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By Rooting Out Corruption, China Is Risking Its Oil

A corruption probe targeting President Xi Jinping's political opponents may wind up disrupting China's global energy interests.

by Luke Patey
Aug 6 2014, 6:40pm

Photo by Thierry Ehrmann

After more than a year of rumors, an official investigation into "serious disciplinary violations" was launched last week against Zhou Yongkang, China’s onetime security czar. The ambitious move by Chinese President Xi Jinping pushes his sweeping anti-corruption campaign to new heights and further consolidates his power by ousting a high-level political opponent.

The shakeup may disturb cohesion in the ruling Communist Party — but the potential consequences of the probe stretch well beyond China’s borders. From Iraq to Canada, the corruption investigation is targeting Chinese oil executives and managers linked to Zhou, and it threatens to compromise China’s global energy interests.

Zhou was once head of one of the world's largest companies: China National Petroleum Corporation (CNPC), valued at more than $200 billion. The 71-year-old maintains an extensive network in China’s oil industry and throughout its expanding international investments. But his ties to the disgraced political leader Bo Xilai, an adversary of Xi, helped to bring about his downfall.

It's fitting that the last public appearance Zhou made — in October 2013 — was at the 60th anniversary of his alma mater, the China Petroleum University. While majoring in geology there, Zhou joined the Communist Party in 1964. He went on to climb the corporate ladder in the oil industry while simultaneously rising through the political ranks of the party.

In two decades of expansion, Chinese national oil companies went from producing zero barrels of oil and gas overseas annually to producing 2.5 million barrels.

From his days as governor of Sichuan province and minister of public security, Zhou acquired a great deal of influence in China’s political and security establishments. But after three decades on China’s oil patch, his power base was strongest in the energy industry. "Oil is a word that stays in the heart of an oilman his whole life," Zhou said in 2012 at the opening of a CNPC office in Turkmenistan.

In the 1990s, Zhou was instrumental in ensuring the survival and growth of Chinese national oil companies. When Zhou became head of CNPC in 1996, he took over a national company in dire need of reform: China’s oil production at the Daqing oil fields was stagnating, and CNPC was hemorrhaging cash trying to develop new resources in the country. Zhou sought to intensify the pace of market-orientated reforms in the company, and was a strong advocate of international expansion even before China’s official "go out" strategy became the norm for Chinese corporations.

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"National oil companies are no longer fat organizations," he told a gathering of international oil executives and government officials in Houston in 1998. "We have been forced to become competitive as business globalizes."

Zhou took CNPC into Sudan, where the company spent billions and fostered a close relationship with President Omar al-Bashir. In two decades of expansion, Chinese national oil companies went from producing zero barrels of oil and gas overseas annually to producing 2.5 million barrels. They invested a record $73 billion between 2011 and 2013, making some of the largest acquisitions in the global energy industry.

But this expansion did not always involve smooth sailing. Although the national oil companies sold much of their overseas production on international markets, the companies were labeled instruments of Beijing’s foreign policy that were "locking up" energy resources around the world for China’s exclusive use. Access to preferential loans from state-owned banks in China and offers of development assistance from Beijing to oil-rich countries are regarded by many as giving the Chinese oil giants an unfair advantage over Western rivals.

For more than a decade, these fears fueled political concerns in the United States that served to prevent China from taking part in North America’s oil and gas boom. Only in the last few years has that changed. In 2012, CNPC purchased a 49.9 percent stake in a project of the Canadian oil company Encana for $2.2 billion. That same year, its Chinese counterpart, the China National Offshore Oil Corporation (CNOOC), bought Nexen and its assets in the United States for more than $15 billion.

But just when China's energy sector found a foothold in Western markets, the domestic politics surrounding Xi’s corruption investigation back home in China began undermining overseas expansion.

In late June, Li Zhiming, the head of CNPC's Canadian operations, was detained in China, delaying a deal worth more than $1 billion with Athabasca Oil Corporation to expand CNPC's interests in Canada’s oil sands. Last year, party officials apprehended Mi Xiaodong, a former CNOOC manager. Mi was allegedly taking part in the sale of overpriced oil equipment to a company run by Zhou Bin — the son of Zhou Yongkang. The Iraqi Ministry of Oil is now investigating Chinese oil contract activities and has suspended the CNPC-linked company Hermic.

The probe has hardly crippled China's energy sector. But because the delay in Canada and the investigation in Iraq are tied to the Zhou probe, they reveal to the whole world how the international investments of Chinese national oil companies become ensnared by China’s domestic politics. What might appear to be relatively minor disturbances could cause a domino effect in which countries are more reluctant to engage with Chinese energy giants, fearful of potential political risk.

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Rooting out corruption is vital for China’s development. Xi’s probe may help to produce a more efficient oil industry — and his efforts are widely applauded by an aggrieved Chinese public. But Zhou does not represent an isolated case; corruption is systemic to China’s oil industry and its other state-owned enterprises. As a result, Xi must walk a fine line. In surgically removing officials close to Zhou, he will be better able to control the industry’s special interests. But if he cuts too deep, he will further jeopardize China’s energy interests overseas. In going after the former oil boss, Xi may unintentionally damage China’s strategic interests.

Luke Patey is author of The New Kings of Crude: China, India, and the Global Struggle for Oil in Sudan and South Sudan, and senior researcher at the Danish Institute for International Studies. Follow him on Twitter: @LukePatey

Photo via Flickr