Beyond dependence? China's revised energy strategy : to what extent have Chinese oil companies gained control over crude oil supplies in Russia, Saudi Arabia and Angola?

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i

B

EYOND DEPENDENCE

?

C

HINA

’

S REVISED ENERGY

STRATEGY

To what extent have Chinese oil companies gained control over crude oil

supplies in Russia, Saudi Arabia and Angola?

M

SC

P

OLITICAL

S

CIENCE

Author: Eline Sparreboom Student number: 10532218 Supervisor: dr. J. Y. Gruin Second reader: dr. S. J. Lim Track: International Relations

Research project: China’s rise and the global economy: capitalism and power in the 21st_century

Year 2017/2018 Word count: 20.192 Date: June 22nd₂₀₁₈

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ii

STATEMENT

OF ORIGINALITY

This thesis is written by Eline Sparreboom who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Social and Behavioural Sciences is responsible solely for the supervision of completion of the work, not for the contents.

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iii

ABBREVIATIONS

AND ACRONYMS

$ = US dollars

CCP = Chinese Communist Party CDB = China Development Bank

China Exim Bank = China Export Import Bank

CNOOC = China National Offshore Oil Corporation CNPC = China National Petroleum Corporation FDI = Foreign Direct Investment

JV = Joint Venture

M&A = Mergers & Acquisitions NOC = National Oil Company1 OBLs = Oil Backed Loans

OECD = Organization for Economic Cooperation and Development OPEC = Organization of the Petroleum Exporting Countries

SASAC = State Asset Supervision and Administration Commission SOE = State-owned enterprise

TNC = Transnational Corporation

1_{Chinese NOCs operate transnationally, therefore the label Transnational Corporations (TNCs) can be applied to their oil}

companies as well. Throughout this thesis, the two labels are used interchangeably to refer to the Chinese oil companies CNPC, Sinopec and CNOOC.

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iv

LIST OF TABLES AND FIGURES

Figure 1. China’s oil production and consumption 1993-2016 p. 2 Figure 2. Relation between SOEs and state council p. 28

Figure 3. Russian oil exports by country p. 38

Figure 4. Scheme of the ESPO oil pipeline route p. 39

Figure 5. Rosneft’s biggest M&A deals p. 40

Figure 6. Saudi Arabia’s oil exports by country p. 44 Figure 7. Major oil fields and refineries in Saudi Arabia p. 45

Figure 8. Angola’s oil exports by country p. 49

Figure 9. Angola’s oil production in its deep-water areas p. 51 Figure 10. Angola’s crude oil production and consumption p. 51

Figure 11. Oil Blocks Angola p. 55

Figure 12. Overview oil price 1980-2016 p. 57

Table 1. Distribution of Overseas Investments by Chinese Oil Companies p. 14 Table 2. China’s top three suppliers of crude oil p. 36

Table 3. M&A deals in Saudi Arabia p. 47

Table 4. M&A activities in Angola p. 52

Table 5. Chinese NOCs attempts to gain control over energy sectors

through M&A, JVs and LTCs p. 61

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v

TABLE

OF

China’s foreign policy has been influenced by China’s growing energy dependence. China’s dependence on crude oil in relation to its strategy to strengthen its control over the natural resource will be examined. The importance of China’s crude oil supply is vital to the national security and is pressing since China can only meet its domestic demand for crude oil for a week without imports. The degree to which China succeeds in gaining control over foreign crude oil supplies, it will be argued, depends on the receptivity of its crude oil suppliers. The thesis is aimed at China’s largest crude oil suppliers; respectively Russia, Saudi Arabia and Angola. On the basis of a comparative analysis between these countries, it will be concluded that Russia and Angola prove to be more receptive to China’s credit, thereby creating a situation of mutual dependence. Saudi Arabia on the contrary, proves not to be receptive to Chinese credit. In other words, the Sino-Saudi relationship is characterized by a power imbalance, resulting in none to little control of Chinese state-led oil companies over the crude oil in the Saudi Kingdom.

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2

1. Introduction

China’s double-digit economic growth has led many to believe that China will become a powerful political player on the global stage. With an average annual growth rate of 10 percent between 1990 and 2004 in combination with its “Go-Out” policy, China’s international expansion in overseas engagement quickly increased. The Asian Infrastructure Investment Bank (AIIB) and the Belt and Road Initiative (BRI) are examples of China’s increasing presence and influence on the global stage. China’s economic power is often equated to an increase of the country’s global influence, however China’s economic growth – and therefore its global power – also has an Achilles heel. Domestically, China is saddled with a lack of crude oil supplies. Moreover, its crude oil dependence is pressing since China can only meet its domestic demand for a week without imports (Ziegler, 2006, p. 6). Ironically, China used to be an exporter of crude oil, but in 1993 the balance turned (see figure 1). China became a net importer and its demand has increased rapidly ever since, pushing China to be the number one importer of crude oil worldwide. Consequently, China is strongly dependent on foreign countries to import crude oil supplies from. The splits between China’s energy dependence endangering its national security on the one hand and its global rise on the other, makes energy security a priority within China’s foreign policy. The fear by Chinese officials that the global oil price can be manipulated by its competitors, in combination with China’s limited domestic production buffer, let alone China’s own effect on the soaring oil price, pushes Chinese oil companies away from purchasing on the global market.

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3 Instead, Chinese oil companies have attempted to gain more control over the energy supplies directly, especially through cross-border merger and acquisitions (M&A) (Peng, 2009). China has the highest amount of FDI outflows among emerging economies from the 1990s, of which nearly half of the FDI is related to its M&A. Interestingly, China’s three main national oil companies (NOCs) are ranked highest on the list of FDI investors (Schüller and Schüler-Zhou, 2009, p. 30). This suggests that China’s foreign policy is aimed to gain control over cross-border crude oil supplies. This is puzzling given China’s high dependence on energy supplies. Even more so, it gives rise to the question of how successful Chinese NOCs are at gaining control over cross-border energy sectors. Perhaps this strategy of direct control over foreign energy supplies can be the answer for China’s energy dependence. Consequently, the research question of this thesis is; how successful are Chinese NOCs at gaining control over crude oil supplies in its top three supplying countries?

The reason to investigate this dynamic by focusing on China’s top three suppliers of crude oil in particular, is because of China’s highly dependent position. The interest of this thesis is concerned with the issue of how Chinese oil companies can reduce dependence by means of several strategies – amongst others M&A. This thesis will not be limited to Chinese M&A alone. In addition joint ventures and long-term contracts (LTCs) will be examined as means by which Chinese NOCs can secure their foreign energy supplies.

The structure of the thesis will proceed as follows. First the literature on China’s energy dependence will be reviewed, after which it will be argued that there’s a missing approach in the attempt to assess the extent to which China succeeds in gaining control over crude oil supplies abroad. If scholars have paid attention to the issue of direct control attempts from resource-dependent countries, the focus has been on whether these have resulted in higher revenues for both countries. However, the possibilities for a dependent country to increase its relational power towards a resource-rich country are often overlooked.

