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Oil Cartel Seeks More Access in China Talks OPEC Set to Counter Russian Competition in No. 2 Importer

Posted on: Saturday, 24 December 2005, 09:00 CST

By David Lague

The Organization of Petroleum Exporting Countries opened its first talks with China on Thursday, as the cartel gears up to face stronger competition from Russia to supply China, the world's second biggest oil importer.

Adnan Shihab-Eldin, the acting secretary general of OPEC, and Sheik Ahmad Fahad al-Ahmad al-Sabah, the Kuwaiti oil minister and president of OPEC, met with Chinese officials in Beijing. Industry analysts expected the discussions to concentrate on increasing Chinese imports from OPEC countries, which supplies about 40 percent of the world's oil.

Analysts also suggested that the talks would allow OPEC to negotiate major investments in China's refining industry, as proposed by cartel members in a bid to secure market share.

"I think OPEC realizes that China is an extremely important customer moving forward," said Kurt Barrow, an analyst with energy consultants Purvin & Gertz based in Singapore. "This is about relationship building."

China's burgeoning economic growth has driven its demand for oil, which has increased at an average of 24 percent a year over the last decade.

From being a net oil exporter in 1993, China has become the second biggest oil importer behind the United States.

Of the 6.7 million barrels of oil a day consumed in China in 2004, almost half came from imports, according to industry statistics from BP, the oil company.

The United States imported about 10 million barrels a day in 2004.

Sustained demand from China has forced oil producers to pump at near-full capacity and has driven a rally that has seen oil prices triple since 2001, forcing the world's major economies to absorb sustained higher energy costs.

China now gets more than 60 percent of its oil imports from the Middle East and North Africa, mostly from OPEC producers, and has become increasingly anxious to diversify its supplies.

Although China's major oil companies have been active in securing supplies from Central Asia, Africa and Latin America, most analysts believe that Russia, with its immense reserves of oil and gas in Siberia, could become a major alternative source of imports.

"China would regard Russia as the primary alternative source and OPEC is worried about that," said Ma Shang, a an energy analyst with Fitch Ratings.

Russia now accounts for only 2 percent of China's imports, but that could rise quickly with plans to build pipelines and increase rail shipments from wells in Siberia.

To counter this anticipated threat, Saudi Arabia and Kuwait, two major OPEC producers, are looking to invest heavily in Chinese refineries so that they can lock in long-term supply contracts.

On Dec. 5, Kuwait and China signed a preliminary agreement to build a $5 billion refinery and petrochemical plant in China's Guangdong Province.

The refinery was expected to have a capacity of 200,000 to 400,000 barrels a day, according to a statement from the official Kuwaiti News Agency.

Industry analysts said that the Guangdong Province deal was clearly aimed at increasing oil shipments from Kuwait to China.

In 2001, the Saudi oil producer Saudi Aramco agreed to jointly fund a $3.5 billion upgrade of a refinery in China's Fujian Province.

OPEC members have used similar investment strategies in South Korea and Japan to shore up market share, and they are expected to invest further in China's refining sector.

However, analysts said that the Chinese government had been disappointed thus far with OPEC's commitment to the Chinese refining industry.

"Actually, China is not very satisfied with OPEC," said Ma of Fitch Ratings. "I believe in these talks OPEC will negotiate with China about more investments in the future."

While China works to diversify supplies, most analysts believe OPEC, and particularly its members in the Middle East, would remain vital to satisfying the country's long-term energy needs.

"At the end of the day, the Middle East is going to be China's premium source of supply for crude," said Barrow of Purvin & Gertz. Before the talks in Beijing with Chinese officials, Shihab-Eldin of OPEC indicated that the organization's members would be satisfied if oil prices remained at levels above $50 a barrel

Shihab-Eldin also said the price of the cartel's basket of heavy crude would remain between $45 and $55 a barrel. "That seems to have been helping to keep the market well supplied and at the same time not hurting the world economy," he said.

Some analysts believe oil prices will fall in 2006 as demand eases and production from non-OPEC producers increases but most agree that demand from China and India meant the days of cheap energy were over.

"We are in for higher prices than we had through the 1990s," Barrow said.

Fro China, high oil prices have delivered a windfall for the country's big producers but refiners and distributors have suffered huge losses because of tight government control of retail prices for gasoline, diesel and kerosene.

Source: International Herald Tribune

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