China’s Energy Diplomacy: SOE Relations in the Context of Global Distribution and Investment Pattern

doi:10.4236/aasoci.2012.24043

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Advances in Applied Sociology

2012. Vol.2, No.4, 325-343

Published Online December 2012 in SciRes (http://www.SciRP.org/journal/aasoci) http://dx.doi.org/10.4236/aasoci.2012.24043

China’s Energy Diplomacy: SOE Relations in the Context of

Global Distribution and Investment Pattern

Hui-Chi Yeh1, Chi-Wei Yu2

1Politics and International Relations, Un i v ersity of Southampton, Southampton, UK

2Department of Politics, N ational Taiwan University, Taipei, Taiwan

Email: H.Yeh@soton.ac.uk

Received September 23rd, 2012; revi se d Oc t ob e r 24th, 2012; accepted November 7th, 2012

This article addresses the mercantilist connotations of China’s energy diplomacy through empirical and

quantitative approaches by arguing that: firstly, the economic logic motivating Chinese enterprises is not

the key variable in the formulation of foreign investment decisions; secondly, the energy security policies

of the Chinese government are key variables which decide the distribution of SOEs’ foreign investment;

thirdly, China’s energy diplomacy is mercantilist in nature due to the weakness of its SOEs in the struc-

ture of the international market; finally, under the premise of satisfying its government’s energy security

policy, SOEs have autonomy in their approaches to investment. Therefore, it may be reasoned that under

specific conditions, mercantilism and liberalism can both explain China’s energy diplomacy. This article

provides compelling evidence supporting this reasoning, through analyzing cases studies in the Middle

East, Central Asia and Africa.

Keywords: Mercantilism; China’s Energy Diplomacy; State Owned Enterprises (SOEs)

Introduction

China’s establishment of energy strategies and diplomacy

principles based on concepts of diversification and outreach,

initiated the entry of its major state-owned companies into

global markets and propagated substantial increases in global

energy prices. Some viewed this in neo-colonialist terms, as it

deepened the dependency of energy rich developing nations on

China (Blair, 2007) and contributed little to poverty alleviation

(Polgreen & French, 2007). Others viewed such investments as

mercantilist and aimed at strengthening national power. Never-

theless, both views fail to represent fully the overseas invest-

ments of Chinese energy corporations. There has been limited

academic research on the geographical composition of Chinese

energy diplomacy, most of which has been conducted by entre-

preneurs and executives in Chinese energy corporations. Xu

Xiaojie, the former director of the Office of Overseas Invest-

ment for the state-owned China National Petroleum Corpora-

tion (CNPC), discussed the role of China in future global en-

ergy strategies, and emphasized the relationship between the

energy rich nations of Central Asia and the Middle East and

China’s energy security (Xu, 1998). Director Xin Zhang of the

International Division of the CNPC and Deputy Wang Jiashu of

the Mining Resources Committee of the China Mining Asso-

ciation (CMA) highlighted the significant role that the Middle

East plays in China’s energy diplomacy and security strategy

(Wang, 2004; Li, 2003; Zekun, 2004).

The development of Chinese energy corporations has lagged

behind Western counterparts, due in part to international

mechanisms and systems for controlling energy prices by Mid-

dle Eastern nations. This makes regional investment decisions

costly, and also contradicts the principle of diversification,

which aims to reduce the risk of interference in domestic mar-

ket prices. However, from recent global investment patterns of

Chinese energy corporations, the number of cases where ex-

traction and ownership permits were purchased from oil pro-

ducing countries greatly exceeded the number of direct oil pur-

chase cases. This casts doubt on literature which emphasizes

the Middle East’s role in building energy security.

This article aims to test the dominant theory that China’s en-

ergy diplomacy exhibits mercantilism, in order to adequately

explain China’s relations with energy rich developing nations.

This article examines the contracts made by the CNPC, the

China National Offshore Oil Corporation (CNOOC), and the

China Petroleum & Chemical Corporation (CPCC) with energy

rich nations from 1993 to 2008, and analyzes the relationships

between both private and public sectors.

In examining these relations, it is important to recognize re-

gional dynamics, as resource endowments vary regionally.

Consequently, selected regions should be endowed with sub-

stantial gas and petroleum resources. Therefore, Europe, Asia-

Pacific and South Asia are excluded. Secondly, mercantilism

places strong emphasis on national/governmental interference

in market principles or economic order. So when a host coun-

try’s national power exceeds that of China, two sets of variables

(interference from both the host country and Chinese govern-

ment) may occur in testing processes. Consequently, the case

studies selected focus upon Central Asia, the Middle East, and

Africa.

Mercantilism and the Growth of

Neo-Mercantilism

Despite the importance of mercantilism in international po-

litical economics, no universal definition exists (Mcdermott,

1999). Robert Gilpin cited economic nationalism when con-

ceptualizing mercantilism and neo-mercantilism (Lairson &

Skidmore, 2002; Gilpin, 1987). Goldstein argued that economic

H.-C. YEH, C.-W. YU

activities represent national development and interests (Gold-

stein, 2003). Mercantilism originated from European nations’

overseas expansion between 1500 and 1776, which was viewed

as a nation’s pursuit of power and wealth. In countries with

declining economic performance, rent-seeking actors would

adopt free trade and modern political economic measures to

enhance national power economically. In these early stages of

mercantilism, gold and silver represented national power and

wealth, and led to over-emphasized protectionism (Schmiege-

low & Schmiegelow, 1975), through attempts to simultaneously

increase import costs and exports (Buzan & Little, 2009). This

resulted in zero-sum schemes in the international economy.

However, from 1750 onwards, many countries were affected

by the excessive importation of British products, which

prompted less developed countries to embrace trade and do-

mestic industry protectionism. Scholars, like Frederick List,

who advocated protectionism and state interference, were

termed neo-mercantilists. Unlike mercantilists, neo-mercantil-

ists believed that nations should seek rare resources and poten-

tial markets abroad, in addition to determining national power

through alternative measures including population, transporta-

tion systems, and wider definitions for economic power, rather

than in terms of gold and silver (Bohning, 1979).

According to the definitions of mercantilism and neo-mer-

cantilism, their characteristics could be categorized accordingly:

firstly, the core concept conceived that economic activities

depended on national development or interests (Goldstein,

2003); secondly, economic activities aimed to increase social

welfare and national interests, and all national industries should

be protected (Gilpin, 1987); thirdly, economic strategies advo-

cated by mercantilism focused on protecting or developing

domestic industries. These strategies include the provision of

foreign aid or subsidies to boost domestic economic develop-

ment, strengthen tariff or non-tariff barriers to protect domestic

industries, or strengthen international competitiveness of do-

mestic industries through economic or political subsidies;

fourth, the concept of power and wealth was interchangeable

(Dougherty & Pfaltzgraff, 2002); finally, industrialization pro-

moted economic development. Sound economic power was

fundamental to protecting national sovereignty while industri-

alization further strengthened national military power (Gilpin,

1987).

Following WWII, when global economic markets embraced

liberalization, the General Agreement on Tariffs and Trade

(GATT) and World Trade Organization (WTO) began consoli-

dating and implementing free trade, and progressively elimi-

nating mercantilism. Moreover, the measurement of national

power in gold and silver terms became outdated; like currency,

these commodities became merely trading tools. In facing

similar critiques, mercantilism faced strong opposition and led

protectionism advocates to pursue alternative ideas, primarily in

specialized or technology-intensive industries like energy,

communication technology, and aviation (Held, Mcgrew, Gold-

blatt, & Perraton, 1999).

Economic development began in East Asia after WWII,

through the adoption of the development strategy of “Rational

Planning”, directing markets when appropriate, protecting new

and high technology industries, and integrating resources into

technological growth (Wang, 2003). The theories associated

with this development strategy were neo-protectionism and

strategic trade theory. Neo-protectionism emphasized increas-

ing import-export profits, while strategic trade theory criticized

free trade theory and overlooked associated developmental

weaknesses (Brander, 1995a). It focused on studying imperfect

competition whilst emphasizing market structure in oligopolies

(Markusen, Melvin, Kaempfer, & Maskus, 1995).

Krugman argued that liberal opposition to US President

Reagan contributed to the rise of strategic trade theory (Krug-

man, 1994). Different from conventional free trade policies,

strategic trade theory stressed that active state interference in

trade policies nurtured national power and economic develop-

ment (Krugman, 1986); such factors are interdependent charac-

teristics of oligopolies (Brander, 1995b). Consequently, profits

from one firm might directly affect the decisions of another. In

imperfect competitive markets, firms are mutually interde-

pendent while governments could increase domestic industrial

competitiveness through appropriate trade policies.

