St. Petersburg University
Graduate School of Management
Master in Management
Of Chinese National Oil Companies
Master’s Thesis by 2nd year student
Concentration — Management
Andrei Ivanov, Associate Professor
ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ ВЫПОЛНЕНИЯ
ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ РАБОТЫ
Я, Лебедев Иннокентий Дмитриевич, студент второго курса магистратуры
направления “Менеджмент”, заявляю, что в моей магистерской диссертации на тему
“Стратегии интернационализации китайских нефтяных компаний”, представленной в
службу обеспечения программ магистратуры для последующей передачи в
государственную аттестационную комиссию для публичной защиты, не содержится
Все прямые заимствования из печатных и электронных источников, а также из
защищенных ранее выпускных квалификационных работ, кандидатских и докторских
диссертаций имеют соответствующие ссылки.
Мне известно содержание п. 9.7.1 Правил обучения по основным образовательным
программам высшего и среднего профессионального образования в СПбГУ о том, что
‘ВКР выполняется индивидуально каждым студентом под руководством назначенного ему
научного руководителя’, и п. 51 Устава федерального государственного бюджетного
государственный университет’ о том, что ‘студент подлежит отчислению из СанктПетербургского
квалификационной работы, выполненной другим лицом (лицами)’.
STATEMENT ABOUT THE INDEPENDENT CHARACTER OF
THE MASTER THESIS
I, Innokenty Lebedev, second year master student, program ‘Management’, state that my
master thesis on the topic ‘Internationalization Strategies of Chinese NOCs’, which is presented
to the Master Office to be submitted to the Official Defense Committee for the public defense,
does not contain any elements of plagiarism.
All direct borrowings from printed and electronic sources, as well as from master theses,
PhD and doctorate theses which were defended earlier, have appropriate references.
I am aware that according to paragraph 9.7.1. of Guidelines for instruction in major
curriculum programs of higher and secondary professional education at St.Petersburg University
‘A master thesis must be completed by each of the degree candidates individually under the
supervision of his or her advisor’, and according to paragraph 51 of Charter of the Federal State
Institution of Higher Education Saint-Petersburg State University ‘a student can be expelled
from St.Petersburg University for submitting of the course or graduation qualification work
developed by other person (persons)’.
Описание цели, задач и
Лебедев Иннокентий Дмитриевич
Стратегии интернационализации китайских национальных
Высшая школа менеджмента
Иванов Андрей Евгеньевич
Целью исследования является идентификация стратегий
интернационализации китайских национальных нефтяных
компаний (ННК), а также основных факторов, оказывающих
влияние на формирование данных стратегий. Для достижения
цели применяется метод кейсов, позволяющий изучить детали и
контекст действий, направленных на интернационализацию.
Задачами исследования стали: создание репрезентативной
выборки кейсов, разработка алгоритма формализации стратегий
стратегий интернационализации китайских ННК, формирование
рекомендаций для российских компаний на базе успешного опыта
интернационализации китайских ННК имеет двухуровневую
структуру. На первом, корпоративном уровне, решаются
проблемы управления портфелем проектов и поддерживающими
видами деятельности (финансирование, связи с правительством,
HR). Корпоративная стратегия разрабатывается, в значительной
степени, для достижения целей международной политики КНР, и
в течение последних 15 лет реализуется в форме стратегии
На уровне отдельных проектов планируются основные виды
деятельности. Эти стратегии формируются под влиянием ряда
факторов (политический риск, законодательство, экономическая
интерпретироваться в рамках модели товарно-рыночной
экспансии И. Ансофа и решают проблемы выбора подразделения
компании для участия в проекте, формы реализации проекта
(альянс, совместное предприятие, поглощения) и структуры
В рамках исследования также сделан вывод о том, что
использование алгоритма может повысить эффективность
интернационализации российских ННК и помочь им в процессе
взаимодействия с китайскими нефтяными компаниями.
Интернационализация, национальные нефтяные компании,
стратегический менеджмент, Китай
Master Student's Name
Master Thesis Title
Main field of study
Academic Advisor's Name
Description of the goal, tasks
and main results
Internationalization Strategies of Chinese National Oil Companies
Graduate School of Management
The aim of this study is to identify the internationalization strategies of
Chinese national oil companies (NOCs), and to detect the main factors
that shape these strategies. Multiple case study methodology is
employed to develop a detailed contextual understanding of the
internationalization activities undertaken by Chinese NOCs. The
objectives were outlined as follows: 1) draw up a representative case
list, 2) formulate an algorithm that would describe the process of
development of internationalization strategies, 3) identify and structure
Chinese NOCs’ internationalization strategies, 4) develop
recommendations for Russian companies based on Chinese NOCs’
The study has revealed that Chinese NOCs’ internationalization
strategy is twofold. Corporate level strategy is designed to shape the
project portfolio and to manage the support activities (financing,
relations with the government, HR). This strategy is aimed at attaining
the goals inspired by the PRC’s foreign policy, and can be identified as
Project strategies are designed to manage primary activities within
each particular project. These strategies are shaped by a number of
factors (level of political risk, legal environment, economic
environment of the host country, etc.), and can be described in the
terms of the growth matrix developed by Igor Ansoff. The strategies
determine the most suitable business unit, manner of project execution
(alliance, joint venture, acquisition), and the ownership structure.
The study has also revealed that the algorithm that describes the
process of development of internationalization strategies may be used
by Russian NOCs to increase efficiency of their internationalization
activities, and to facilitate their interaction with Chinese NOCs.