The resource-dependence theory will be introduced in order to address this gap, after which the theory will be applied to three cases. The three cases are the countries China depends on most for its crude oil supplies, which are Russia, Saudi Arabia and Angola respectively. By means of a comparative case analysis, the mutual differences between the cases with regard to Chinese oil companies’ success in obtaining energy control will be explained. The period between 2004 and 2011 will be examined, since the crude oil consumption in this period has risen sharply (see figure 1). Also it captures the pre and post period of the global financial crisis. Consequently, it can be analysed

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4 whether this crisis has influenced Chinese NOCs’ chances for direct control over energy resources. The selected cases provide us with a least-likely design concerning China’s options to gain control, given China’s high level of dependency in relation to its top three oil suppliers. Nonetheless, despite the expectation that Chinese oil companies will not be likely to gain control over crude oil supplies in the countries it is found that Chinese oil companies are more fortunate in their attempts to secure their energy supplies through direct control than one would expect. The explanations for the different outcomes in each of the countries will be discussed in the empirical analysis after which the discussion and conclusion will follow.

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5

2. Literature review and contribution

CHINA’S ENERGY DEPENDENCE

Introduction

More than a decade ago, David Zweig and Bi Jianhai already stated that “an unprecedented need for resources” was the determining China’s foreign policy (Zweig & Jianhai, 2005, p. 25). Not only the rapid domestic economic growth, but also urbanization and the need for industrial and construction materials were factors that increased the demand for oil and gas (Ibid.). The authors go even further to say that China’s access to foreign resources is not only necessary in order to maintain its economic growth, but also for the survival of the Chinese Communist Party (CCP), since growth is “the cornerstone of China’s social stability”(Ibid, p. 25-26).

Amineh and Guang add to this that the quest for energy security has become a strategic concern, because a disruption in the flow of natural resources can “paralyze states, urban households and enterprises. Under modern conditions, food production and transport rely on energy” (2018, p. 14). Moreover, the authors argue that “scarcity is indicated by geopolitical and geo-economic rivalry between major consumer countries, and tends to outpace their cooperation” (Ibid.). In sum, China’s lack of crude oil supplies is pressing and needs to be addressed in an efficient and durable manner to avoid social- and political unrest in the country.

2.1. Risks, vulnerability, dependence

The crude oil dependency of China is rooted in its vulnerability to high prices and possible disruptions in its crude oil supplies. Clearly, it is a major problem for the Chinese economy that its state-owned companies can only meet the domestic demands for a week without crude oil imports from outside its borders (Ziegler, 2006, p. 6). Consequently it has provided many scholars with a fruitful base for research concerning China’s oil dependency (Amineh & Guang, 2018; Ziegler, 2006; Zweig & Jianhai, 2005). Mostly the conclusion is that China has very little influence on the oil prices and heavily depends on countries in the Gulf. Moreover, the risks of China’s lack of energy supply are stressed. For example, Ziegler describes how in recent years, 50 to 60 percent of China’s oil imports have come from the Gulf States. This means that perhaps the most (politically) volatile region in the world is of vital importance to China’s energy supplies (2006, p. 5).

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6 Moreover, he stresses that China has less than two percent of the world’s total oil reserves, of which the recently discovered oil fields in Xinjiang province are relatively small and expansive to develop (Ibid.). The general lack of China’s domestic oil and gas supply, in combination with the instability of its most prominent resource exporting trade partners, makes China vulnerable to price fluctuations.

2.2. Likelihood for conflict due to energy dependence

Given the above described fundamental need for resources, in which a lack of sufficient energy supplies can even endanger China’s national security, it can be expected that conflict might arise whenever a country proves unable to secure its crude oil supplies in a cooperative manner. This branch of scholarly literature is dominated by realist scholars (see for example Mearsheimer, 2010 or Glaser, 2011).

Especially with regard to the Middle Eastern region – accounting for the highest amount of recoverable oil reserves – the likelihood for conflict or even war related to energy is often described. The main reason why crude oil is mostly related to conflict or military dominance abroad is because crude oil cannot be seen as just a commodity. Crude oil is not just a commodity because of its vital importance for a country’s national security. Moreover, in China specifically it has even been argued that crude oil security is essential for the survival of the CCP (Zweig & Jianhai, 2005, p. 25-26). The following quote indicates why this is the case:

“Without democracy like western countries, the regime has to solicit legitimacy through improving the lives of its people. This requires rapid economic growth, which in turn calls for adequate energy supplies to sustain such development “(Chen, 2008, p. 81).

As a result, securing a country’s energy supply “provides a justification to engage in conflicts which can be easily understood and accepted by politicians and the general public (Andrews-Speed et al, 2014, p. 81). Given the close relation between national security and energy supply, the dependence on foreign crude oil gives China a legitimation for getting involved with conflicts in order to obtain the sufficient supply.

China’s quest for energy supplies abroad alone can already lead to fear for conflict among several crude oil importing countries. For example, Zweig and Jianhai describe how China’s search for energy resources frightens for example the United States (US). As a result of China’s energy deals with countries in Asia, Washington fears that the Chinese military might challenge US military dominance in the region (2005, p. 26). According to the authors, “China’s boom can no longer be understood in regional

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7 terms alone; as Beijing’s economic influence brings it international political influence and the potential for more military power, China’s growth will have worldwide repercussions”(Ibid.). Although the authors state that China’s new energy demands do not need to be a source of serious conflict between the US and China, they state that “[…] the United States, as the world’s hegemon, must somehow make room for the rising giant; otherwise, war will become a serious possibility”(Zweig & Jianhai, 2005, p. 27).

Despite the fact that crude oil is a commodity that can be (mis)used for political goals and therefore might enhance the risks for conflict due to competition, this thesis does not aim to engage in this ‘realist’ approach of the issue. For example the power transition theory, which is rooted in the realist approach in the field of international relations (IR), expects the probability for war to rise dramatically in case China will challenge the US as current hegemon (Lemke & Tammen, 2003, p. 270).

One of the reasons why conflict will not be a topic in this thesis regarding China’s energy dependence is based on the fact that the Chinese CCP has expressed its desire to rise peacefully and to improve China’s relations with all the nations in the world (Bijian, 2005, p. 21). The image of China seems to be essential for the CCP, in which cooperation, harmonious partnerships and peace are crucial elements. Therefore, despite the motivations for interstate competition, conflict or war related to energy security should not be regarded as indivertible, since there is a big incentive for cooperation in energy security too. According to the CCP, peaceful rise and harmonious cooperation are both preferred strategies for China’s interstate behaviour. Taking note of the fact that the possibility for conflict or even war over natural resources is lurking, it is important to see how Chinese oil companies seek to gain control over crude oil abroad from power-relational perspective instead. This approach enables us to see more clearly how the power relations manifest themselves economically.