Strategic trade theory stresses the government’s role in do-

mestic industrial development. While conventional free trade

theory promotes constant comparative advantage, strategic

trade theory advocates dynamic comparative advantage, and

suggests that government and industry are capable of fine-tun-

ing comparative advantage. Two examples include investment

in the Japanese semiconductor industry and support for the

European aviation industry (Reimer & Steigert, 2006). More-

over, comparative advantage might be altered by governmental

and industrial accomplishments. This implies that under perfect

free trade regulations, increased competitiveness could be

achievable through governmental market interference. Thus,

competition serves as the basis for international economic rela-

tionships. However, in imperfect competitive markets, the ef-

forts of one government and industry to increase competitive-

ness might be offset by another, ultimately, propagating an “an

eye for an eye” scenario in international economic relationships

(Thurow, 1992).

Hypothesis

The hypothesis of this article conceives that Chinese energy

diplomacy exhibits neo-mercantilism. This article developed

four sub-hypotheses based on neo-mercantilist theory and re-

cent developments in Chinese energy corporations and energy

diplomacy.

The first sub-hypothesis conceptualizes that economic activi-

ties represe n t national interest s. Thus, the key factor influencing

economic activity is national interest rather than individual

profits. For net oil importing countries, basic interests regard

strengthening energy security. If the energy diplomacy of the

target country resembles neo-mercantilism, the costs of invest-

ment and profits are not principal issues for energy corporations

when making overseas investments. Therefore, the first sub-

hypothesis is: the costs of investment and profits are not key

issues for Chinese energy corporations when making overseas

investments. The relationships are rather weak and insignificant,

and since another major claim of neo-mercantilism, advocating

development through “Rational Planning”, then state interfer-

ence and resource integration for boosting industrial develop-

ment are appropriate. It is widely accepted that profit and in-

vestment decisions of individual firms may be mutually in-

compatible with the interests and decision-making logic of the

nation. Therefore, under these conditions, it is expected that

individual firms play comparatively less significant roles in

making overseas investment decisions. Hence, the second

sub-hypothesis is: when making overseas investment decisions,

326

H.-C. YEH, C.-W. YU

the main concern for Chinese energy corporations is to ration-

alize government policies on national energy security. Fur-

thermore, though the political-economic system in China con-

tributed to the assumption that Chinese energy diplomacy re-

sembles neo-mercantilism, this partially overlooks the potential

weaknesses of these corporations. The development of Chinese

energy corporations only began when China implemented its

open-access policies. When China established its energy poli-

cies based upon diversification and outreach, global energy

markets were dominated by Western energy corporations. Un-

der such conditions, overseas investments by Chinese energy

corporations tended to display neo-mercantilism. Thus, the

third sub-hypothesis is: The structure of the international en-

ergy market heavily contributed to the overseas investment

scheme of Chinese energy corporations, which explains why

Chinese energy corporations’ investments overseas appear neo-

mercantilist.

Conversely, though neo-mercantilism places great emphasis

on government interference and industrial protection, the role

of industry is significant. The case studies show (Downs, 2008)

that such transformations may alter government interference in

overseas investments. In old government-centred relationships,

industry complied with government orders when making in-

vestments. However, the transforming relationship between the

government and industry implies that Chinese corporations are

embracing mergers and acquisitions, to lower investment costs,

while simultaneously consolidating the role corporations play

in global energy markets. Hence, the fourth sub-hypothesis is:

The relationship between the government and state-owned en-

terprises (SOEs) is more optimized for energy corporations and

determines investment decisions, since energy corporations are

capable of allocating resources efficiently and merging with

other trans-national corporations to circumvent direct-entry

approaches.

Categorization Criteria and Approach

The empirical results of this study show that energy invest-

ments can be categorized into three categories according to the

investment pattern. The first category addresses the investment

based on the rights associated with oil fields. The host country

government or state-owned energy corporations must partici-

pate in formulating investment contracts. These can further be

divided into three sub-categories. Firstly, the right of explora-

tion; a basic principle associated with oil fields. Corporations

have the right to conduct underground investigations for oil

reserves, regardless of whether they own any right over the

field itself. Secondly, concerns the right to extraction. Though

corporations have oil extraction rights in the host country, it

must be conducted legitimately, which often involves sharing

reserves locally. Thirdly, is the right to purchase oil fields and

their associated rights; this permits oil extraction upon payment

of related taxes. However, corporations do not have to share

reserves locally.

The second category emphasizes the commercial supply of

oil or gas, and has no relation to the rights of the oil field.

Though the resource seller may be the host country or a third-

country energy corporation, the buyer does not have to comply

with the host’s regulations, tariffs, or tax system. Though con-

tracts of this category are not restricted by host government

interference, it is expected that prices will fluctuate through

market mechanisms.

The third category addresses the issue of basic infrastructural

development. Buyers of this category do not obtain tangible

resource supplies. However, through the construction of basic

infrastructure, e.g. refineries, pipes, and storage facilities, buy-

ers may expand their flexibility in the energy market, through

obtaining greater bargaining chips when negotiating with host

governments or state-owned corporations. This contract type is

built upon the basic energy related infrastructure in the host

country, thus the host government or state-owned corporation is

significant in formalizing contracts.

For energy importing nations, the ultimate goal of energy di-

plomacy is to build domestic energy security. Therefore, the

most important mid-term goal is to secure imports of resources

to meet domestic demand in the energy market. Another goal is

to enhance the independence of energy corporations in overseas

markets, to alleviate the fragility and sensitivity of the domestic

energy market. Furthermore, higher levels of independence

limit variations in domestic energy prices, arising from price

fluctuations in international energy markets or regional con-

flicts.

The objective of this article is to test whether China’s energy

diplomacy displays neo-mercantilist tendencies through the

distribution of overseas investment by Chinese energy corpora-

tions. It uses three criteria, based on variables (types of energy

investment), categorization and evaluation, to distinguish the

types of i nvestment . The first evaluates whether the corporation

acquires oil or gas products; the second measures the corpora-

tion’s level of independence in the host country’s energy mar-

ket; and the third, assesses the contribution made to energy

diplomacy. The order of the goals of energy diplomacy implies

that the main concern for importing countries, apart from

building energy security, lies in the acquisition of oil or gas

products. Consequently, levels of independence and contribu-

tions to energy diplomacy, receive less attention. Therefore,

this study focuses on the corporation’s acquisition of resources

and assigns weights accordingly. Thus, a weight of two or zero

is assigned to corporations, based upon their respective re-

source obtaining capabilities.

The second criterion is to evaluate the integrity of the corpo-

ration’s independence. For energy importing countries, one

objective of energy diplomacy is to enhance the independence

of domestic energy corporations in overseas markets. This in-

dependence is affected by interference from the host country or

state-owned corporations and changes triggered by price varia-

tions in the energy market. Upon securing the right of extrac-

tion, corporations are obliged to share their harvest, thus, the

corporation is influenced by the host country. Conversely, re-

source supply contracts depend strongly on price mechanisms

in the energy markets.

Strictly speaking, these criteria impact differently on levels

of independence. The right of extraction is considered a

long-term deficiency, while disturbance arising from market

price mechanisms is short-term and can often be offset. Hence,

this study assigns the weight of one to completely independent

corporations, .5 for disturbances caused by market mecha-

nisms and zero if disturbances from the host country prevail.

The third criterion for weight assignment is the evaluation of

the corporation’s investment in basic infrastructure and contri-

butions to energy diplomacy. In the energy industry, the con-

struction and maintenance of basic infrastructure and explora-

tion of oil fields requires substantial capital investment (La-

tourette, Bernstein, Hanson, Pernin, Knopman, & Overton,

H.-C. YEH, C.-W. YU

328

2003). These are often bargaining chips which third-country

energy corporations use when negotiating with host country

governments or energy corporations. These chips aid the acqui-

sition of the rights of extraction and are often key components

in energy diplomacy. Corporations are assigned weights of 0.5

or zero, depending on their bargaining abilities. These criteria

are summarized in Table 1, along with an overall weight for

each investment category. The significance of this overall

weight is also outlined.

