Chinese State Owned Oil Companies Receive Special Advantages

The Motley Fool's energy bureau chief, Joel South, spoke with Michael Levi about his new book, co-authored with Elizabeth Economy, By All Means Necessary: How China's Resource Quest is Changing the World. As the David M. Rubenstein senior fellow for the energy and environment at the Council on Foreign Relations, Levi is no stranger to the impact that countries and their decisions have on the rest of the world. In fact, Levi also writes a blog for the CFR, Energy, Security, and Climate, where he discusses the relationship between energy, the world, and its inhabitants. In the book, Levi analyzes the impacts and effects China's resource hunt has on the world and international affairs, specifically looking at the synthesis of economics, security, and politics.

In the second part of this 10-part interview, Joel South and Michael Levi discuss China's national oil companies, or NOCs, and whether those companies have advantages from lower interest rates. Levi frames his answer first by China's overall acquisition strategy and then by its international operations strategy, where South notes that the Chinese Sinopec has made deals with Devon Energy (DVN 0.40%) and Chesapeake Energy (CHKA.Q). From here Levi further explains the challenges that the Chinese companies have met with, and how they have worked to evolve their strategies. 

A transcript follows the video.

Joel South: First off, we'll just get into the Chinese government and their involvement with Chinese companies that are trying to extract natural resources overseas -- primarily, first off, just looking at the Chinese NOCs. It's been documented that they received lower interest rates, tried to go out and secure assets. Does this really give the NOCs a leg up on competition?

Michael Levi: First, it's essential to step back and remember that the biggest aspect of China's resource quest is its acquisition of resources through trade, rather than through investment. The biggest global consequences have been through more prosaic trade relationships that drive prices up and have consequences, regardless of whether China is directly involved in the country in question.

When you move on to investment, the picture looks different depending on the target, and depending on the industry. Chinese state-owned companies certainly get advantages from cheap capital, that allow them to sometimes underbid their competitors. They also have disadvantages, because they are generally weaker performers. They don't have the technical and managerial skills that the big international oil companies have.

As you move into sectors other than oil, you have a lot less market concentration. You don't have just the three big players. In mining, you have a lot of smaller players, private firms. In agriculture, you have provincial players that are important, and they come with their own advantages and their own burdens.

The other thing that's worth appreciating, when we think about what advantages the Chinese companies might or might not have, is that their lack of experience internationally -- at least early on -- was a significant challenge.

The reality is that you don't go and read a book in the library to figure out how to operate internationally. You figure it out through experience -- and the international competition has a lot of experience.

At least early on, the Chinese companies only had experience at home, so whatever they were used to doing at home, they took with them internationally. China at home was China abroad. The consequence was that they couldn't compete on labor standards, environmental standards, dealing with communities -- all of these pieces that are actually essential to surviving and thriving in the resource world.

South: Looking at a couple of deals, with Sinopec (NYSE: SHI) signing some joint venture deals with Devon Energy (DVN 0.40%) and Chesapeake Energy (CHKA.Q) here domestically, in your book you also talk about how a lot of these Chinese companies are out there trying to maximize profit.

With some of these deals, joint ventures, do you think they're really after going for the maximization of profits, or is it trying to secure more technology that they can bring back home and try to strengthen some of their supply chain issues that they might have?

Levi: You're looking in the exact right place. I think these companies are trying to do two things. They're trying to put more reserves on their books, like other big energy companies do, and they're trying to learn more about the advanced technologies and managerial skills that they need to be able to be effective, not just internationally but with resources at home -- and the way you learn is by working alongside skilled companies.

You see this repeatedly around the world. It's not just in shale in the United States, but it's in offshore elsewhere, it's in oil sands in Canada. ... There is a desire to acquire the skills. These companies know that that they are still a rung or two down the ladder from the IOCs [independent oil companies], and from the high-end independents in the United States.