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8 2.3. Financial performance focused on results of energy cooperation

When the focus is more on the international economic cooperation, often a financial performance approach is taken which is directed towards the outcomes of cooperation in the energy sector. However, this again does not allow us to see the power-relational dynamic between China and its oil suppliers. From a financial approach, it is clear that Chinese oil companies seek resources abroad and try to secure them by means of bilateral relations or by providing development assistance of a kind (Zweig & Jianhai, 2005, p. 27). In this case, the development assistance or financial help to a foreign country can take many forms, e.g. foreign aid or infrastructural projects. However, when scholars include the elements of resource acquisition abroad, they mostly focus on the transactional role (for an overview see Deng & Yang, 2015, p. 161) or on the question whether M&A lead to an increased performance or added value of the organization (Yan & Gray, 1994; Tao et al, 2015). However, the transactional role or the increased performances of an organization provide us with little to none information on the relational power between the two countries involved. Consequently, this is not helpful for the issue in this thesis.

Instead, in accordance with Sean Starrs’ article (2013), this thesis argues that the globalization of national corporations should not be underestimated. Starrs argues that the rise of transnational corporations and globalization of corporate ownership, national accounts with regard to gross domestic product (GDP) are no longer relevant when one aims to measure the power of a nation (Ibid, p. 817). Instead, it is important to explore the national domination of sectors in international perspective. Rather than investigating the national account, Starrs argues that it is “the nature of the transnational corporations themselves” that should be investigated (Ibid, p. 820). In other words, in order to assess China’s relative power, research should be focused on the extent to which Chinese oil companies dominate the energy sector abroad. By assessing resource-control from a less technical perspective and focus on the interdependence between the two countries, it can be analysed whether – and to what extent - Chinese oil companies are able to reduce their dependence on crude oil accordingly.

Consequently, this thesis tries to add to the debate on economic interdependence which is largely rooted in the liberal approach to international relations. The thesis specifically aims to create a more concrete link between China’s dependent position with regard to its crude oil imports and its strategy to reduce it through interdependence and by means of cross-border M&A, joint ventures and long-term contracts. This thesis argues that the increased Chinese shares and ownership in foreign energy firms are means by which China tries to resolve its dependency on other

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9 countries for its oil and gas. Distinct from the literature that has been reviewed above, this paper aims to examine the direct control of Chinese transnational oil companies with regard to their bargaining positions. Relating direct control to an expected gain of bargaining leverage, this thesis explores how the foreign energy asset acquisition of Chinese NOCs leads to a decrease in China’s energy dependence.

2.4. Bargaining power theory

In the literature, the issue of energy dependence is often related to China’s weak bargaining power, rather than the ability to increase bargaining power. Albert Hirschmann’s book called National Power and the Structure of Foreign Trade can be seen as the foundation for understanding bargaining power, vulnerability rooted in dependence and influence of states based on a trade relationship. Hirschmann describes this dynamic in the following quote:

“[…]the power to interrupt commercial or financial relations with any country, considered as an attribute of national sovereignty, is the root cause of the influence or power position which a country acquires in other countries, just as it is the root cause of the ‘dependence on trade’.”(Hirschmann, 1945, p. 16).

The logic of Hirschmann’s theory is based on the assumption that the relative increase in power by one country lies in the ability to interrupt commercial or financial relations (Hirschmann, 1945, p. 16). However, interrupting such a relation can only be done in a situation in which country A’s trading partner will be relatively worse off than country A itself once interrupting the relation. The underlying logic that relates economic interdependence to influence is captured in the concept of bargaining power. This logic is further elaborated on by Wagner:

“In the standard theory of threats, a bargainer can increase his bargaining power by worsening the position of the other bargainer in the no-agreement situation relative to his own. This leads to a relative increase in the utility gain to the other bargainer from every possible division of the money, which implies that the amount of money awarded to the other bargainer must be reduced to restore equilibrium” (Wagner, 1988, p. 469).

Clearly, the power in this situation is derived from the situation of asymmetry between both trading partners. Following Hirschmann’s logic, country A is only able to demand policy convergence because the other countries are too dependent to lose a beneficial trade relationship with A. The risk of losing this relationship fundamentally shapes the bargaining power of country A in this situation. Wagner has also elaborated on the topic of asymmetrical interdependence. He describes ‘dependence’ as need,

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10 and ‘asymmetry’ as the fact that one party needs the benefits derived from a relationship more than the other (Wagner, 1988, p. 461). Richardson & Keygley go even further to say that foreign policy behaviour of dependencies can be seen as a “partial payment in exchange for the maintenance of benefits they derive from their economic ties to the dominant country (1980, p. 198).

Nonetheless, bargaining power theory on its own is insufficient to explain China’s foreign energy strategy. It shows the underlying logic of the behaviour of a dependent country in a bargaining situation but is not applicable because it remains a conceptual description of bargaining situations. Despite withdrawing from a trade relation, it does not show how actors can increase their relative leverage. Moreover, it is not related to natural resources specifically. Since it has been argued that natural resources are not just a commodity, and the focus of this thesis is on the control of natural resources abroad, the theory requires a more in-depth focus on how dependent countries cope with resource dependency by means of cross-border control specifically. The resource-dependency theory clarifies this grey area of how to apply the theoretical foundations of bargaining situations, which will be presented in the theory chapter.

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3. Theory Chapter

ACHIEVING CONTROL DESPITE DEPENDENCE

Introduction

Scholarly debate concerning bargaining power and cross-border M&A, joint ventures and long term loans have thus far been described to be two separate topics; bargaining power theory is often seen as a theory with strong explanatory power for war or conflict (Lake, 2010-2011; Powell, 2002). On the other side, the debate has been focused on the more technical aspects and outcomes of China’s engagement in M&A and joint ventures (JVs) specifically. The theoretical puzzle and therefore the aim of this theory chapter, is to bridge the gap between the two branches and try to bring them together in a theory that captures both bargaining power as a non-conflictual theory and explores the impact of M&A, JVs and LTCs related to increased relative power and therefore securitization of China’s energy supplies.

Consequently, it can be explored how and to what extent China is able to decrease its energy dependence. Consistent with Deng & Yang’s research on M&A, JVs and LTCs, the resource-dependence theory (RDT) will be utilized in order to analyse this. The central argument of RDT is that there are several strategies a firm can opt for to ensure access to natural resources. M&A and JVs are the most effective options to minimize uncertainty (Deng & Yang, 2015, p.). Moreover, M&A and JVs enable firms to acquire control over resources, thereby either obtaining complete control over an organization or increasing power relative to that of others (Ibid.). Moreover, Chinese cross-border M&A and JVs take place in resource-intensive industries specifically (Sun et al, 2012, p. 12).

