Big Red Energy Machine Invests in America

Niobrara PlayThe big story in the energy industry over the last ten years has been the spectacular growth in China—the big story in growth in every segment, it seems, today is China.  My focus is energy and China more than any other nation is changing the way the energy business works across fuels and technologies.

You know the story so I won’t repeat it here but China is ravenously acquiring and consuming the world’s energy resources to fuel its continued economic growth. It has reverse engineered wind turbines, solar photovoltaic panels, coal and nuclear power plants and now produces them for both domestic consumption and global market share.

The cash thrown off by China’s immense export business give it the resources to buy anything it wants.  Too much of a big thing can be worrisome and so one of the great economic and political challenges facing the United States and every nation in the global economy over the next decade is how to deal with a rising China.

The corollary is also true. We know the stock market does not only go up—it can go down, and so it is with the Chinese miracle of double digit economic growth.  Part of China’s unspoken strategy—and our deliberate spoken strategy must also be ‘what if’ or ‘when’ China’s economy slows or crashes under its own bubbles.

Part of China’s strategy for a soft landing and future of slower growth is to diversify.  One part of that diversification is to use a growing share of its cash reserves to buy strategic assets around the world.  This is prudent, but it is also scary because assets that can be consumed in China like oil, coal, metals and other commodities will surely be used to sustain China’s exports.  Other assets such as equity stakes in companies and markets are designed to assure access to markets, new technology and skills for the next generation of export products.

The flip side of exports is the power of investment in companies and strategic assets to service the installed Chinese exports in markets around the world.  This too helps China diversify its economic foundation and lay the groundwork for a future transition to a less export driven economy where Chinese consume more but also control more consumption in markets around the world and not just at home.

If China were an American Fortune 500 company we would be cheering it.  That is is a state controlled collection of strategic enterprises focused on China’s economic, political and other strategic objectives —not ours—is worrisome.

Until recently, China spent its cash buying US Treasuries but its change in investment strategy and the weakness of the US dollar mean that China see’s America as a big Walmart—‘lower prices, always lower prices’ for some prime assets and a good place to park cash.

In January 2011, China’s state-owned oil company CNOOC agreed to pay Chesapeake (CHK) $570 million to acquire a one-third stake in a drilling project in the Niobrara shale and will invest another $700 million in joint venture development in Niobrara and the Powder River Basin. In October 2010 CNOOC and CHK made a $1 billion investment deal on a project in the Eagle Ford.  CHK said it expected to invest about $5 billion to expand its resource base in these areas.  Want to hazard a guess where that investment is going to come from?

Niobrara Shale Potential is Growing

The Niobrara shale formation is part of the Denver-Julesurg Basin situated in northeastern Colorado and parts of adjacent Wyoming, Nebraska, and Kansas. Niobrara is one of the emerging plays made economic by unconventional drilling techniques.  In its early stages of development, companies have been leasing land for future drilling to prevent competitors from gaining a foothold. By investing in CHK, CNOOC gains access to the plays without the controversy of direct dealing.

Niobrara’s potential to be the next big domestic US oil and gas unconventional play was demonstrated by the success of EOG‘s Jake well, which produced around 50,000 barrels of oil in its first 90 days. Why would China be interested in unconventional oil and gas in the American Midwest?  Because China also has unconventional oil and gas resources but it lacks the expertise and technology to exploit it.  America is China’s technology superstore.

China wants to Own a Big Piece of America’s Strategic Energy Future

I use this as an illustrative example, but China’s investment in Niobrara, Powder River Basin and Eagle Ford are hardly isolated events.  Similar investments in companies, assets, and energy plays are being made around the world as part of China’s larger strategy of diversifying and insulating its economy from bursting bubbles, declining dollars and other economic realities.

  • Access to American Energy Resources. So China’s decision to invest in CHK instead of EOG or Noble or any of a dozen other unconventional oil and gas players can change the competitive landscape in that industry segment.
  • Access to American Technology. China’s access to advanced horizontal drilling technologies and the ability to reverse engineer them for use in China and then for export can adversely affect some of America’s biggest oil services firms just as China’s export of wind turbines and photovoltaic panels has transformed the renewable energy industry.
  • Control Strategic Assets. For companies and countries on the economic ropes, China’s willingness to buy assets, buy technology, buy future positions in strategic industries is both a blessing and a curse.  For CHK it is a chance to reduce debt and restore its once stronger financial position.  CHK told investors that its DJ and Powder River Basin assets have estimated average ultimate recovery (EUR) of more than 500 MBoe per well.

So what?

China’s entry in a big way into America’s unconventional oil and gas and coal industries are strategic game changes for America and the strategic industries we depend upon. China is becoming a larger importer of American coal—you know that black stuff we used to use to produce electricity and keep our rates low until it became politically incorrect.  Now China is happy to buy all the coal we no longer want to use at home and then sell us the wind turbines and solar panels that are politically correct but much more expensive.  Today falling prices on Chinese made solar PV panels are driving domestic producers to financial ruin even while they have driven wind and solar energy costs to mainstream levels.  Mainstream prices are good news for renewable energy consumers who are required to pay for it through their utility bills.  But many of those ‘green jobs’ we keep hearing about—are in China where the most popular car is a Buick.

Welcome to the global economy!

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