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Why China Trumps India in the Oil Industry in Angola and Nigeria?

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  • March 11, 2016
    Fellows' Seminar

    Chairperson: Ambassador Mahesh Sachdev (Retd.)
    External Discussants: Prof. Alka Acharya and Prof. Girijesh Pant
    Internal Discussant: Ms. Ruchita Beri

    The competition between China and India in Africa has been an important and recurrent theme of discussion within the academic community. The paper presented by Raj Verma contributes to the ongoing discussion by making a comparative study of the Chinese and Indian interests and stakes in the oil sectors of the two West African countries: Angola and Nigeria. In recent years, West Africa has emerged as a major energy producing region with Nigeria and Angola as major players. If Nigeria is the largest oil producer in Africa and has the second largest oil reserves, Angola is the second largest oil producer and has the third largest oil reserves. Proven oil reserves in Nigeria have increased from 23 billion barrels in 2001 to 37 billion barrels in 2015. In Angola, proven oil reserves have almost doubled from 5.4 billion barrels in 2001 to nine billion barrels in 2015. Oil production has also increased significantly in Angola.

    The paper seeks to explain why China’s national oil companies (NOCs) have been able to outperform Indian oil companies (both NOCs and private sector oil companies) in Angola and Nigeria. The paper identifies four reasons in this regard: first, the Chinese NOCs have more oil blocks in Angola and Nigeria compared to the Indian companies; second, NOCs from China are able to outbid Indian oil companies when they directly compete for the same oil block; third, Chinese NOCs are favoured as partners both by the African NOCs as well as the international oil companies (IOCs); and fourth, Chinese NOCs have access to better quality oil blocks compared to the Indian companies. These four reasons can be attributed to macro level and micro level factors.

    At macro level, the difference in the economic, political and diplomatic support received by the Chinese and Indian oil companies from their respective governments plays a huge role in China outperforming India in Angola and Nigeria. It is important to note that China has foreign exchange reserves of more than US$ 3.33 trillion compared to India’s modest US$ 348.93 billion.
    At micro level, access to capital, rate of return on investment, pricing of oil, risk aversion and ability to acquire technology are factors that place Chinese NOCs at an advantageous position. The Chinese NOCs have greater access to cheap capital than the Indian oil companies as they are able to borrow at 0-1 per cent interest rate domestically, whereas the cost of capital in the domestic market for Indian state owned enterprises including NOCs and private sector enterprises is 10-11 per cent. Moreover, the Chinese NOCs operate at lower rates of return on investment compared to the Indian oil companies. Similarly, while the Chinese NOCs operate at a margin of three to four per cent in general, the Indian NOCs operate at a margin of 10-11 per cent. Indian private enterprises operate at margins close to 18-20 per cent.

    The Chinese valuations of oil and investment is very high as it is able to take substantial risks due to massive financial resources available to it and hence are able to outbid India by shelving out vast amounts of money to acquire oil blocks. Chinese valuations of the oil blocks in Nigeria and Angola have been on the higher side as Chinese assume that their economy will keep growing at a high rate and the demand for oil will remain a primary mover of international oil prices. While Indian firms have better project management skills, Chinese are able to purchase technology with greater ease as they have colossal financial resources. Given this asymmetry of power and resources, it may be difficult for Indian oil companies and other corporations to compete with China in direct competitive bidding for oil assets in Africa.

    Discussion and Suggestions:

    • While the paper presents a good empirical material, it needs to be interpreted theoretically.
    • In the recent past, Chinese state owned enterprises have witnessed significant changes in terms of greater devolution of power taking place.
    • China’s energy mix is going through a transformation due to factors such as climate change. In the next 10 to 15 years, India will become a major global energy player due its sustained economic growth. Taking into consideration these factors, their impact on the oil sector in Africa has to be analysed.
    • Why China is not reluctant to invest in risky countries like Sudan and Iraq too needs to be analysed.
    • Role of domestic institutions in China’s foreign policy making has to be understood in order to comprehend its decision making process for acquiring global energy assets.
    • It is important to explore how change in strategic value of oil assets in coming years is likely to impact or transform China’s policy towards Africa.
    • If perceptions matter, then it is important to analyse why India despite its rich historical connections and diaspora has not been able to sufficiently influence the perceptions of the African people.
    • It should also be noted that Africans are getting disenchanted with Chinese companies as they bring their own labour and do not transfer technology to them.
    • The African perspective on Chinese and Indian engagement in African oil industry needs to be properly understood. Africans are interested in diversifying their energy operators.
    • The political aspect of the Indian and Chinese engagement in Angola and Nigeria needs to be factored in along with the economic aspect.

    Report prepared by Mr. Nachiket Khadkiwala, Research Assistant, IDSA