However, before applying RDT to the cases, it is important to take into account the relevance of the dynamic illustrated by the bargaining power theory. In this theory it is described what the incentives are for actors to avoid a situation in which they are highly dependent. This dynamic is very relevant with regard to RDT, since the bargaining power theory is the foundation for how countries react to a situation of dependence. In sum, it gives an insight in the mechanisms by which dependent countries can overcome the problem of vulnerability to the countries it depends on. Especially the ability to interrupt financial relations, as will be argued later, will play an essential role when it comes to China’s credit abundance and China’s cross-border provision of loans in return for natural resources.

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12 3.1. Diversification and control to reduce dependence

“SAFETY AND CERTAINTY IN OIL LIE IN VARIETY AND VARIETY

ALONE” -

WINSTON CHURCHILL

As Churchill pointed out at the eve of the First World War, the key to energy security is by diversifying one’s import sources (Yergin, 2006, p. 69). Churchill’s decision to convert the British navy from Welsh coal to imported oil gave the British a decisive advantage over Germany. At this period in time, Britain was able to seek oil supplies before its rivals did. However, approximately 80 years later, Chinese NOCs are unable to do the same. Nonetheless both Churchill and Chinese NOCs have the same objective; to lessen dependence on crude oil suppliers as much as possible to increase certainty in the supplies of crude oil. In this section it will be assessed to what extent Chinese NOCs have been able to diversify its oil supplies.

For Chinese NOCs, the diversification tactic serves as a means to reduce crude oil dependence, which is why one of the important goals of China’s foreign policy is indeed also to diversify its import sources (Downs, 2000, p. 19; Che, 2008, p. 81). Especially concerning China’s limited buffer – a week approximately – it is of vital importance to diversify its oil import sources to help alleviate these vulnerabilities.

China’s diversification strategy is described to be a statist oil security policy, since China’s energy diversification strategy is closely tied to the CCP’s political legitimacy. For example, the CCP steers the state led oil companies in their pursuit of global equity stakes and the energy diplomacy in general (2011, p. 232). In line with the statist approach of China’s energy strategy is its “Going Out” policy. This endorsed Chinese national oil companies’ quest for oil overseas by for example supporting long-term contracts and transnational pipelines. This way the Chinese government encouraged its state-led companies to seek alternatives besides from its main import sources to purchase oil from (Ibid, p. 43-44).

The definition of a diversified import strategy is described the following:

“[…] one that sources oil from several different regions of the world, thereby minimizing the potential for supply disruption. Relying on a single source for oil imports is generally far riskier than importing oil from multiple sources. Having multiple suppliers provides security and reduces vulnerability in cases of temporary or permanent disruption of supply” (Vivoda & Manicom, 2011).

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13 One of the explanations for China’s focus on the countries relatively nearby is that China aims to avoid the sea-lanes, since they are most vulnerable for disruptions, piracy or conflict (Ibid, p. 82). One of the most explicit fears for the Chinese government is a possible blockade of the Strait of Malacca, through which 80% of Chinese seaborne oil imports must pass in order to reach the mainland (Gholz et al, 2017, p. 44). Therefore, the country is particularly vulnerable once a blockade or conflict might occur.

China proved to be relatively successful in diversifying its oil importing sources, given the fact that it relies for less than 40% on the Middle Eastern region for its oil imports (Vivoda, 2009, p. 4619). Compared to other East Asian oil importers, such as Japan (80%) and South-Korea (72%) this is very low, especially when taking into account the double-digit growth of China over the last 15 years (Ibid.). China’s oil diplomacy covers nations across the world. Its regional focus is on Russia-Central Asia, Middle East-North Africa and South America. On the national level, Chinese national oil companies (NOCs) strive to import crude oil specifically from Russia, Kazakhstan, Turkmenistan, Iran, Iraq, Sudan, Venezuela and Indonesia.

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14

CNPC Sinopec CNOOC Others Total

Major countries

Projects % Projects % Projects % Projects Projects %

Europe 16 22 3 9 0 0 2 21 15 Russia, Kazakhstan, Uzbekistan Middle East 8 10 11 34 0 0 6 25 18 Saudi Arabia, Yemen, Iran Africa 19 26 11 34 4 25 3 37 27 Sudan, Angola, Algeria, Nigeria

North-East Asia 1 1 0 0 1 6 1 3 2 Mongolia

South-East Asia 15 20 3 9 11 69 2 31 22 Indonesia, Australia, Malaysia, Papua New Guinea Latin America 11 15 3 9 0 0 2 16 11 Venezuela, Brazil, Ecuador, Peru North America 4 5 1 3 1 6 0 6 4 Canada Total 74 100 32 100 17 100 16 139 100

Table 1. Distribution of Overseas Investments by Chinese Oil Companies, Vivoda 2009 However, Xu and his colleagues have concluded in their research on China’s oil import diversification strategy that it does not efficiently reduce China’s energy dependence. Despite the fact that diversification among suppliers can reduce dependence, there are particular risks that cannot be induced through a diversification strategy. The authors characterize China’s diversification strategy to be market-oriented, which only enables China to meet the domestic demand of oil for a short term (Xu et al, 2014, p. 8340). Moreover, the authors have shown that China’s oil import diversification strategy “[…]

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15 does not fundamentally reduce the risk of oil importing; it is difficult to guarantee China’s oil import demands in the future” (Ibid.). In addition, the authors argue that in order to overcome this problem, China’s strategy should be reserve-oriented and focused on long-term supply guarantees instead (Ibid.).

As indicated before, it is not diversification alone which contributes to energy security. Both diversification and the relative gain of control over resources are strategies for a crude oil import country to contribute to energy security. The definition of energy security is:

“[...] the availability of energy in various forms, in sufficient quantities and at reasonable/affordable prices at all times, without unacceptable or irreversible impacts on the environment” (Amineh & Guang, 2018, p. 14).

Intuitively, it is clear that in order to reduce dependence, a country should either gain control over the sources it needs, or try to diversify its import sources – if domestic production lags behind. This is the debate in which the two theoretical approaches should be placed. Bargaining theory stresses the importance of the diversification of an actor’s sources (Yan & Gray, 1994). According to the advocates of bargaining theory, “the bargaining partner who has more alternatives is more powerful because it can threaten to walk away from the current bargaining and exercise its best alternative to a negotiated agreement”(Ibid, p. 1481). Given the earlier mentioned definition of diversification, the logic of bargaining power theory is clearly related to that of the diversification strategy. Diversification can be seen as a means through which the bargaining power of a country can be increased.

The RDT approach to the topic of dependency on the other hand, stresses the importance of control over resources in order to achieve a better bargaining position based on the following reasoning: “If a firm contributes more critical resources to an interorganizational arrangement than its partner, it will be more powerful than the partner in the partnership between them” (Yan & Gray, 1994, p. 1481). In other words, if a dependent country is able to gain control relative to its focal organization, the dependent actor has strengthened its position. Applying this to the case of Chinese NOCs, it follows that if Chinese NOCs have certain ‘critical resources’ it can contribute to its independent focal organization, the NOCs will be able to increase their bargaining position.

