24  November  2017

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 Infopetro -> Industry in Focus


China Aims For Market Share In African Refining Sector

  06/27/2017

On 22 March 2017, Sinopec agreed a deal to buy out Chevron

's downstream businesses in South Africa and Botswana, in

China's first major investment into the downstream oil

industry in Africa. Although China already has an

extensive footprint in Africa, the majority of these

operations have been confined to the upstream sector 每 in

oil and gas exploration.

China has been steadily expanding its upstream operations

outside China since the late 1990's, through its three

main state-controlled oil companies: CNPC, Sinopec and

CNOOC, in an attempt to meet the country's growing oil

demand.

Over the past several decades, China's oil demand has

risen drastically, driven by continued economic growth, an

expanding middle class and a growing demand for consumer

goods. China is now the world's second-largest oil

consumer, but due to a steady drop in domestic production

每 thanks to high production costs, a deterioration in

mature oilfields, and cheaper international oil prices 每

it has also become the world's biggest importer of crude

oil.

In 2016, China's dependency on foreign oil imports

reached 64.4 percent of total demand 每 an increase of 3.8

percent from 2015 每 this is expected to increase further

through 2017.

However, despite this increase, domestic demand has

actually begun to slow down significantly. In 2016, demand

for oil in China grew at its slowest pace since 2013,

increasing by just 2.5 percent 每 down from 3.1 percent in

2015 and 3.8 percent in 2014. Notably, the slowdown

occurred as the Chinese economy expanded at its slowest

pace in 26 years.

Therefore, although foreign investments by Chinese oil

companies have largely remained within the upstream

sector, the significant slowdown in domestic demand has

meant that Chinese companies are turning to foreign

markets to secure further customers for continued growth.

Notably, Africa appears to be one of China's top

destinations for investment.

Sinopec Acquisitions

The majority of imported oil in China is from the Middle

East and Africa; and in April 2017, China imported some

1.48 million barrels of oil a day from West Africa alone.

Furthermore, energy demand in Africa is predicted to grow

by over 75 percent between 2015 and 2035, much faster than

the global average of 31 percent; while South Africa's

demand for refined oil is continuing to increase at a rate

of about 5 percent every year, offering an obvious

attraction as a healthy and growing energy market.

Under the Sinopec-Chevron deal, Sinopec bought 100 percent

of Chevron Botswana and 75 percent of Chevron South Africa

(the remaining 25 percent stake is held by local

shareholders, in accordance with South African

regulations) for US $900 million. These included included

a Cape Town refinery, oil storage facilities, a lubricants

factory in Durban and the Caltex service station

distribution network across South Africa and Botswana.

The Cape Town oil refinery has a capacity of 5 million

tonnes per year, while Caltex owns and operates more than

820 petrol stations, 220 convenience stores and other oil

storage and distribution facilities across the two

countries.

Sinopec was the sole bidder after French oil company

Total, and commodity traders Glencore and Gunvor pulled

out of the auction due to the South African government's

desire to keep the Cape Town refinery running. Research

firm BMI estimates the cost of upgrading the refinery at

about US $1 billion, but said that Sinopec's previous

experience in upgrading refineries in China likely helped

their bid.

Sinopec may use the purchase of these assets to expand

into the downstream African market. Caltex is one of South

Africa's top four petroleum brands, and the purchase

presents Sinopec with access to Caltex's substantial

forecourt footprint.

Furthermore, South Africa is Africa's second largest

economy and, in comparison to the majority of countries in

Africa, has relatively strong institutional structures,

sophisticated financial services, and better

infrastructure availability.

Furthermore, South Africa and China have an established

relationship. China has been South Africa's largest

trading partner since 2010, when the two countries

announced a 'comprehensive strategic partnership', which

aimed to deepen and strengthen co-operation and exchanges

between the two countries in terms of political, economic

and business support. More recently, in December 2015, the

two countries signed 25 agreements worth a combined value

of US $16.5 billion during the Forum on China-Africa

Cooperation (FOCAC).

Furthermore, these purchases have given Sinopec 每 Asia's

biggest oil refiner and the world's second largest 每 its

first major refinery in Africa, and thrust it into the

leagues of other international oil companies (IOCs), such

as ExxonMobil, Royal Dutch Shell, Lukoil and Kuwait

Petroleum, that operate downstream petrol stations outside

their country of origin.

Sinopec has since confirmed that it is planning to

increase its foreign investment to more than $30 billion

每 almost double the $16 billion spent by the company in

30 different countries between 2010 and 2015. Although the

timeframe and specific locations have not yet been

confirmed, some of this investment is likely to be in

Africa.

Despite boasting an estimated 7.6 percent of the world's

proven reserves, a lack of adequate infrastructure and

investment has forced many African countries to rely on

imported oil 每 therefore presenting the African

downstream oil industry as an attractive opportunity for

investment for China.

A Political Proxy, or Just Business?

Since 2009, China has become Africa's biggest trading

partner; bilateral trade between the two reached US $149.1

billion in 2016, with investments by Chinese companies

reaching US $3.2 billion.

Traditionally, Chinese investment in Africa has focused on

the natural resources sectors, but in recent years it has

also expanded to include construction, manufacturing,

agriculture, transportation and communications.

As China-Africa trade increases, the relationship between

the two has become increasingly scrutinised. With western

media often suggesting that China's economic approach to

African countries over-proportionately benefits China.

At first glance, the relationship appears to benefit both

parties. Africa not only has an abundance of much needed

natural resources, but also presents a largely untapped

consumer market for Chinese consumer goods, produced by

China's growing manufacturing sector. In return, Chinese

investments have created employment opportunities,

increased infrastructure development, and provided a

wealth of technical and professional knowledge.

However, with the majority of Chinese multinational

companies being state-owned enterprises (SOEs), fears have

been raised that the Chinese government is merely using

them as a means to both secure much-needed natural

resources at low-prices, and also extend China's global

political influence.

Investing in Africa has allowed China to strengthen its

diplomatic relations with several African governments 每

subsequently increasing its influential power on the

global stage and in global forums such as the United

Nations.

In 2015, AidData 每 a U.S. research lab 每 published

research that appeared to suggest that African countries

that align with China's voting at the United Nations

General Assembly received more development assistance.

Furthermore, Chinese national Margaret Chan was allegedly

elected to the post of Director General of the World

Health Organisation (WHO) through attaining the majority

of votes from African delegations.

Notably, South Africa is Africa's only member of the

influential G20 international forum, and in September

2016, South African President Jacob Zuma announced his

willingness to strengthen cooperation with China in the

UN, G20, BRICS, Forum on China-Africa Cooperation (FOCAC),

and other multilateral frameworks.

This increasing interest in Africa is likely to be part of

China's One Belt One Road initiative, which aims to

increase connectivity and trade flows between China,

Central Asia, Europe and Africa by constructing roads,

railways, ports, pipelines and other infrastructure

projects.

Conversely, it can be argued that theories that Chinese

investments in Africa are all part of a grand political

scheme are actually hiding the more obvious motive: that

Chinese companies are simply business-driven and actually

just looking for new growth markets.

As with any significant investments, China's investing in

African countries has benefits and disadvantages for both

parties. But as relations between China and Africa

continue to develop, China's expanding economic influence

may result in an increasing dependence that will dominate

the economies and politics of several African countries in

the long-term.

Or conversely, China's increasing interest in the

continent may cause other countries and businesses to

reassess the value of their relationships in Africa.



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