In classifying and managing independent variables, it is nec-

essary to review the hypothesis of this study. The objective is to

test whether China’s energy diplomacy is strongly linked with

neo-mercantilism. The two core concepts are, firstly, that eco-

nomic activities represent national interests and facilitate na-

tional support to industries. The first sub-hypothesis concerns

whether Chinese energy corporations’ investments in overseas

markets are profitable. This question is rather complex and its

evaluation is specific in the energy industry. Starting from 2007,

the Fraser Institute of Canada annually interviewed over 350

executives of trans-national energy corporations. From these

interviews, the Institute presented the investment cost assess-

ments made by trans-national energy corporations to 133 global

regions.

The report focused on sets of 16 questions, which included

the fiscal conditions of the host country’s upstream energy

industry, tax system, local natural gas price, the trade-off for

compromising with governments, regular uncertainties, envi-

ronmental regulations, local infrastructure, trade rules, labour

employment regulations, local public infrastructure, quality and

coverage of geological database, labour capability, land issues,

political stability, and the safety of investors and their property

(Angevine & Cameron, 2007).

The Likert Scale was used to distinguish the evaluations of

each interviewee, and group the questions into distinct catego-

ries: encourages investment, facilitates investment decisions,

slightly impedes investment decisions, strongly impedes in-

vestment decisions, and discourages investment (Angevine &

Cameron, 2007). Furthermore, the report proportioned the in-

terviewee evaluations, thus each category was assigned twenty

per cent respectively. For conducting regression analysis, the

results for each question set were simplified into a single score.

In order to present the score of a condition in a certain region, a

weight from one to five was assigned to the five categories.

Since different interviewees were surveyed, this study inte-

grated the total number of annual interviewees to simplify the

results. The results are reduced to a single score (Figure 1):

Finally, though independent variables were derived from

studies between 2007 and 2010, the precision of this study is

unaffected. Overseas investment from Chinese energy corpora-

tions first began in 1993; however, it wasn’t until 2003 that

large scale expansion of overseas markets commenced. Fur-

thermore, a country’s investment environment is not subject to

extensive transient transformation unless political conflict oc-

curs. With these preconditions, the report published in 2007 is

capable of testing the evaluations made by executives of the

energy industry from 2003 to 2006.

China’s Global Energy Investment Distribution

and Geological Deposition

The Middle East

Middle Eastern countries exercise stringent control on their

domestic oil or gas resources (Cordesman & Al-Rodhan, 2006),

and thus are capable of interfering with markets. The energy

Table 1.

Weight of each dependent variable (categories of energy investment).

Weight

Investm ent category

Directly

obtain oil

supply

Independency

of energy

industry

Beneficial for

other

negotiations WeightInvestm ent category

Right of exploration 0 1 .5 1.5

- Right of investigation,

- Incapable obtaining resources directly

- High levels of independence and ba rgaining power

Right of exploitation 2 0 0 2

- Acquires resources directly

- Shared extraction

- Lowered in d epende nce levels

- No bargaining power

Property right of oil

field 2 1 0 3

- Ensured resource supply

- Vulnerable to market mechanisms

Oil/gas supply 2 .5 0 2.5 - Ensured supply of resourc es

- High levels of indepe nd ence

Basic infrastr ucture 0 1 .5 1.5 - Incapable of securing resources directly

- Increased bargaining power through basic infrastructural

investment

Note: The interaction of the three criteria in each investment category results in an overall weight for each category. Corporation s with the ri ght of invest igation, but inca-

pable of obtaining resources directly, but which have a hi gh level of i ndependence and bargaining ability, have a weight of 1.5. Corporations with the right of extraction are

able to acquir e resources directly, though wh ere the extraction is shared; the independence level is lowered and eliminates the bargaining power. These corp orations are

assigned a weight of two. Moreover, corporations with resource supply contracts ensure a supply of oil or g as; howeve r, they are more vulnerable to energy price markets

and are thus assigned a weight of 2.5. The fourth investment category, the acquisition of the right of the oil field, ensures a supply of resources while at the same time

maintains high levels of independence. Such corporations are assigned with the highest weight of three. Lastly, though importing countries are incapable of obtaining

resource supplies directly through basic infras tructural investment, they hold effective bargaining power through such investments, and thus, a weight of 1.5 is assigned.

H.-C. YEH, C.-W. YU

Figure 1.

The equation for integrating independent variables

market in these countries primarily depicts non-discriminating

state-control where granted property rights over oil fields are

refused to foreign energy enterprises. Under this condition,

from 2003 to 2010, Chinese energy enterprises made 74 in-

vestments in the Middle East with 146 rights of oil fields or

construction work (Table 2 and Figure 2), primarily comprised

from property rights over oil fields, extraction, investigation,

and supply of oil or gas.

Only China’s Middle Eastern investments in Qatar, UAE,

and Oman were higher than global averages for the region.

However, the performance of each index and total performance

in Iraq and Iran were substantially below average. Chinese

energy enterprises’ investments in Iraq and Iran comprised 28%

of their total Middle Eastern investment. Additionally, most

Chinese investments were made in Syria, where the economic

performance was below the global average. According to this

distribution scene, the first sub-hypothesis proposed may, par-

tially, be testified.

The number of investments from Chinese energy enterprises

in each country reflected China’s regional difficulties (Table 3).

The majority of investments went to Syria and Iran, which to-

talled 56.7% of total investments. These nations are isolated

internationally for political and human rights issues. Although

the basic energy-related infrastructures in these countries are

insufficient compared with other regional countries, they exer-

cise absolute control over domestic oil fields and are

well-equipped. The investment scheme made in Syria and Iran

by Chinese energy corporations highlighted China’s investment

targets and preferences.

China’s initial investment in Syria involved cooperation be-

tween Chinese energy enterprises and local government and

enterprises. The Gbeibe oil fields exploited joint-investment

from the CNPC, the Syrian Ministry of Oil, and Syria National

Petroleum Corporation. Another investment path was coopera-

tion with foreign investors, as seen by the merger of Al Furat

Production Company’s stakeholders’ right to cooperate with the

CNPC and the India Petroleum Natural Gas Corporation in

2005. However, from 2009, mergers and acquisitions with for-

eign corporations became the principal investment path for

Chinese enterprises. In 2008, the CNPC merged with Canadian

Tanganyika Oil and acquired eight property rights over oil

fields. In 2010, CNPC merged with a subsidiary of Shell in

Syria, and acquired 40 oil fields.

Conversely, the investments from Chinese energy corpora-

tions in Iran emphasized mutual cooperation between govern-

ments, including state-owned corporations. Reduced Western

investment in Iran may also facilitate Chinese enterprises’ co-

operation with host countries. However, a more critical differ-

ence is that Chinese energy corporations’ investments in Iran

principally focused on basic infrastructure. In the North Pars oil

field, investment from the CNPC expedited liquefied natural

gas factories and transportation facilities for liquefied natural

gas. In 2009, the CNPC promised Iran US$6.5 billion in in-

vestment for refining equipment. Hence, it can be suggested

that a mutually beneficial relationship existed between Chinese

energy corporations and the Iranian government. This enabled

Iran to obtain the basic infrastructure needed for its oil refiner-

ies, while at the same time granted China with the rights asso-

ciated with Iranian oil and gas fields.

Central Asia

Trans-national energy enterprises were only able to increase

their energy-related investments in Central Asia after the col-

lapse of the USSR. Cooperation and dialog between Shanghai

and the five countries of former Soviet Central Asia (Kazakh-

stan, Kyrgyzstan, Uzbekistan, Tajikistan and Turkmenistan),

and the Shanghai cooperation organization, strengthened mu-

tual political trust between Central Asia and China. Addition-

ally, no competitive relations among oil or gas exporting coun-

tries existed, and therefore facilitated intensive energy-related

cooperation between these countries (Nincic, 2009). Compared

with the Middle East where unfavourable conditions arose due

to host country interference, interference by Central Asian

countries in energy markets proved beneficial to China.

Table 4 and Figure 3 show how, from 2003 to 2010, a total

of 43 investment projects were made in Central Asia by Chi-

nese energy corporations, which included 160 right of oil fields

or construction work. These were principally rights of investi-

gation, extraction, property rights of oil fields, and supply of oil

or gas.