In line with Pfeffer and Salancik’s resource-dependence theory, the choice in this thesis is made to focus on the control that Chinese transnational corporations (TNCs) seek to gain in cross-border energy companies. This is not to dismiss the value of

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16 bargaining theory all in one. Neither is it to suggest that Chinese TNCs do not diversify in their crude oil sources altogether. Instead, it is part and parcel of China’s energy strategy, and should not be overlooked. Nonetheless, the choice to focus on the control of Chinese TNCs abroad rather than the diversification is because diversification alone has proved to be inefficient to secure China’s crude oil demand on the long term (Xu et al, 2014, p. 8340). Xu and his colleagues emphasize that China should move beyond the strategy diversification solely in order to secure long-term supplies of crude oil. In order to obtain this, Chinese oil companies must gain control over the supplies. The reason why M&A, JVs and LTCs are studied is since RDT is the dominant theoretical approach that helps explain why focal organizations are receptive to engage in these partnerships (Hillman et al, 2009; Deng & Yang, 2014, p. 157). Moreover, since it is vital for Chinese NOCs to achieve energy security, it is a valuable theory to assess Chinese NOCs chances for success. Also it is important to have a theory that addresses and helps explain the seemingly counterintuitive decision of a focal organization to engage in M&A, JVs or LTC deals which will result in a relative loss of control over its natural resources.

3.2. Interdependence, control and receptivity

In order to proceed to the resource-dependence theory, it is important to make clear what is meant by ‘control’ in this thesis, since it is one of the core concepts in this thesis. The exploration of this thesis concerns China’s oil companies’ attempts to gain control over crude oil outside of its borders. This suggests that obtaining control over crude oil is a unilateral attempt. However, it is crucial, especially given the dependence situation of China, that resource-rich countries are receptive to China’s attempts too. In sum, it is important to be aware of the duality concerned with China’s cross-border attempts to gain control over crude oil.

This duality is rooted in the concept of ‘interdependence’. According to Pfeffer and Salancik: “[…]interdependence exists whenever one actor does not entirely control all of the conditions necessary for the achievement of an action or for obtaining the outcome desired from the action” (2003, p. 40). In other words, organizational outcomes are shaped by both the actors involved. This stresses the earlier mentioned point about China’s attempts to gain control, which can for the reason of interdependence never be seen as a unilateral act.

Next to this, the boundaries within which the organizational outcomes are shaped are determined by the organizations’ control (Pfeffer & Salancik, 2003, p. 259). The

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17 authors utilize the following definition for control: “Control is the ability to initiate or terminate actions at one’s discretion” (Ibid.). However, the authors also acknowledge that “An organization’s control over activities is never absolute because there are always competing claims for the control of given activities” (Ibid.). Interdependence is therefore interesting in relation to control given the duality. As the authors point out:

“Ironically, to gain some control over the activities of another organization, the focal organization must surrender some of its own autonomy. Organizations seek to avoid dependencies and external control and, at the same time, to shape their own context and retain their autonomy for independent action” (Pfeffer & Salancik, 2003, p. 261).

The above described dilemma for the focal organization problematizes the issue of interdependence. Moreover, it shows the duality in the sense that the focal organization’s receptivity to – in this case - China’s attempt to gain control over the focal organization by means of M&A or JVs. Or, to engage in a long-term contract which also reduces the autonomy of the focal organization, since Chinese oil companies are able to lock up a set amount of oil barrels from the focal organization.

Pfeffer & Salancik state that to solve the abovementioned problem of interdependence, the typical solution involves “increasing coordination, which means increasing the mutual control over each other’s activities […]” (2003, p. 43). The long-term contracts are an example of increased coordination, in which the focal organization might be willing to reduce its autonomy in return for the control over China’s activities. The loan-for-resources mechanism does so by ‘buying’ the barrels which are locked up for China, which then results to accumulate to the total sum of the loan previously set by both organizations. This way both organizations have control over each other’s activities. This mechanism will be described more in-depth in the operationalization section.

Going back to the distinction between the diversification strategy and the strategy of increased control over energy supplies, the following issue should be addressed before moving forward. The concept of interdependence might raise questions concerning the strategy of diversification and the gain of control. For example, how do these interact or influence one another given the duality involved with the strategy of control – just like there is with interdependence. In sum, how should the difference between the two concepts be understood?

To begin with, interdependence can take several forms, as will be explained in the resource-dependence theory section of this thesis. Diversification can be seen as a means through which a multilateral or bilateral mutually beneficial relation can be

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18 achieved. In this situation the reciprocity between the actors is clear. However, diversification – seen from the Chinese perspective – is simply a means to reduce risks (i.e. trade disruptions). Diversification of import sources will be perceived as the first layer of China’s energy security. On top of it, there’s the strategy to gain control in China’s most vital resource-rich countries. The gain of control is needed in order to secure long-term securitization of oil supplies which cannot be obtained through diversification alone, as has been found by Xu et al (2014). Consequently, it is important to take note of the fact that the strategy of control will be approached in a bilateral manner, since it is focused on Chinese TNC’s control over specific countries, in which China bilaterally approaches its top three suppliers of crude oil in order to seek control in their respective energy sectors. Consequently, mutual dependence will be referred to in the remainder of this thesis as a bilateral relation.

To be clear, the strategy of control and that of diversification do interrelate. Countries on which China depends on for its crude oil supplies are certainly countries that Chinese TNCs aim to diversify from, in order to reduce the risk of a possible disruption of trade. Nonetheless, as has been pointed out earlier, Chinese TNCs- despite their relatively weak bargaining position – need to do more than diversify in order to achieve a secured energy supply. Consequently, despite its position, Chinese oil companies aim to gain control in its top three oil supplying countries. To what extent they are expected to achieve control over cross-border energy supplies will be theorized in the following section on resource-dependence theory.

3.3. Resource-dependence theory

The core problem concerning China’s energy dependence is the fact that it negatively affects China’s bargaining position. Since China’s domestic production of crude oil still lags behind, Chinese oil companies are at the mercy of resource-producing countries which are in a better bargaining position and therefore decide on the prices and amount of oil barrels it will provide to China.

The resource-dependence theory provides a theoretical explanation for the reason why resource abundant firms would allow other firms partial control within its energy sectors. Originally, the resource-dependence theory is rooted in managerial and sociological research. However, it accounts for a relational dynamic that is not limited to these realms solely. Economic interdependence is an important aspect in the theory of resource-dependence, and is also a key factor in the liberalist approach in the field of (IR). The liberal pillar within IR argues that economic interdependence promotes

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19 international cooperation, mostly through means of multilateral organizations (Ziegler, 2006). As explained above, in this thesis the multilateral dimension will not be analysed given the focus on bilateral and relational power balances. Nonetheless, it is interesting to take note of the overlap - or partial integration - between the liberalist school of thought and the realm of sociology and managerial research within RDT.

