China Wants Your Oil, and Has $1.95 Trillion U.S. Dollars to Get It

Russia and the Ukraine have been battling it out over natural gas pipelines every since the Ukraine spun off from Soviet Russia. In 2005, 2006, 2007 and 2008, the countries fought over the price, transport and debts owed or incurred for shipping natural gas to Europe.

Over the winter of 2008 this bickering lead Gazprom - the large Russian gas company - to cut off supply to the Ukraine and thus to Europe.

The result was that 18 countries in Europe felt the effects. Some countries in the Balkans were reduced to just 12 days worth of gas left in storage as temperatures across the continent plummeted.

The people were outraged!

There is no faster way to lose an election than to turn off the heat. This fear has led European leaders on a mad quest to circumvent the Gazprom near monopoly on imported gas.

The quest has turned to North Africa, because there is gas in Algeria, Morocco and Libya…

But the Europeans better act fast because the Indonesians, the Chinese and even Gazprom are getting there first.

Gazprom shifted the management of a company, First Calgary (FCP.TO), a company with sizable natural gas holdings in Algeria. Gazprom then forced a sell at a 75% increase to shareholders, but at a 1/10 discount to what the reserves were worth.

The buyer was ENI - the large Italian energy company with strong ties to Gazprom - much to the dismay of Italian politicians.

But these aren’t the only countries on the hunt for oil… Indonesia is flying in from the South Pacific.

Indonesia on the Hunt for Oil

Indonesia was once so prized as an oil field of Asia that it was a cause of World War II. Those days are over however; Indonesia had to drop out of OPEC last year as its insatiable demand for energy coupled with declining oil fields forced the country to become a petroleum importer.

As a result, the state oil company PT Pertamina is looking to buy up overseas oil fields to fulfill demand. PT Pertamina hopes to increase production from 150,000 barrels of oil per day (bpd) to 171,000 bpd in 2009.

Libya has the largest oil reserves in Africa at 41.5 billion barrels and pumps more than 1.75 million barrels a day. It is also close to Europe and could help Euro-land circumvent Russia’s effort to monopolize gas flow.

Buying a large field on the cusp of Europe would be a coup for PT Pertamina. But as it is now, no one wants to pull the trigger when the price for crude has fallen so far, so fast. It could go lower after all…

They are eyeing each other and the oil markets to see who will blink first. So far it’s been the Chinese.

"This is a window of opportunity for China’s energy diplomacy that we cannot afford to miss. If we wait until economic recovery pushes oil prices up again, it would be much more difficult to secure long-term deals."
-- Wang Xia, energy expert with China Petroleum University

And they just bought Verenex (VNX.TO), sending the share price from a low of $4.02 in November to $9.57, at the time of this article.

Cash Is King

If the U.S. were smart, instead of paying $700 billion for wars to protect our oil supply and another $3 trillion in bailout money and green energy, we’d be doing what the Chinese are doing and buy up oil assets at fire-sale prices.

And right now oil companies are eager to sell assets and shore up their balance sheets.

Cheap Crude and Frozen Credit

Oil fields and exploration companies around the world have been hit by the two hammers: falling crude prices (from $147 to $38) and the freezing of credit.

It costs money to find and produce oil. In some oil deposits, such as the oil sands region of Canada, $38 oil means producing at a loss. No lender wants to risk capital in a declining market. This means that oil companies are cutting back and looking for funding.

China has stepped up big and bought out chunks of oil firms and given loans of up to $40 billion to Russia, Brazil and Venezuela to secure a future flow of cheap oil.

A string of oil deals has gone down lately with foreign companies buying out Canadian ones, including a bid for Nova Chemicals Corp (NCX.TO) by Abu Dhabi's International Petroleum Investment Co. Bow Valley Energy (BVX.TO) was bought by Britain's Dana Petroleum (DNX.L) and UTS Energy Corp (UTS.TO) was hit by a hostile takeover from Total SA (TOTF.PA) of France.

Deals are getting made because oil majors are flush with cash from $147 per barrel of oil last year. The top six in the world, Exxon Mobil (XOM), Chevron (CVX), BP, Shell (RDS.A), Total (TOT) and Enersis (ENI) had $106 billion in cash and short-term investments at the end of Q3 2008.

All of these companies (and countries) need new oil fields to survive the next boom cycle. And when the bottom in oil arrives, all of the buyers won’t be able to fit through the door at the same time.

Right now, the prices of these energy stocks are selling at a severe discount. But their share prices are tracking up. The buyouts are already happening. They won’t be around for long.

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Other Related Topics: Asia Investments , Christian DeHaemer , Crisis Trader , Crude Oil

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