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China's Next Oil War

Written By Christian DeHaemer

Posted March 24, 2011

China’s energy demand is insatiable. 

The country’s state-owned oil firms are on an international buying spree and a disputed group of islands in the South China Sea could be the catalyst for the next oil war.

Demand Just Off All-Time High

Global oil research firm Platts recently reported:

China’s apparent oil demand in February climbed 10.1% year on year to 36.65 million tons or an average 9.58 million b/d, with demand reaching its second highest level ever barely two months after hitting its all-time high.

This jump in demand is attributed to refineries increasing production and coming back from planned maintenance.

Oil demand in February climbed 4.2% from January’s 9.19 million b/d, which was just a bit lower than the all-time high reached in December of 9.62 million b/d.

CNOOC Has Cash to Burn

To help meet this demand, CNOOC (NYSE: CEO) — China’s largest offshore oil explorer — is on a global buying binge.

The company just reported record fourth-quarter and full year results. 

CNOOC spent $8 billion on acquisitions in 2010 and ended the year with $6 billion on hand to buy more.

The company already put up $570 million for 33% of U.S.-based Chesapeake Energy’s (NYSE: CHK) Niobrara shale gas project.

CHK, a natural gas producer, has seen its share price rise from $19 to $35 over the past year. CNOOC’s has seen its replacement reserve grow by 202% — a new record. The company is planning 10 new projects this year.  

PetroChina (NYSE: PTR), another of the Chinese big three, is planning on spending $60 billion on new deals over the next decade. 

Both of these companies’ share prices are up more than 40% this year.

Oil in the South China Sea

Typical hydrocarbon mercantilism might not be enough to meet China’s growing energy needs.

Learning from the West, China is picking up a big stick and enforcing its territorial claims… After all, the West has a long history of military adventures regarding rebels who sit on oil patches.

East Timor, Kurds in Iraq, and now the rebels in Libya all hold the lion’s share of their countries’ oil lands.

China Warns Off Drillers

Today, China warned against any oil exploration without its consent in waters it claims in the South China Sea.

This comes after a Philippine announcement that Forum Energy had completed a seismic survey for a piece of ocean near the Spratly Islands. The next step would be drilling.

The oil-rich Spratlys are contested by Brunei, Malaysia, Taiwan, Vietnam, the Philippines, and China.

The Chinese Foreign Ministry stated:

China holds indisputable sovereignty over the Nansha Islands (Spratlys) and the adjacent sea waters…

Any activities by countries or companies to explore for oil or gas in the sea waters in China’s jurisdiction without the permission of the Chinese government will constitute a violation of China’s sovereignty and… will be illegal and invalid.

That’s what we call a gauntlet being tossed.


The Spratlys are a group of 100 islands that cover 410,000 square kilometers.  Some 45 of these islands are occupied by small military units.

In recent years, various countries have been building airstrips and bunkers to protect their claims — which, up until recently, have been used as fishing stations and scuba Meccas.

But battles have been fought in the past…, a historical military website, writes:

In 1988, China and Vietnam fought a naval battle, off the Spratly islands. The Chinese victory, in which a Chinese warship sank a Vietnamese transport carrying troops headed for one of the disputed islands, was followed by Chinese troops establishing garrisons on some of the islands.

In 1992, Chinese marines landed on Da Lac reef, in the Spratly Islands. In 1995, Chinese marines occupied Mischief Reef, which was claimed by the Philippines.

It is clear China intends to defend its claims over the Spratly islands. It is unknown how these conflicts will be resolved. 

The hawks in China clearly see America’s overstretched empire and are willing to probe the weak spots.  

With China’s economic ties to the rest of Asia, one can hope for a negotiated settlement.  

What we do know is that the Chinese government will continue to seek the energy it needs to ensure its 1.3 billion people continue to see advancements in standards of living. People with an economic future don’t go in for revolutions.

Oil is the lifeblood of the world economy.

Eight of the last nine recessions in the U.S were preceded by high oil prices. And above all, The Communist Party of China wants to remain in power.

As an investor, the one sure bet is to play the Malthusian fight over energy.

No matter the price, the Middle Kingdom will always buy.


chris sig

Christian DeHaemer
Editor, Energy & Capital

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