Moreover, RDT is concerned with a fundamental understanding of a behavioural dynamic which provides insight in the dynamics between countries just as it does between firms. The fact that different units of analysis are used does not mean the explanatory power of behavioural dynamics cannot be applied to interstate cooperation. More so, since China’s energy supplies are secured through its state-led oil companies, which enable one to focus on the organizational or firm level of analysis. Next to this, RDT is concerned with the question why firms engage in partnerships, which is mainly to reduce both competitiveness and dependence. These two issues are at the core of China’s motivations to move away from dependence and seek control over resources instead.

Pfeffer and Salancik’s publication in 1978, The External Control of Organizations: A Resource Dependence Perspective, can be seen as the foundation for RDT. The main reason to use this theory is because of its explanatory power with regard to the question why firms engage in M&A. To be clear, the definition used for M&A is “the absorption of all resources (assets and liabilities) or a target firm, in exchange for assets or stocks, so that a new firm is being created” (Drees & Heugens, 2013, p. 1678). According to RDT, firms and organizations will aim to restructure their dependency in order to reduce uncertainty in the flow of needed resources (Casciaro & Piskorski, 2005, p. 167). M&A are one of the most important options that firms can opt for in order to minimize environmental uncertainty, according to Casciaro and Piskorski. The reason why M&A are a powerful tactic is because organizations can absorb constraints (Ibid, p. 168). Absorbing constraints is “the only tactic that gives the dependent organization direct control over valued resources” (Ibid.). This will be explained later in the theory chapter. RDT offers three explanations for firms to engage in partnerships. First to reduce competition, second to manage interdependence and third, to diversify operations in order to lessen dependence on a small number of organizations (Ibid.). In sum, RDT is concerned with the question how organizations react to dependency (Hillman et al, 2009, p. 1405).

The central argument of resource-dependence theory is that firms that are dependent on natural resources can opt for several strategies in order to decrease its external constraints and get access to critical resources (Casciaro & Piskorski, 2005; Deng

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20 & Yang, 2015). These strategies can take several forms of interorganizational arrangements. These arrangements are considered to be instruments for reducing power imbalances and for managing mutual dependencies. Among them are interlocks, alliances, joint ventures, in-sourcing and M&A (Drees & Heugens, 2013, p. 1669). Pfeffer and Salancik, propose three distinct strategies for firms to absorb constraints: mergers and acquisitions, joint ventures and long-term contracts (Xia, 2010, p. 159). Through M&A, organizations can absorb constraints completely, through joint ventures and long-term contracts constraints can be absorbed partially (Ibid.; Casciaro & Piskorski, 2005, p. 168). However, the possible outcomes of constraint absorption fall or stand with the following two concepts of mutual dependence and power imbalance.

3.3.1. Mutual dependence and power imbalance

Casciaro and Piskorski (2005) criticized the research-dependence theory for a lack of conceptual clarity and specifically the missing distinction between power imbalance and mutual dependence which originates from Pfeffer and Salancik’s publication forty years ago. Casciaro and Piskorski describe the theory to be “[…] more of an appealing metaphor than a foundation for testable empirical research.” Given their effective work on these concepts, these will be used in order to operationalize the concepts in this thesis too. Casciaro and Piskorski add two distinct theoretical dimensions of resource dependence, namely power imbalance and mutual dependence. In the original theory of RDT, these two were integrated in the concept of interdependence:

“In social systems and social interactions, interdependence exists whenever one actor does not entirely control all of the conditions necessary for the achievement of an action or for obtaining the outcome desired from the action”(Pfeffer & Salancik, 2003, p. 40).

Casciaro and Piskorski criticize this integration, since power imbalance and mutual dependence have opposite effects on an actor’s ability to reduce dependence (2005, p. 167). More specifically, mutual dependence is a key driver of M&A, whereas power imbalance is an obstacle to engage in M&A (Ibid.).

Casciaro and Piskorski’s definition of power imbalance is “the power differential between two organizations”. In relation to power imbalance, the authors define mutual dependence as “the sum of their dependencies” (Casciaro & Piskorski, 2005; Hillman et al, 2009). In other words, the more the power or leverage between two countries differs, the bigger the power imbalance, which means that partnerships will be unlikely to

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21 develop successfully, let alone allow constraint absorption. On the other hand, mutual dependence is obtained when both countries are highly dependent on the partnership or trade relation, increasing the chances for a successful cooperation. The RDT considers power to be relational, since a change in country i’s dependence can either increase or decrease the power imbalance. According to Casciaro and Piskorski, the question whether a relation between actors is mutually beneficial or imbalanced has an effect on the critical issue of constraint absorption as is described below:

“Mutual dependence creates both the incentive and the ability to absorb constraint successfully. Hence, attempts to absorb constraint become increasingly successful as the mutual dependence between two organizations increases. Conversely, under conditions of power imbalance, the dependent organization is likely to be more motivated but less able to absorb constraint” (Casciaro & Piskorski, 2005, p. 169). In this quote it is again emphasized that constraint absorption is a crucial element to the resource-dependence theory. Constraint absorption is defined the following:

“Absorbing constraints entails giving the rights to control the resources that create dependencies to the dependent actor. Organizations can absorb constraint completely through mergers and acquisitions. Partial constraint absorption can be achieved through formal long-term contracts, such as joint ventures” (Casciaro & Piskorski, 2005, p. 168).

The relevance of constraint absorption to this thesis is that it is the only tactic that allows dependent organizations to gain direct control over the valued resources (Ibid.). Thus, the theory leads us to expect that mutual dependence between China and its crude oil suppliers will increase the chances for the partner to be willing to absorb constraints, meaning that China will be more likely to get control over the natural resources abroad. Conversely, China will be less successful in its partnerships when a power imbalance occurs, since this will limit its chances for absorbing constraints and therefore will be an obstacle - and decrease its possibilities - to gain control over foreign held natural resources.

Tracing back to the theoretical framework concerning interdependence, control and receptivity, in a situation of power imbalance, the focal organization will be unlikely to “surrender some of its own autonomy” (Pfeffer & Salancik, 2003, p. 261). Consequently, constraint absorption will most probably occur in a situation of mutual dependence.

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22 3.4. Operationalization

Introduction

Moving away from the market in order to secure energy supplies, China instead aims to get direct control over foreign resources (Chen, 2008). Chen Zhengdong, member of the Economic Committee of the Chinese People’s Political Consultative Conference described the move from trade to direct control the following:

[…] as long as we have sufficient foreign crude oil output, our economy can be alleviated and even offset from the percussions resulted from high oil prices. Therefore, it would be better to go abroad to exploit oil than to purchase oil” (Chen, 2008, p. 90).

This quote stresses that Beijing considers direct control of oil resources a more safe strategy to secure oil supplies than via trade. In this section the indictors for power reflection of control will be distinguished in order to analyse the strategies in relation to China’s control of foreign natural resources. The founding fathers of RDT, Pfeffer and Salancik, propose three distinct strategies for firms to absorb constraints: mergers and acquisitions, joint ventures and long-term contracts (Xia, 2010, p. 159). Through M&A, organizations can absorb constraints completely, through joint ventures and long-term contracts constraints can be absorbed partially (Ibid.; Casciaro & Piskorski, 2005, p. 168).

