004, the country produced 534,800 barrels per day (bbl/d) of total oil liquids, of which 528,200 bbl/d was crude oil. Ecuador also consumed 144,000 bbl/d of oil in 2004. According to Oil and Gas Journal, Ecuador held proven oil reserves of 4.6 billion barrels in 2005, the third-largest in South America.And so while the Chinese talk about producing more oil at home, and hesitating to fill their SPR (as has been commented a possible attempt to get the prices down before they really do start) they continue to vacuum up foreign production, leaving less for the rest of us. (226,000 +237,000+140,000 = 603,000 > 534,800 bd.)
Ecuador is a significant oil exporter, mostly to the United States. Ecuador sends over 50% of its oil exports to the U.S., the remainder split between Latin America and Asia. During the first eleven months of 2004, Ecuador exported 226,000 bbl/d of crude oil to the United States, some 2.3% of U.S. total oil imports. Ecuador is the second-largest single source of crude oil imports from South America, after Venezuela.
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If fungibility disappears, markets will not work. And where will that leave us?
Just look at the relative importance of domestic or foreign military in areas of important world production. One doesn't have to get very far outside the 'civilized' west before oil + M16s (or Kalashnikovs) are constant companions.
If we factored in the cost of government and private military operations that support, defend or influence oil production world wide, price/bbl would probably double.
What gives the US the right to have all the energy resources? Who says that China has to play by our rules? Obviously the policians don't give a fsck or they wouldn't be undermining our national security by sending all of our technology to China.
(a long time uniphile)
America's military option to secure oil supplies has proven unworkable. America's energy security will be contingent on its own good behaviour: good public policy, energy conservation, and observing the rule of international law.
</sarcasm>
The evidence shows that China will use contracts and lawyers when they expect other nations (namely us) to respect them. They'll use arms to take over other countries, as they have before. China's methods are not principled, they are cynical and deserve even less respect than you accord to the US.
Nevertheless, the economic costs of not responding to the market will be high, as Indonesia is finding. China will not be able to subsidize domestic oil prices indefinetly, especially since Chinese demand is such a key driver of higher oil prices. There may be a lag, but it's not long, as we just saw with their decision to reduce purchases for their SPR. China can't go on ignoring the effects of higher prices and rising demand.
Even if China obtained enough oil reservers to satisy their domestic market today, they cannoe insulate themselves from rising prices. They would face rising costs for development, extraction, and transportation as the necessary services were bid up in price by the rest of the oil industry when prices rise again. And, of course, their domestic demand is rapidly growing, requiring a continuing effort to secure new reservers - so they would face the same market pressures anyway because those future reserve purchhses would reflect rising prices, and if they cannot cover their costs because they are subsidizing domestic oil, then they will not be able to afford the additional future reserve purchases.
Remember: if something can't go on, it won't.
indefinetly = indefinitely reservers = reserves satisy = satisfy cannoe = cannot purchhses = purchases
gotta slow down, but there's so much great discussion from all of you to participate in!
- Mr. Tanstaafl (There Aint No Such Thing As A Free Lunch!)
The more and more that countries try to lock in oil supplies, either through very long-term contracts and/or defacto security-for-oil arrangements (such as might be suggested by Iran recently becoming so chummy with China), the smaller will be the true oil market place. It's crudely analogous to the owner of a grocery store in time of famine taking his stock off the shelf so he can promise his family and friends a food supply.
A recent comment pointed out that when one factors in the cost of military protection of petroleum supplies, the real cost of those supplies can much greater than the apparent 'market' price. I agree with this notion completely and think it is quite purposely overlooked by our government. The math is pretty depressingly simple: Take some reasonable fraction of our annual defence spending and allocate it to protecting our oil imports from the Middle East (say at least 25%), then divide that by the annual amount of oil we actually import from that region. When you do this, you get a suprisingly large number, which when added to the apparent market price makes for some VERY expensive oil. I have always maintained that it is THIS combined price that should be used when comparing alternative energy with established fossil fuel systems.
But getting back to China and other countries frantically trying to scrounge up secure sources of oil, I see no other outcome but for this situation getting more contentious and dangerous. The logical end point is global armed conflict over oil supplies, a conflict that I could easily picture going nuclear. Markets mean nothing when the law of the jungle takes over.
The economics of going to war to secure oil don't add up. Anyway, USA has already secured the Middle East. China will not do what the USA has done. Russian east may or may not be another story.
There is a peace dividend.
China is doing what all market economies are trying to do - secure energy supplies. How can this be news?
China is no doubt looking not to found its economy on low efficiency auto productions. While centrally planned, bureaucratic and corrupt, it is nevertheless innovative. It may be that mass produced low-cost people movers and solar energy harvesters will ultimately resile to China.
But, as in the West Eurasia, time is running out.
China and the other countries are trying to BUY the oil. Thats good. The alternative is that they try to TAKE it. Which would be bad.
As I noted just above, any supplies China buys now will deplete, just as all fields deplete. And Chinese demand is rising - so they're gonna have to come back to the market every year and buy more oil. The tin pot anti-Japanese sabre-rattling in the East China Sea over a gas field (the Chinese ownership of which is NOT disputed) worries me more than China's efforts to buy oil resources.
Unless you're a member of OPEC or the name of your country rhymes with Fussia or Jorway, you're at the mercy of world prices. China could pretend otherwise, but doing so will just make the lesson that much more expensive to learn.