Investing patterns were credited in facilitating Chinese en-

ergy corporations’ acquisition of 160 rights in 43 investment

projects. The main approach for Chinese energy corporations’

regional investments was the establishment of new energy cor-

porations through joint-investment with host country’s enter-

prises and the merger with third-country enterprises. From 2003

to 2010, Chinese energy corporations acquired 39 rights

through seven merger and acquisition projects. Five joint ven-

tures were established, and 84 rights obtained, through coop-

eration with state-owned energy enterprises in Kazakhstan and

Uzbekistan, respectively. The merger and acquisition project

completed by the CNPC, in 2009, is the best example of this

investment pattern. The CNPC and Khazak National Petroleum

and Natural Gas Corporation, co-financed Mangistau Invest-

ments B.V. in the Netherlan d s. M an g is t a u Investments

B.V. purchased all the properties of Mangistau Munai Gas

(MMG) and acquired 15 rights of investigation and extraction

each from the Kalamkas and Zhetybai regions.

The CNPC’s four oil-gas pipe construction projects in Ka-

H.-C. YEH, C.-W. YU

Table 2.

Chinese energy enterprises’ investment in the Middle East between 2003 and 2010.

Right of oil fiel d Basic infrastructure

Country Right of

investigation Right of

extraction Property right

of oil field

Oil/gas

supply Refinement of

crude oil Store of

crude oil T ra nsp ort of

crude oil

Total

Qatar 0 0 0 1 0 0 0 1

Iraq 2 6 1 0 0 1 0 10

Iran 4 11 5 6 5 0 0 31

Saudi Arabia 9 1 1 5 6 0 0 22

Azerbaijan 0 0 4 0 0 0 0 4

UAE 0 0 1 0 0 0 1 2

Oman 2 1 0 4 0 0 0 7

Kuwait 0 4 0 1 0 0 0 5

Syria 2 0 50 1 1 0 0 54

Yemen 5 4 1 0 0 0 0 10

Total 24 27 63 18 12 1 1 146

Table 3.

Investigation result of Chinese investments in Middle Eastern Nations from Global Energy Investigation Result Report.

Country Finance Tax

regulations Price of

natural gas Price paid for rules

compromised Uncertainties of

rules Environmental

rules

Local

production

facilities

Trade

rules Labour

regulations

Average

(shown in

Report) 3.862 3.863 3.73 3.641 3.643 3.76 3.781 3.852 3.787

Qatar 4.04 4.06 3.86 4.00 4.11 4.01 3.84 4.16 3.90

Iraq 3.01 3.07 2.97 3.26 2.69 3.81 3.30 3.38 3.47

Iran 2.22 2.56 2.97 3.26 2.69 3.81 3.30 3.38 3.47

Saudi Arabia N/A N/A N/A N/A N/A N/A N/A N/A N/A

Azerbaijan 3.86 3.76 3.47 3.48 3.50 3.85 3.59 3.71 3.70

UAE 3.80 4.05 3.75 3.84 3.85 3.89 3.93 4.15 3.87

Oman 3.81 3.69 3.71 3.73 3.82 3.83 3.74 3.88 3.55

Kuwait 3.16 3.54 3.49 3.42 3.49 3.89 3.36 3.60 3.49

Syria 3.49 3.45 3.38 3.45 3.33 3.89 3.38 3.35 3.30

Yemen 3.55 3.65 3.02 3.52 3.45 3.93 3.48 3.70 3.24

Country Public basic

infrastructure Business

infrastructure Geologic

database Labour capabilit iesLand disputesPolitical

stability Security Total

Average

(shown in

Report) 3.761 3.837 3.992 3.921 3.993 3.889 4.084 61.40

Qatar 4.26 4.25 4.04 3.80 4.16 4.27 4.32 65.08

Iraq 2.71 2.99 3.52 3.31 3.23 2.29 2.51 49.52

Iran 2.99 2.95 3.37 3.37 3.21 2.75 3.29 46.34

Saudi Arabia N/A N/A N/A N/A N/A N/A N/A N/A

Azerbaijan 3.66 3.29 3.45 3.82 3.8 3.43 3.74 58.11

UAE 4.24 4.31 3.99 4.06 4.34 4.37 4.28 64.72

Oman 3.76 3.79 4.04 3.91 4.29 4.13 4.29 61.97

Kuwait 3.75 3.72 3.81 3.78 3.97 3.90 4.05 58.42

Syria 3.29 3.26 3.36 3.62 3.63 3.36 3.59 55.13

Yemen 2.84 3.11 3.46 3.4 3.43 2.81 2.95 53.54

330

H.-C. YEH, C.-W. YU

Table 4.

Chinese energy enterprises’ investment in Central Asia between 2003 and 2010.

Right of oil fiel d Basic infrastructure

Country Right of

investigation Right of

extraction Property right of

oil field

Oil/gas

supply Refinement of

crude oil Store of crude

oil T ra nsp ort of

crude oil

Total

Kazakhstan 30 21 25 2 2 0 3 83

Turkmenistan 2 5 1 3 0 0 1 12

Uzbekistan 31 27 5 2 0 0 0 65

Total 63 53 31 7 2 0 4 160



Figure 2.

Chinese energy enterprises’ investment in the Middle East between 2003 and 2010.



Figure 3.

Chinese energy enterprises’ investment in Central Asia between 2003 and 2010.

H.-C. YEH, C.-W. YU

332

zakhstan and Turkmenistan signalled another important char-

acteristic of China’s regional energy diplomacy. These four

construction projects built three resource pipelines linked to

China through Xinjiang, and connected directly to the west-east

network. The first pipeline connected Atyrau, Western Kazakh-

stan, with Alashan, Xinjiang. The second connected Almaty

with Korla, Xinjiang, and the third connected the Amu River

with Huoerguosi, Xinjiang.

Notably, managers from trans-national energy enterprises

appraised poorly the three Central Asian countries. In a report

covering 2007 to 2010, the economic performance of these

three countries lagged behind the global average. Environ-

mental regulation in Kazakhstan and Uzbekistan only slightly

exceeded the global average. The remaining 15 indices fell

below their respective global averages (Table 5). The overall

performance of Turkmenistan and business infrastructures in

Kazakhstan and Uzbekistan ranke d among th e lowest globally.

Africa

Africa constitutes a major investment destination for many

trans-national energy corporations, due to the incapability of

host countries to refuse foreign corporate capital (African De-

velopment Bank and the African Union, 2009). Table 6 and

Figure 4 show how, from 2003 to 2010, 71 investment projects

were initiated by Chinese energy corporations in 16 African

countries. These led to the acquisition of 165 rights of oil fields

or construction work, of which, 112, or 68.3% of total rights,

were the right of investigati on and extraction.

The investment scheme by Chinese energy corporations in

Africa reflected Africa’s relative development weakness in the

international energy market. Unlike Middle Eastern nations

who have significant control over their oil fields or the three

Central Asian countries, the African energy market was the

closest conceptually to a perfect market. Due to this relative

regional development weakness, Chinese energy corporations’

investments depicted prominent neo-mercantilist concepts,

especially in investment patterns, competition, and cooperation

with European/American energy enterprises.

Firstly, Chinese energy corporations often obtained property

rights to oil fields or supply of oil or gas through investments in

basic energy-related infrastructure. In most cases with Chad as

an exception, China built oil refineries in countries with exten-

sive oil fields or in countries where China imported crude oil.

Sudan, Nigeria, and Algeria contained large oil fields, while

Angola and Niger imported oil from China. Nigeria and Niger

acted as examples of “construction work for oil and gas”. The

CNPC purchased priority development rights in the OPL721,

732, 281, and 471 regions of Nigeria in May, 2006. Subse-

quently, the Chinese government promised to buy the Kaduna

oil refinery in Nigeria, for US $2 billion. Furthermore, the

CNPC’s construction work on oil refineries in Niger in No-

vember, 2008, propagated a three-year contract with the right of

extraction in the Agedem region.

Secondly, Western energy enterprises had large investments

in West Africa, particularly in Nigeria and Gabon. Until 2008,

China only obtained (Angevine & Cameron, 2007) rights in

these respective countries. Following the global financial crisis,

however, China obtained eight rights of investigation and 17

rights associated with nine oil fields, through the merger and

acquisition of Addax Petroleum, in 2009.

Table 7 shows that the economic evaluations of China’s in-

vestments in Africa were lower than the global average. The

political stability and security indexes of Niger, Algeria, Nige-

ria, Democratic Republic of Congo, Sudan, and Chad were far

below the average. The economic performance of Nigeria, the

recipient of most Chinese investments, ranked lowest.

Why Mercantilism?

Testing Sub-Hypothesis #1

This study utilized information from Tables 2 to 6 and con-

ducted a Pearson Correlation Analysis; the results are shown in

Table 5.