Based on the RDT, M&A, joint ventures and loan-for-resources will be examined in this thesis to explore how Chinese state-led oil companies gain control over the natural resources they are dependent on. Chinese TNCs are increasingly engaged in all three constraint-absorbing strategies. According to the US organization Energy Information Administration, China’s state-owned oil companies have increased their purchases of international crude oil assets through both direct acquisitions of equity and financial loans in exchange for oil supplies in order to secure China’s oil and gas supplies (EIA, 2016, p. 10). Next to this, the aim of the TNCs is to make long-term agreements and gain technical expertise with regard to the extraction of natural resources (Ibid.). Therefore, these are means through which TNCs can gain control

3.4.1. Mergers & Acquisitions

M&A are described to be means by which a firm can absorb constraints completely. In the RDT section, the crux to the likelihood of success to absorb constraints lies in the question whether there is a situation of mutual dependence or power imbalance. Casciaro & Piskorski describe the M&A as the situation in which “two organizations lose

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23 their status as distinct social actors, and the rights to control resources that generate dependencies are transferred to the merged entity” (2005, p. 182).

Given the starting point of Chinese oil companies being heavily dependent, it is expected that Chinese cross-border M&A will reduce the power imbalance, since the companies will be the owners of an energy company abroad. However, the role of the focal organization is of major importance. If the focal organization is not receptive to China’s M&A attempts, Chinese oil companies will not be able to reduce the position of power imbalance between the two countries.

3.4.2. Joint ventures

There are many forms of interorganizational linkages; interlocks of board of directors, exchange of personnel between organizations, but also non-contractual relations take place to foster interlinkages between organizations (Pfeffer & Nowak, 1976, p. 398). What makes joint ventures different, is the durable character of joint ventures. Joint ventures represent a more thorough integration of organizations than exchanges between organizations (Ibid.).

Joint ventures are defined as “a distinct organizational entity set up to jointly develop a product or share technology, generally involving an equity investment”(Drees & Heugens, 2013, p. 1678). Moreover, this partnership can “incur debt, sign contracts, or undertake other activities in its own name” (Pfeffer & Nowak, 1976, p. 400). The difference between a merger and a joint venture is distinguished by the fact that “in a merger, two or more companies (organizations) combine all of their assets to create a new entity. In a joint venture, two or more companies combine less than all of their assets to create a new entity” (Ibid.).

This distinction already reveals the stronger reduction of risks in a joint venture compared to mergers. Dorraj and English describe how this newly established relationship benefits China’s energy security the following: “Downstream joint ventures solidify China’s relations with its key energy supplies while channelling additional energy resources to the mainland. These refineries and factories also represent profitable investment opportunities for China’s extensive cash reserves" (Dorraj & English, 2012, p. 180).

However, regardless of the financial risks a firm exposes itself to, there are also legal boundaries to the creation of joint ventures. Especially antitrust authorities are watching joint ventures with suspicion, since they fear the partnerships will decrease market competition (Drees & Heugens, 2013, p. 1674). One of the reasons why

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24 organizations chose to engage in joint ventures is to obtain relational advantages, interorganizational learning and to stabilize resource supply relationships (Drees & Heugens, 2013, p. 1671). Joint ventures are expected to facilitate reliable and durable access to both knowledge and the resources itself (Ibid, p. 1669). Joint ventures, just like M&A are durable commitments, since they limit the previous owner of the firm or assets from the possibility to easily deploy its investments elsewhere (Ibid, p. 1671). Consequently, after such a partnership is agreed upon, a new pattern of dependence is created, which limits the strategic flexibility of the focal organization (Ibid.).

By entering a joint venture, the more dominant party involved would likely lose part of its discretion and flexibilities concerning the allocation of its resources, compared to the situation prior to the partnership(Casciaro & Piskorski, 2005, p. 172). Consequently, this actor is likely to resist the more dependent actor’s attempt to absorb constraints (Ibid.). Chances are that the dependent party in this case will be unlikely to overcome this resistance. However, the advantage of a semi-permanent engagement such as the joint venture, or another long-term contract, is that the potential costs and uncertainty during negotiations can be reduced (Ibid, p. 174). This way, the chances for a mutual beneficial outcome are increased.

3.4.3. Long-term contracts

Next to the M&A and JV’s, long-term contracts are also a strategic choice for Chinese TNCs to secure its crude oil supply. Long-term contracts can take several forms, of which loan-for-resources is the most important one with regard to China’s long-term contracts in the energy sector specifically. It is a means through which Chinese TNCs are able to gain long-term control over its energy supplies.

This strategy allows China to lock up future supplies and extent its presence in resource-rich countries (Tan, 2013, p. 755). Mostly, loan-for-resources deals are negotiated with countries that have an abundance of resources but limited financial capacity. More interesting is the fact that loan-for-resources deals require a high degree of cooperation between the government and the Chinese companies. The China Import Export Bank and the China Development Bank play a crucial role as coordinators and financers of loan-for-resources deals (Ibid.).

Furthermore, it is expected that China’s loan-for-resources agreements will increase. One of the important drivers for this future trend is the enormous amount of foreign reserves China holds, no less than $3.3 trillion in foreign reserves (Tan, 2013, p. 755). A large portion (80%) of China’s foreign reserves is in US dollars, which are likely to

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25 decrease in value. By means of loans-for-resources deals, China is able to avoid this depreciation in its foreign reserves by expanding its involvement in foreign energy supplies (Ibid.).

According to Drezner, dependence on foreign creditors alters the distribution of power in two ways: first through a mechanism by which a country with sufficient levels of reserves is in a more autonomous position to reject foreign policy pressures from a debtor state (Drezner, 2009, p.14). Secondly through a more assertive strategy, by which a creditor country can exercise its leverage. This can be done by threatening with withdrawal from the investment, more specifically from the exportation of capital to the debtor nation (Drezner, 2009, p. 14). According to Drezner: “Leverage could be exercised most crudely through the threat of investment withdrawal.” This line of reasoning brings us back to both the definition of control and the bargaining power theory, in which withdrawal from the trade relation is also the ultimate threat- and source of bargaining power.

Even if creditor nations do not explicitly threaten to refrain from further capital investment, the possibility alone should constrain the debtor country to increase pressures with its creditor which might evolve to a policy dispute (Ibid.). Former U.S. president Barack Obama has perhaps captured this dynamic best in the following quote: “It’s pretty hard to have a tough negotiation when the Chinese are our bankers”(Washington Times, 2008). Setser summarized this in the following quote: “political might is often linked to financial might” (2008, p. 3-4). This mechanism allows us to understand that China – as a creditor country – has increased its bargaining leverage relative to its debtor countries, since the debtors are dependent on China’s credit. This will come back in the empirical section of the thesis.

