17.906 The Geopolitics and Geoeconomics of Global Energy, Spring 2007 Prof. Flynt Leverett Lecture 9: Resource mercantilism — China, India, and Japan Resource mercantilism is not • Not demand side management- for example curtailing demand etc • Not strategic petroleum reserve management- used as insurance in the event of serious supply disruptions, not simply spikes in prices, these reserves are supposed to be able to supplement supply for 90 days however few countries including the United States actually meet this standard o Some of these reserves in Europe were utilized to supplement lost refining capacity during hurricane Katrina What is resource mercantilism? • Important question is reserves and who owns them o Much of the worlds reserves are owned by independent countries and it is not necessarily easy for oil companies etc to get easy access to these reserves, there is competitor for access in the modern world energy market o Now we seem more and more national energy companies going out and trying to cut their own deals via joint ventures or production sharing agreements that would give them ownership/equity stake in other countries oil reserves. These firms are competing with royal Dutch shell and Exxon Mobil etc for the first time. The new comers are Asian NOC’s from Malaysia Korea India Indonesia etc.  These companies initially were responsible for developing oil reserves within their own countries however these are no longer large enough to meet demand.  These national oil companies are competing for access with direct support and assistance from national governments within their own countries and they are endorsing these companies as part of their national energy security strategies. • US vaguely says that its good for companies to do this as long as they don’t encroach upon foreign corrupt practice acts etc or cause international security problems- they are allowed to make business decisions either way in their own interests. • Chinese or Indian governments are not taking such a relaxed view. Chinese has stated policy for companies to go out and do this- the “Going out” policy. Tells companies to go out and secure reserves abroad and Chinese provide them financing through state banks at low costs of capital and other forms of support such as infrastructure developments etc. o Chevron has no control over infrastructure developments in other countries etc but Chinese oil companies can solve this problem because they can get the Chinese government to arrange Cite as: Flynt Leverett, course materials for 17.906 Reading Seminar in Social Science: The Geopolitics andGeoeconomics of Global Energy, Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu), MassachusettsInstitute of Technology. Downloaded on [DD Month YYYY].intergovernmental loans or can get Chinese construction companies to help etc. Can package in improvements that other companies simply can’t do. o Chinese companies can bid up to higher levels than other companies can justify as a fair rate of return to share holders. • Not first time a country has done this. France tried to do it by not cooperating with international organizations and not allowing its energy situation to be dominated by the market. Japanese also tried to influence but they also realized the government could not run an upstream oil process and do it in a way that can meet energy security need. • The People’s Republic of China set up a ministry of petroleum industry and a ministry of chemical industry responsible for down stream and China developed oil industry as a state owned enterprise. o When China began to undergo serious economic reform the question about how to organize the energy sector arose.  In the 1980s these ministries were abolished in an effort to reform economy and the country spun off state own companies out of these former ministries • 1982 realized they had significant off shore oil and gas reserves in addition to those onshore and they established CNOOC out of the ministry of the petroleum industry • 1983 abolished ministry of chemical industry and created the China national petrochemical corporation –Sinopec • 1988 abolished ministry of petroleum industry and set up CNPC- China National Petroleum Corporation. • CNOOC was to focus on off shore exploration and production • Sinopec was set up as a downstream company-refining and marketing • CNPC was set up as an on shore exploration and production company • Chinese eventually realized it was more efficient and more productive to have vertically integrated oil companies which function in both the upstream and the downstream. This model was used by the United States oil industry decades before. o One counter example of this is Occidental which decided to be an upstream production company and still functions efficiently o Exxon Mobil and other major players are all vertically integrated though Cite as: Flynt Leverett, course materials for 17.906 Reading Seminar in Social Science: The Geopolitics andGeoeconomics of Global Energy, Spring 2007. MIT OpenCourseWare (http://ocw.mit.edu), MassachusettsInstitute of Technology. Downloaded on [DD Month YYYY].17.906 The Geopolitics and Geoeconomics of Global Energy Lecture 9 Prof. Flynt Leverett Page 2o In response to this decision China did not know what to do with CNOOC but thy made Sinopec and CNPC vertically integrated companies  They divided China in half by Yangtze river and gave Sinopec south of this point and took all of its refining capacity and gave it to CNPC. CNPC gave all of its oil and gas fields north of river to Sinopec. And there were now 2 vertically integrated oil companies operating in China and these companies now compete intensely with each other.  CNOOC remained in its own special niche.  In the 90s the Chinese authorized each of these companies to create a subsidiary or an affiliate and create an IPO to be listed on international stock exchanges. • Sinopec traded in New York, London, Hong Kong, and Shanghai • CNPC traded in NY and Shanghai • CNOOOC traded in Hong Kong and Shanghai • Now these companies had resources through vertical integration to create autonomy through the state and their autonomy was reinforced by allowing them to publicly lists because it would be an embarrassment if the Chinese interfered with these companies in way which prevented them from being