Investigation result of Chi n es e in v es tments in Centra l A sian Nations from Global Energy Investigation Result Report.

Country Finance Tax

regulations Price of

natural gas

Price paid fo r

rules

comp ro mi se d

Uncertainties of

rules Environmental

rules Local production

facilities Trade rulesLabour

regulations

Average

(shown in

Report) 3.86 3.86 3.73 3.64 3.64 3.76 3.78 3.85 3.79

Kazakhstan 3.39 3.45 3.12 3.08 2.85 3.72 3.47 3.29 3.32

Turkmenistan 2.99 2.95 3.20 2.81 2.79 3.51 3.22 3.22 3.17

Uzbekistan 3.41 3.48 3.39 3.11 2.80 3.96 3.48 3.48 3.30

Country Public basic

infrastructure Business

infrastructure Geologic

database Labour

capabilities Land disputesPolitical stabilitySecurity Total

Average

(shown in

Report) 3.76 3.84 3.99 3.92 3.99 3.89 4.08 61.40

Turkmenistan 3.12 2.78 3.20 3.57 3.81 3.22 3.06 52.45

Kazakhstan 2.99 3.08 3.33 3.68 3.86 3.45 3.20 51.46

Uzbekistan 3.39 2.95 3.18 3.72 3.85 3.37 3.42 54.28

H.-C. YEH, C.-W. YU

Table 6.

Chinese energy enterprises’ investment in Africa between 2003 and 2010.

Right of oil fiel d Basic infrastructure

Country Right of

investigation Right of

extraction Property right

of oil field

Oil/gas

supply Refinement of

crude oil Store of crude

oil T ra nspo rt of

crude oil

Total

Sudan 1 1 5 0 0 0 2 9

Algeria 3 3 2 1 3 1 0 13

Libya 1 0 0 1 0 0 2 4

Nigeria 11 12 4 1 0 0 0 28

Gabon 8 3 6 1 0 0 0 18

Tunisia 14 14 1 0 0 0 0 29

Mauritania 6 4 1 1 0 0 0 12

Morocco 3 0 0 0 0 0 0 3

Kenya 6 0 0 0 0 0 4 10

Angola 4 1 5 0 1 0 0 11

Somalia 1 0 0 0 0 0 0 1

Niger 2 2 0 0 2 0 2 8

Equatoria l Guinea 1 1 0 0 0 0 0 2

Cameroon 2 0 0 0 0 0 0 2

Chad 3 3 3 0 2 0 1 12

Republic of C ongo 2 0 0 0 0 0 0 2

Total 68 44 27 5 8 1 11 164



Figure 4.

Chinese energy enterprises’ investment in Africa between 2003 and 2010.

H.-C. YEH, C.-W. YU

334

Table 7.

Investigation result of Chinese investments in African Nations from Global Energy Investigation Result Report.

Country Finance

Tax

regulations Price of

natural gas

Price paid fo r

rules

compromised

Uncertaintie s of

rules Environmental

rules

Local

production

facilities

Trade

rules Labour

regulations

Average (shown in

Report) 3.86 3.86 3.73 3.64 3.64 3.76 3.78 3.85 3.79

Gabon 3.78 3.76 3.40 3.55 3.50 3.80 3.70 3.70 3.53

Niger 3.39 3.55 3.65 3.33 3.07 3.70 3.41 3.07 3.26

Angola 3.78 3.69 3.23 3.55 3.60 4.07 3.46 3.92 3.58

Libya 3.10 3.25 3.59 3.27 3.37 3.99 3.35 3.51 3.47

Equatorial Guinea 3.32 3.55 3.49 3.31 3.34 3.77 3.61 3.67 3.50

Nigeria 3.18 3.14 3.15 3.13 2.98 3.65 3.04 3.45 2.98

Kenya N/A N/A N/A N/A N/A N/A N/A N/A N/A

Algeria 2.92 3.2 3.36 3.28 3.13 3.96 3.54 3.51 3.58

Chad 3.48 3.54 3.11 3.35 3.36 4.10 3.48 3.28 3.89

Tunisia 3.62 3.55 3.79 3.57 3.42 3.78 3.25 3.41 3.53

Mauritania N/A N/A N/A N/A N/A N/A N/A N/A N/A

Republic of Congo 3.51 3.49 3.29 3.44 3.55 3.95 3.32 3.45 3.49

Somalia N/A N/A N/A N/A N/A N/A N/A N/A N/A

Cameroon 3.84 3.42 3.22 3.69 3.45 3.93 3.93 3.83 3.68

Morocco 4.00 3.89 3.49 3.85 4.03 4.02 3.85 3.58 3.85

Sudan 3.10 3.18 3.38 3.15 2.98 3.90 3.31 3.33 3.62

Country Public basic

infrastructure Business

infrastructure Geologic

database Labour

capabilities Land disputes Political

stability Security Total

Average(shown in

Report) 3.76 3.84 3.99 3.92 3.99 3.89 4.08 61.40

Gabon 3.15 3.39 3.52 3.59 3.66 3.44 3.61 57.08

Niger 2.46 2.65 3.02 2.89 2.89 2.76 3.08 50.18

Angola 3.00 3.27 3.67 3.68 3.93 3.31 3.59 57.33

Libya 3.13 3.12 3.61 3.99 4.00 3.58 3.81 56.14

Equatorial Guinea 2.97 3.15 3.44 3.28 3.43 3.07 3.36 54.26

Nigeria 2.61 3.14 3.48 3.19 2.88 2.33 2.42 48.75

Kenya N/A N/A N/A N/A N/A N/A N/A N/A

Algeria 3.43 3.49 3.66 3.74 3.87 2.99 3.08 54.74

Chad 2.47 2.50 3.38 3.54 2.99 2.28 2.40 51.15

Tunisia 3.83 3.83 3.71 3.75 4.28 3.53 3.82 58.67

Mauritania N/A N/A N/A N/A N/A N/A N/A N/A

Republic of Congo 2.86 3.05 3.19 3.60 3.53 3.07 3.11 53.90

Somalia N/A N/A N/A N/A N/A N/A N/A N/A

Cameroon 3.13 3.41 3.55 3.59 3.66 3.68 3.57 57.58

Morocco 3.46 3.56 3.75 3.92 3.94 3.97 4.20 61.36

Sudan 2.51 3.00 3.06 2.93 2.89 2.15 2.50 48.99

Table 8. Related data for Somalia, Kenya, Mauritania, and

Saudi Arabia were excluded because such information was not

provided in the secondary resources of this study. When as-

sessing the connection between global distribution and the host

country’s average economic evaluation, it became obvious that

the host country’s investment environment was not the main

variable which Chinese energy enterprises interpreted when

making overseas investment decisions. Moreover, a negative

correlation existed between the host country’s investment en-

vironment and the basic infrastructure construction contract

signed by China globally.

Table 8 shows a negative correlation between Chinese en-

ergy corporations’ overseas investment and global energy en-

terprise’s executive evaluation over the past five years. There-

fore, the first sub-hypothesis revealed that Chinese energy cor-

porations’ overseas investments were not dependent on the

economic logic of the enterprise level, investment costs or prof-

itability.

Such negative correlations partially fell between 2007 and

2010 (Table 9), though the scale of this decline was indistinct

H.-C. YEH, C.-W. YU

and might be attributed to the global financial crisis. When

Western enterprises were affected by the crisis, Chinese energy

enterprises’ investments in basic infrastructure in countries with

poor economic performance dropped. The negative correlation

between rights of oil fields and economic evaluation similarly

declined. It was likely that the crisis weakened Western energy

enterprises, and contributed to this trend. However, when com-

paring investment distributions from 2003 onwards, and from

2007 onwards, with the host country’s economic evaluation,

both distributions reflected that economic components of the

enterprise were not significant factors that Chinese energy cor-

porations considered when making overseas investment deci-

sions.

Testing Sub-Hypothesis #2

According to the study by Downs, many participants agreed

on outreaching when overseas investment issues were raised

when negotiating energy security policies. However, due to low

commercial benefits, Chinese energy corporations became

strongly opposed to building foreign oil pipelines (Downs,

2004). From the overseas investments of Chinese energy cor-

porations, only 16 oil or gas foreign pipelines were built. Of

these, the most important investment which best reflected the

second sub-hypothesis in this study, was located in Central

Asia.