Consequently, the expectation is that the loan-for-resources will create a situation of mutual dependence in which Chinese TNCs are likely to achieve a partial absorption of constraints. Nonetheless, it is important to note that there are many risks involved in the loan-for-resources deals. Some resource-rich countries might fail to supply the quantity of resources which is agreed upon. More importantly, “[…] because oil is not collateral for the loan, if the borrowers threaten to cut off the supply of oil, lenders cannot seize extra oil or oil revenue to compensate for potential losses”(Jiang & Sinton, 2011).

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26

4. China's political power and its energy sector

INTERTWINEMENT BETWEEN THE CCP, NOCS AND SOES

Introduction

The tight relation between both NOCs and state-owned enterprises (SOEs) and the Chinese government is important to clarify on, since many misconceptions exist regarding this relationship. Moreover, in order to understand the overseas investment strategies employed by Chinese NOCs, it is important to understand how they originated. Amineh and Guang have described China to be a ‘transnational capitalist state’ (2018, p. 30). Meaning that China was able to become a global economic power given its state-led character and financial assistance through China's state-led banks. The fact that China’s biggest NOC’s have the same set of parents, namely the Ministry of Petroleum Industry and the former Ministry of Chemical Industry, already shows the strong intertwinement of China’s government and its NOCs. Moreover, the fact that China’s state-owned banks, the CDB and China Exim Bank provide loans for the NOCs’ investments abroad, shows that NOCs, SOEs and the CCP are united concerning China’s foreign policy, which enables them to gain economic power internationally. Consequently, Chinese oil companies are integrated in the Chinese state’s energy

policy.

4.1. National oil companies

NOCs are generally state-owned enterprises (SOEs) and act in line with national interests (Amineh & Guang, 2018, p. 29). The three major Chinese NOCs, also called “the Three Barrels” - are the CNPC, Sinopec and CNOOC, which all evolved to be oil companies after being integrated to government ministries (Downs, 2010, p. 74). The three NOCs have both an oligopolistic power on energy supplies and prices domestically, and are internationally operating. The NOCs have recently emerged as strong competitors on the global energy market (Amineh & Guang, 2018, p.31).

The CNOOC was formed in 1982 as a corporation under the Ministry of Petroleum Industry (MPI) with the aim to form joint ventures with foreign firms to operate in China’s territorial waters (Ibid.). One year later, in 1983, Sinopec was established from the assets of both the MPI and the Ministry of Chemical Industry. Last was the CNPC, which was formed in 1988 from the assets of the MPI (Ibid.). Both Sinopec and the CNPC are

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27 ministry-level companies. Interestingly, they are ranked at the same level as the State Asset Supervision and Administration Commission (SASAC), which has formal authority over China’s largest SOEs, including the NOCs (Ibid, p. 75).

SASAC’s power instrument over China’s NOCs is the authority to appoint, dismiss, and promote the companies’ general managers (Downs, 2010, p. 75). The ultimate authority however, lies with the CCP’s Organization Department. This authority has far stretching consequences as indicated by the following quote:

“This authority extends, indirectly, to the NOCs’ internationally listed subsidiaries because an individual appointed general manager of a parent company usually concurrently serves as the chairperson of the board of its listed subsidiary. Consequently, NOC managers must balance corporate and party-state interests, especially if they want to advance their political careers. Executives who demonstrate managerial prowess while not running afoul of the Chinese Communist Party can often use their tenure in the oil patch as a springboard to national leadership”(Downs, 2010, p. 76).

This quote indicates that general managers of NOCs have to take the CCP’s interests in mind while running their corporations in order to stay in place. Given the fact that SASAC is a government body, it is indirectly the Chinese government who decides whether a general manager of a NOC should remain in its position, get promoted, or will be dismissed. The incentive for the general manager to take into account the national interests, will be rewarded by means of a possibility to get to China’s national leadership (Downs, 2010, p. 76).

On the other hand, the major Chinese NOCs gain power relative to the CCP given its vital role in the countries’ energy supply. Together with the increase of energy consumption, the financial might of the NOCs has relatively increased too. The major NOCs hold an “oligopolistic power” over the Chinese oil industry (Jiang & Sinton, 2011, p. 26). Consequently, this power allows the NOCs to lobby for more influence in the CCP. Moreover, the top officials of the CNCP, Sinopec and CNOOC are strongly connected to the top leadership of the government (Ibid.). Since it is in the interest of both the CCP and the NOCs to be commercially successful and to secure a vast amount of energy supplies, the managers have a certain amount of freedom in the choices how to achieve these goals, as long as they do so (Ibid.).

However, the CCP the ability to control the NOCs’ investments both domestically and internationally (Downs, 2010, p. 76). Domestic investments ranging from oil fields to oil storage facilities require the approval of the Chinese government (Ibid.). International investments made by NOCs’ that are above $30 million, need to be approved by the Chinese government beforehand. In relation to these investments, are the loans the

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28 Chinese state-owned banks can provide to the NOCs. Although the NOCs’ have generally not required government funds because of their strong cash flows, the ability of both the CDB and China Exim Bank to provide low-cost loans do function as an additional source of leverage over the NOCs (Downs, 2010, p. 76).

4.2. State-owned enterprises

In the early 1980s, China’s economic reforms were initiated. This was the period in which the Chinese government decided to create state-owned enterprises based on the converted productive assets of several government ministries (Jiang & Sinton, 2011, p. 9). The goals for the SOEs were set to introduce among others; competition, promotion of economic efficiency, create a wider share of ownership and to let SOEs function according to the market discipline (Ibid.).

In contrast to private corporations, whose primary goal is to maximize profits, Chinese SOEs also have a social responsibility (Wang, 2012, p. 488). The Chinese SOEs serve the state by providing economic stability and development at the state level (Ibid.). The Chinese SOEs are expected to both serve firm goals and national goals, which shows governance features that are distinct from western corporations.

Beyond dependence? China's revised energy strategy : to what extent have Chinese oil companies gained control over crude oil supplies in Russia, Saudi Arabia and Angola?

B

EYOND DEPENDENCE

?

C

HINA

’

S REVISED ENERGY

STRATEGY

To what extent have Chinese oil companies gained control over crude oil

supplies in Russia, Saudi Arabia and Angola?

M

SC

P

OLITICAL

S

CIENCE

STATEMENT

OF ORIGINALITY

ABBREVIATIONS

AND ACRONYMS

LIST OF TABLES AND FIGURES

TABLE

OF

CONTENTS

1. Introduction

2. Literature review and contribution

3. Theory Chapter

ACHIEVING CONTROL DESPITE DEPENDENCE

“SAFETY AND CERTAINTY IN OIL LIE IN VARIETY AND VARIETY

ALONE” -

4. China's political power and its energy sector

INTERTWINEMENT BETWEEN THE CCP, NOCS AND SOES