A total of four pipelines were built in Central Asia by Chinese

energy corporations, and were largely related to China’s energy

security policy of “west gas-transport east”. As mentioned in

China’s “Ten One Five Planning”, it was vitally important to

expand domestic and overseas oil or gas resource investigations

and complete the construction of national pipeline networks.

The objective was to complete transportation channels such that

oil produced in the west could be transported east, oil produced

in the north could be transported south, and gas produced in the

west could be transported east (Xinhua, 2006). The CNPC co-

operated with Kazakhstan in building crude oil pipelines con-

necting Atasu and Atyrau, Kazakhstan with Alashan, Xinjiang.

Later, from 2006, construction work began on oil pipelines

connecting Almaty, Kazakhstan with Korla, Xinjiang.

Of these two pipelines, the first pipeline (Atasu-Atyrau-

Alashan) connected with the Caspian Pipeline Consortium

(CPC) network. Furthermore, the two pipelines stretched west-

ward into Azerbaijan. To the north, the pipelines connected

with far eastern oil or gas networks in Russia; and to the south-

east, the pipelines connected to oil or gas fields in South/North

Pars, Iran; to the southwest, the pipelines connected to oil or

gas networks in the Persian Gulf (Jiang & Sinton, 2011).

Secondly, regardless of economic or security logic, for en-

ergy net importing nations, in general, the distance between the

energy production and consumption sites is proportional to the

risk presented in transportation. The economic and security

costs increase when more resources are devoted to security

when negotiating with the host country. If the nation’s energy

security strategy was a motivation for Chinese energy corpora-

tion’s overseas investments decisions, then, the overseas in-

vestment distribution will depict a negative correlation with

transport distance.

By accounting for China’s heavy reliance on oil and gas im-

ports, this study focuses on the geographic centre of each coun-

try when measuring the linear distance between “China” (cen-

tred on Gansu at 35˚N, 105˚E) and the host country. Table 10

shows the distance between the geographic centre of China

and the 29 countries where Chinese energy corporations in-

vested overseas. Figure 5 visualizes the ratio of investments

made to geographic distance from China, for recipient coun-

tries.

Table 8.

Correlation between Ch i n ese energy industries ’ global investments and host country’s economic apprai sal between 2003 and 2010.

Total weight of

energy

investments

Right of

investigation Right of

extraction Property right

of oil field Oil/gas supply Basic infrastruc t u r e

Overall economic appraisal –.305 –.207 –.353 –.147 –.205 –.534 **

Financial sy st em –.309 –.164 –.384 –.112 –.483* –.677**

Taxation system –.415* –.272 –.438* –.207 –.472* –.625**

Local price for natura l gas –.22 1 –.128 –.225 –.133 –.184 –.270

Price paid for rules

compromised –.486* –.393 –.562** –.201 –.535** –.646**

Uncertainties of rules –.477* –.424* –.597** –.190 –.349 –.533**

Environme ntal rules –.397* –.290 –.442* –.171 –.599** –.446*

Local prod u ction needs –.416* –.274 –.471* –.218 –.371 –.460*

Trade rules –.386 –.201 –.386 –.211 –.483* –.663**

Labour employment rules –.536** –.424* –.547** –.301 –.482* –.300

Local public basic

infrastructure –.086 –.058 –.072 –.055 .106 –.366

Business infra str uc t ure –.212 –.171 –.22 1 –.106 –.071 –.412*

Quality of geologic

database –.320 –.259 –.278 –.223 .020 –.344

Labour ca pabilities –.011 .044 –.058 .002 .088 –.265

Land dispute s –.013 .086 –.013 –.033 .099 –.319

Political stability –. 076 –.027 – .152 –.017 .088 –.357

Security –.138 –.129 –.221 –.040 .113 –.352

Note: Made by author; a single *mark means correlation does exist; a double ** mark means there is a high correlation.

H.-C. YEH, C.-W. YU

Table 9.

Correlation between C h i n e s e energy industries’ global investments and host country ’s economic appraisal between 2007 and 2010.

Total weight of energy

investments Right of

investigation Right of

extraction Property rights of oil

field Oil/gas

supply Basic infrastructure

Overall economic appraisal –.217 –.239 –.393 –.048 –.108 –.415

Financial system –.244 –.225 –.495* –.020 –.341 –.561*

Taxation system –.321 –.352 –.559* –.078 –.328 –.400

Local price for natura l gas –.156 –.225 –.355 –.016 –.100 –.102

Price paid for rules compromised –.333 –.407 –.595** –.052 –.506* –.467

Uncertainties of rules –.274 –.337 –.509* –.050 –.336 –.296

Environmental rules –.309 –.428 –.593** –.022 –.546* –.409

Local production needs –.363 –.253 –.452 –.174 –.286 –.431

Trade rules –.364 –.189 –.443 –.160 –.402 –.703**

Labour employment rule s –.398 –.308 –.354 –.240 –.374 –.202

Local public basic infrastructure –.077 –.207 –.239 –.0 20 .210 –.256

Business infra str uc t ure –.189 –.202 –.295 –.05 5 –.111 –.358

Quality of geologic database –.288 –.207 –.253 –.184 –.090 –.282

Labour ca pabilities .048 .044 –.043 .058 .222 –.269

Land disputes –.022 .006 –.052 –.007 .280 –.382

Political stability –.002 –.024 –.129 .040 .225 –.278

Security –.019 –.172 –.236 .071 .208 –.164

Note: Made by author; a single *mark means correlation does exist; a double ** mark means there is a high correlation.

Table 10.

Distance between China’s geographic centre and Chinese energy invested nations’ geographic centre.

Country Geographic centre

Distance to China’ s

geographic centre Nation Geographic centre

Distance to China’s

geographic centre

Kazakhstan 48˚00'N, 68˚00'E 3365.3539 Kenya 1˚00'N, 38˚00'E 7873.5629

Uzbekistan 41˚00'N, 64˚00'E 3623.974 Cameroon 6˚00'N, 12˚00'E 9908.2869

Turkmenistan 40˚00'N, 60˚00'E 3970.6215 Libya 25˚00'N, 17˚00'E 8286.1855

Iran 32˚00'N, 53˚00'E 4784.0869 Tunisia 34˚00'N, 9˚00'E 8408.7468

Oman 21˚00'N, 57˚00'E 4917.0762 Chad 15˚00'N, 19˚00'E 8710.7184

Azerbaijan 40˚30'N, 47˚30'E 5030.0124 Angola 12˚30'N, 18˚30'E 8940.4360

UAE 24˚00'N, 54˚00'E 5035.2235 Algeria 28˚00'N, 3˚00'E 9258.5833

Qatar 25˚30'N, 51˚15'E 5232.0708 Morocco 32˚00'N, 5˚00'W 9595.2247

Iraq 33˚00'N, 44˚00'E 5543.7272 Niger 16˚00'N, 8˚00'E 9622.1817

Kuwait 29˚30'N, 45˚45'E 5566.4982 Nigeria 10˚00'N, 8˚00'E 10010.5420

Saudi Arabia 2 5˚00'N, 45˚00'E 5805.2351 Republic of C ongo 1˚00'S, 15˚00'E 10082.6020

Syria 35˚00'N, 38˚00'E 5984.4918 Gabon 1˚00'S, 11˚45'E 10278.4390

Yemen 15˚00'N, 48˚00'E 6077.1710 Equatorial Guinea 2˚00'N, 10˚00'E 10346.3060

Somalia 10˚00'N, 49˚00'E 6298.9660 Mauritania 20˚00'N , 12˚00'W 11000.297

Sudan 15˚00'N, 30˚00'E 7716.0383

Note: Ratio of investment ag ainst distance from China.

336

H.-C. YEH, C.-W. YU

Figure 5.

Visualisation of ratio of inv e s t ments made to geographic distance from China, for global recipients o f Chinese energy enterprises’.

Table 11 analyzed the above data and the right of investiga-

tion, extraction, oil fields, and supply of oil or gas acquired by

Chinese energy corporations overseas. The four investment

categories depict inverse relations with distance for supply of

oil or gas.

Finally, from 2003 to 2010, China reaffirmed its energy se-

curity policy of outreach and diversification, and emphasized

its “west gas-transport east” policy and the strategy mentioned

in the “Ten One Five Planning”:

“Expand oil and natural gas resource investigations ··· call

for equalized cooperation; mutual beneficial scenarios, expand

overseas cooperative development in oil or gas resources ··· ac-

celerate construction of oil or gas pipeline networks and related

infrastructure, and gradually complete national pipeline net-

works; constructing west oil-transport east, north oil-transport

south networks; construct secondary west-east oil pipelines, and

ground transportation importing oil or gas pipelines when nec-

essary” (Xinhua, 2006).

This official Chinese government document highlights that

China’s energy security policy is built with Xinjiang as the

focus. This connection point was built to link overseas oil or

gas supplies with domestic consumers. A national oil or gas

pipeline network serves as the basis for domestic consumption

which is linked to oil pipelines connected with overseas oil

production. By 2007, the CNPC had signed large scale con-

tracts for natural gas with Turkmenistan and Uzbekistan. Fur-

thermore, China had an agreement with Turkmenistan con-

cerning supplies of oil or gas over the next thirty years.

In cross-analyzing these three types of evidence, it is plausi-

ble that the negative correlation between the oil or gas supply

and distance may be accredited to meeting China’s domestic

energy security policy, and explains the oil and gas supply con-

tracts signed with nearby countries.

Testing Sub-Hypothesis #3

The Effects of International Energy Market Structure on

Chinese Energy Corporations Investment Strategy Tables 3, 5,

and 7 show that, of all the Chinese energy corporations’ in-

vestments in Central Asia, the Middle East, and Africa from

2007 to 2010, only Qatar (65.08), UAE (64.72), Oman (61.79),

Morocco (61.29), and Tunisia (59.34) had averages that ex-

ceeded the average of all countries in the same period (exclud-

ing Kenya, Saudi Arabia, and Somalia). The phenomenon sig-

nalled that economic profits or cost consideration was not in-

fluential in overseas investment decisions. However, it is be-

lieved that the recent development of Chinese energy corpora-

tions in the international energy market might have also con-

tributed to such phenomenon.

While China established its energy security policy through

outreach and diversification (Table 12 and Figure 6), in 2004,

the ratio of global oil exports to China was rather low. This

distribution suggested that, Chinese energy corporations faced

difficulties in the international energy market, during the initial

stages of outreaching.

If the third sub-hypothesis is affirmable, and associated with

mercantilism, then the current government should prioritize

aiding energy corporations through outreach. For the govern-

ment, it is more beneficial to invest in countries with sound,

rather than weak, mutual interactions. Furthermore, government

aid contributes to diplomacy and also facilitates overseas in-

vestments by energy corporations. Moreover, since Western

enterprises invested relatively less in these countries, then entry

barriers for Chinese enterprises are reduced.

The relationship between these oil producing countries and

H.-C. YEH, C.-W. YU

Table 11.

Correlation between distance and Chinese foreign investment categories.

Right of investigation Right of extraction Property right of oil field Oil/gas supply Total

Distance to China’ s

geographic centre –.274 –.362 –.243 –.474* –.395*

Source of Data: Made by author acco rding to data listed in Tables 2-7; a single * mark means correlation does ex ist; a double ** mark means there is a high correlation.

Investment.

Table 12.

Oil export states’ export destination and quantity in 2004 (in ten million barrels).

Destination United States Canada Mexico Central/South AmericaEurope

Former Soviet

Union Australia/Asian

Region

Total amount

exported to China .7 0 0 4.1 2.6 18 2.2

Amount of gl o bal

export 47.6 106.2 106.2 159.3 97.4 318.9 11

Amount exported to

China

(in percentage) 1.47% 0% 0% 2.57% 2.67% 5.64% 20%

Others in

Asia Pacific Region North Africa East/South

Africa Middle East Japan West Africa Other Re gions

Total amount

exported to China 40 2.1 5.8 62.8 2.1 27.5 .5

Amount of gl o bal

Export 117.1 144.5 12.2 975.2 3.8 201.9 63.7

Amount exported to

China

(percentage wise) 34.16% 1.45% 47.54% 6.44% 55.26% 13.62% .785%



Figure 6.

Percentage total exports from oil exporting states to China, in 2004.

China roughly subdivides into two categories: first, positive

interaction between China and the oil producing country; the

countries of Central Asia have solid records of cooperation with

China due to the Shanghai five countries and Shanghai coop-

erative organizations (Oresman, 2007; Fravel, 2005; Gill, 2007;

Sutter, 2008). China established close military ties with Iran

338

H.-C. YEH, C.-W. YU

(Garver, 2006; By man, 2001; Gill, 2007) while at the same time

fostered solid friendships with Sudan, Algeria, Libya, and Syria

during the Cold War (Taylor, 2004; Snow, 1995; Tull, 2006).

Another category characterized by long-term national inter-

nal conflicts and where Western energy corporations have

largely avoided, includes countries like Angola and Somalia.

Table 13 shows that each type of investment project made by

Chinese energy corporations in these countries amounted to

more than half of the total investments in Central Asia, the

Middle East, and Africa. The right of oil fields, the most critical

investment, accounted for 81% of total investment in these

regions. Furthermore, China acquired far more right of oil

fields in these countries than the remaining 19 countries. This

highlighted how overseas investment by Chinese energy cor-

porations was affected by national security and political con-

siderations.

Secondly, a positive correlation existed between Chinese en-

ergy corporations’ investment in basic regional infrastructure

and the number of rights acquired (Table 14). This correlation

is particularly notable in the supply of oil or gas in the Middle

East and the right of oil fields in Central Asia. This distribution

reflected China’s relative weaknesses in the international mar-

ket that necessitated investment in basic infrastructure in order

to gain certain energy rights. Of all the rights, including the

rights of investigation, extraction, oil fields, and the supply of

oil or gas, the rights of oil fields granted the highest level of

independence. Hence, in Central Asia where fewer investments

were from Western enterprises, and where host countries were

more pro-China, the ratio for exchanging rights of oil fields

with basic infrastructure investment was the highest. Con-

versely, in the Middle East where the host countries held abso-

lute control over the rights of oil fields, contracts on supply of

oil or gas were more common.

In May 2006, the CNPC purchased the rights of investigation

and priority development from four regions in Nigeria (OPL721,

732, 281, and 471). Following this, China promised to purchase

the Kaduna oil refinery in Nigeria for US$2 billion. In Novem-

ber 2008, the CNPC contracted the construction of oil refineries

in Niger, which enabled China to obtain a three-year term of

rights of extraction in the Agedem region. Furthermore, the

Chinese government promised Sudan and Algeria investments

for constructing and expanding oil refineries while simultane-

ously purchasing oil fields from these host countries.

The same phenomenon occurred in the oil field investment

project between CNOOC and North Pars, Iran. CNOOC an-

nounced its resolution to build oil refineries and liquefied natu-

ral gas transportation facilities in Iran. Once the investment

project in South Pars was settled, the CNPC announced its US

$1.8 billion investment for constructing a liquefied natural gas

factory. Similar acts in Central Asia by China were seen to be

more evident and diversified, in that besides constructing oil

refineries, China signed a contract with Kazakhstan after the

global financial crisis, stating that Kazakhstan agreed to the

CNPC’s purchase of Mangistau Munai Gas, in 2009. Addition-

ally, such acts were seen through energy cooperation between

China and Russia, Brazil, and Venezuela.

Testing Sub-Hypothesis #4

Table 15 and Figure 7 suggest that the main investing pat-

tern for overseas investment of Chinese energy corporations

was through the merger and acquisition of foreign enterprises.

Table 13.

Chinese oil/gas investment in closely interacted nations.

Right of oil fiel d Basic infrastructure

Country Right of

investigation Right o f

extraction Property right of

oil field

Oil/gas

supply Refinement of

crude oil Store of crude

oil T ra nspo rt of

crude oil

Total

Iran 4 11 5 6 5 0 0 31

Syria 2 0 50 1 1 0 0 54

Kazakhstan 30 21 25 2 2 0 3 83

Turkmenistan 2 5 1 3 0 0 1 12

Uzbekistan 31 27 5 2 0 0 0 65

Sudan 1 1 5 0 0 0 2 9

Algeria 3 3 2 1 3 1 0 13

Libya 1 0 0 1 0 0 2 4

Angola 4 1 5 0 1 0 0 11

Somalia 1 0 0 0 0 0 0 1

Total 79 69 98 16 12 1 8 283

Number of total

overseas investments 155 124 121 30 22 2 16 470

Percentage of overseas

investmen ts accounted for 50.97% 55.65% 80.99% 53.33%54.55% 50% 50% 60.21%

Source of Data: Made by author according to data listed in Tables 2-7.

H.-C. YEH, C.-W. YU

Table 14.

Correlation between Chinese-built basic energy infrastructures and energy rights gained.

Middle East, Central Asia and Africa

Total weight of energy

investments Right of investigation Right of extraction Property right of oil field Oil/gas supply

Basic infrast ructures .333 .159 .211 .213 .353

Middle East

Total weight of energy

investments Right of investigation Right of extraction Property right of oil field Oil/gas supply

Basic infrast ructures .304 –.091 .395 .102 .718*

Central Asia

Total weight of energy

investments Right of investigation Right of extraction Property right of oil field Oil/gas supply

Basic infra st ructures .643 .298 .066 .941* –.327

Africa

Total weight of energy

investments Right of investigation Right of extraction Property right of oil field Oil/gas supply

Basic infra s tructures –.013 –.136 –.182 .032 –.106

Source of Data: Made by author according to data listed in Tables 2-7.

Table 15.

Rights gained by Chinese energy enterprises through merger and acqui s ition within overall rights gained.

Right of oil fiel d Basic infrastructure

Right of

investigation Right of

extraction Property right

of oil field

Oil/gas

supply Refinement

of crude oilStore of

crude oil T ransp ort of

crude oil

Total

Amount 57 35 92 0 1 0 0 155

Percentage (%) 36.7 7 28.23 76.03 .00 4.55 .00 .00 39.36

Figure 7.

Rights gained by Chinese energy enterprises, throug h mergers and acquisitions, displaying overall rights gained.

In mergers and acquisitions, enterprises had greater independ-

ence and profit-to-loss ratios than through negotiations with the

host country led by the government. From 2003 to 2010,

76.03% of the total rights of oil fields acquired by Chinese

energy corporations were gained through mergers and acquisi-

tions. Overseas investment through trans-national mergers and

acquisitions and through merging Western energy corporations

compensated for deficient extraction technologies. Such in-

vestments helped energy corporations obtain new technology

and also to avoid condition exchange with host countries. In

this way, resource allocation and global deployment became

more efficient and effective.

340

H.-C. YEH, C.-W. YU

Table 16 presents the change in overseas investment quan-

tity by Chinese energy corporations over the years, and the

rights acquired through mergers and acquisitions. Except for

the large decline of overseas mergers and acquisitions around

2007, mergers and acquisitions were seen as the main invest-

ment pattern for overseas investment by Chinese energy corpo-

rations. This trend became increasingly evident after 2008.

From 2003 to 2006, the percentage of mergers and acquisi-

tions was 27.91; however, from 2008 to 2010, this increased to

57.36%. This change signalled the changing relationship be-

tween the Chinese government and the enterprises in China’s

energy diplomacy. Governmental influence in enterprises is

refocusing on broader objectives that are set by the government

while enterprises have complete control over investment deci-

sions.

Literature studying the relationships between China’s energy

SOEs and government concede that the Chinese government

does not dominate the SOEs; on the contrary, since SOEs have

maximized annual profits, the executives have greater influence

over the government than before (Downs, 2009; Liou, 2009).

According to such literature, the observations and inferences

mentioned above do not necessarily mean that Chinese energy

corporations lack any government control. They imply that

once energy security needs were met, investment costs and

profits should then be considered in economic activities.

China’s investment in Central Asia, from 2006 to 2010, estab-

lishing channels of “west gas-transport east” was the main mis-

sion for Chinese energy enterprises. Furthermore, the agree-

ment between the CNPC and Turkmenistan, signed in 2007,

ensured that one billion cubic metres of natural gas will annu-

ally pass through the Central Asia gas pipeline built by the

CNPC, until 2038. This amount increased to 1.3 billion cubic

metres annually in 2008. Upon establishing the annual amount

of piped natural gas, the CNPC purchased Mangistau Munai

Gas and acquired 15 rights of extraction and investigation on

oil fields in Kazakhstan.

In summary, mergers and acquisitions of trans-national en-

terprises became the main approach for overseas investment by

Chinese energy corporations. In contrast to the initial stages of

outreach which necessitated government influence, Chinese

energy corporations are growing stronger internationally,

thereby transforming the relationship between Chinese energy

corporations and the government. While the government influ-

ences enterprises’ investment strategy through energy security

policies, enterprises now adjust investment strategies while

balancing the government’s will and investment costs.

Conclusion: Implications of Chinese Energy

Diplomacy Policy on Neo-Mercantilism

According to the empirical data provided, it is necessary for

the Chinese government to guide and aid Chinese energy cor-

porations in fulfilling the policy of outreach. With the precondi-

tion of C hi na ’ s poli tic a l sy st e m and its energy corporations’ lagged

development in the international market, mercantilism inevitably

became the main approach of Chinese energy diplomacy.

Table 16.

Rights and benefits gained by Chinese energy enterprises through mergers and acquisitions b etween 2003 and 2010.

Year 2003 2004 2005 2006 2007 2008 2009 2010 Total

Overall investment cases 54 61 97 46 15 28 108 61 470

Azerbaijan 1 0 0 0 0 0 0 0 1

Tunisia 24 4 0 0 0 0 0 0 28

Kazakhstan 3 8 20 0 0 2 32 7 42

Iran 0 1 0 0 0 0 0 0 1

Sudan 0 2 0 0 0 0 0 0 2

Gabon 0 0 1 0 0 0 10 0 11

Mauritania 0 0 2 0 0 0 0 0 2

Syria 0 0 1 0 0 8 0 40 49

Nigeria 0 0 0 2 0 0 7 0 9

UAE 0 0 0 1 0 0 0 0 1

Iraq 0 0 0 0 0 0 4 0 4

Niger 0 1 0 0 0 0 0 0 1

Angola 0 0 0 0 0 0 1 0 1

Chad 1 0 0 0 0 0 0 0 1

Cameroon 0 0 0 0 0 0 2 0 2

Total 29 16 24 3 0 10 26 47 155

Rights/benefits gain ed in % 53.70 26.23 24.74 6.52 .00 35.71 51.85 77.05 39.36

H.-C. YEH, C.-W. YU

However, the government and enterprises view overseas en-

ergy investments differently. The government places greater

concern on whether such investment decisions fulfil energy

security policies, whereas, enterprises focus on profitability.

With Chinese energy corporations’ increasing international

development and the recovery of Western enterprises following

the global financial crisis, the investment strategies of Chinese

energy corporations are transforming. Though these strategies

for overseas investment are still based on governmental energy

security policies, Chinese energy corporations are capable of

pioneering numerous key factors and hence achieving effi-

ciency. One key adjustment is to gradually decrease negotia-

tions between the host and Chinese government. Instead, Chi-

nese energy corporations are expanding overseas investment

through mergers and acquisitions.

In implementing such energy security policies, upon meeting

partial demands outlined in the policy, Chinese energy corpora-

tions adopt more efficient ways to expand overseas investments.

Based on the government’s energy security policy, Chinese

energy corporations seek more efficient mergers and acquisi-

tions thereby transforming energy diplomacy from state-based

to economy-based. Moreover, the implementation of such ac-

tions moves initiatives from the government to enterprises.

Enterprises no longer need to depend on negotiations between

governments; they may negotiate directly with the host gov-

ernment, state-owned enterprise, or Western enterprises. These

changes allow Chinese energy diplomacy to attain higher effi-

ciency and more importantly, enrich the connotations embed-

ded within mercantilism.

Mercantilism emphasized the role of the nation, while liber-

alism believes that nations play a minimal role. Hence, the case

with Chinese energy corporations seems to challenge both

mercantilism and liberalism. According to the empirical re-

search on Chinese energy diplomacy and the overseas invest-

ment of Chinese energy corporations, it is possible for mercan-

tilism and liberalism to pre-conditionally co-exist. The precon-

dition holds that enterprises require a degree of independence in

strategy mapping, while fulfilling governmental policy, and that

investment decisions should be based on economic evaluations.

However, despite considering that prices in the energy mar-

ket are not determined by the supply-demand curve, the energy

market is monopolized by trans-national corporations and in-

ternational organizations. The phenomenon may be the result of

government considerations, since direct mergers and acquisi-

tions of trans-national corporations can gain rights associated

with oil fields, and also enhance the nation’s status internation-

ally. Furthermore, with this enhanced status, the government

can take greater control in agenda setting. In order to test this

hypothesis, a more complete and holistic picture of the struc-

tural change in international energy markets is needed, along

with more interviews analyzing the will of the Chinese gov-

ernment. These issues may be the focus of future studies and

investigations.

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