Internationalization, national oil companies, strategic management,
Chapter I. Literature review ..........................................................................................................9
1.1 Literature review .....................................................................................................................9
1.1.1 Studies on the theory of internationalization .......................................................................9
1.1.2 Studies on state capitalism and the specific features
of Chinese internationalization strategy ......................................................................................12
1.1.3 Studies on internationalization of Chinese NOCs ..............................................................14
1.1.4 Summary and research gap ................................................................................................16
1.2 Research question and objectives..........................................................................................17
1.2.1 Research strategy and the structure of the study ................................................................18
1.3 Summary of Chapter I ...........................................................................................................19
Chapter II. Methodology and theoretical study
of Chinese NOCs’ internationalization strategy .........................................................................20
2.1 Determining the object of the study ......................................................................................20
2.2 Multiple-case study methodology justification .....................................................................22
2.3 Validity and reliability of the research ..................................................................................24
2.4 Limitations of the research strategy ......................................................................................25
2.5 Summary of Chapter II..........................................................................................................25
Chapter III. Empirical study ........................................................................................................27
How to read the cases ..................................................................................................................27
Case 1. Strategic alliance with China Development Bank (Sinopec Group and CNPC) ............28
Middle East .................................................................................................................................30
Case 2. Yadavaran field deal in Iran (Sinopec Group) ...............................................................30
Case 3. Saudi Aramco and Sinopec
JV YASREF refinery in Yanbu city, Saudi Arabia (Sinopec Group) .........................................34
The Americas ..............................................................................................................................36
Case 4. Repsol Sinopec Brazil in Santos Basin, Brazil (Sinopec Group) ...................................36
Case 5. Devon Energy, USA (Sinopec Group) ...........................................................................39
Case 6. Acquisition of Addax Petroleum (Sinopec Group) ........................................................41
Case 7. Exxon Mobile, Saudi Aramco, and Sinopec
JV refinery in Fujian Province (Sinopec Limited) ......................................................................44
Case 8. Royal Dutch Shell in China (Sinopec Limited) ..............................................................47
Executive summary .....................................................................................................................49
Findings and discussion ..............................................................................................................52
List of references .........................................................................................................................56
Appendix1. Table 1 - Internationalization strategy of Chinese NOCs: the summary................62
Appendix 2. Table 2 - Sinopec Group and Sinopec Limited Internationalizion Activity:
Summary of Cases.......................................................................................................................62
Beginning of the 21st century was the time when some major changes in the world’s
economy took place. Developing countries started their impressive rise to world leadership,
while gaining economic power and international influence. This process has been fuelled by
different factors in Russia and China, that both belong to the largest developing economies in the
world. In Russia, the progress was largely driven by its national oil companies, following the rise
in oil prices. In China, foreign investment and manufacturing helped to boost the economy.
However, these two countries share a lot of very important characteristics and trends.
First of all, both Russia and China share a socialist past and have a strong state, i.e. their
governments exercise a very high degree of influence over many areas of the economy and own
a lot of different enterprises within the so-called pillar industries. Second, both countries have
established special umbrella organizations that united largest state-owned companies in various
strategic industries to manage them more effectively. Also, a series of market reforms has been
conducted to change the old-fashioned non-efficient state-owned enterprise (SOE) model and
allow the companies be driven by market forces. One of the organizations established to boost
the profitability of SOEs was China’s State-owned Assets Supervision and Administration
Commission of the State Council (SASAC). It was created in 2003 and originally managed over
200 large holding companies and about 150,000 small enterprises. By 2013, the number of
SASAC-controlled entities shrank to 117, partly due to sell-off and partly because some largescale mergers took place. The list of the companies is not finalized yet and is expected to drop
under 100 in the coming years. However, the largest portion of revenue, profit and assets is
generated by only a handful of companies, among which national oil companies (NOCs)
play the most prominent role. There are only two major NOCs in China, and the industry is
very centralized. They are also the most actively internationalizing Chinese companies, just as
their peers in Russia.
Today, oil accounts for almost 50% of energy consumed worldwide and it is the main
source of revenue for many countries across all continents. Generally, oil companies can be
divided into two categories: those owned by national governments (NOCs), and those owned by
private investors (international-owned companies, IOCs, such as Shell, ConocoPhillips, etc.).
National-owned companies posses 90% of world’s oil & gas reserves and account for 75%
of production. Private international oil companies have 10% of worldwide reserves, but account
for 25% of total output.
The role of NOCs has been growing over the last two decades. The composition of
worldwide oil reserves ownership has been changing accordingly. Some of the largest NOCs by
oil reserves, output and revenue are Chinese companies owned by the government. One of them
is China Petrochemical Corporation (Sinopec Group) with its publicly traded subsidiary
China Petroleum and Chemical Corporation Limited (Sinopec Limited). Sinopec Limited is
the largest oil company in China by revenue ($440 billion in 2014) and one of the most active
players in the fields of international alliances and M&A (Sinopec Annual Report 2014). While
mostly owned by the government, it pursues a market-driven strategy trying to increase margins,
secure higher profits and diversify risks. However, state support remains an invaluable resource
for the company to attain its goals and grow further. The company has historically focused on the
downstream sector of oil production and started to actively internationalize earlier than other
major Chinese NOCs. In the mid-2000s the company had a greater need to go overseas in order
to level its downstream operations with inputs, i.e. to have more crude oil to process. Although
the company operates on its own, one should be able to see the State behind it and understand
that Sinopec is a member of a large, SASAC-managed family, with other major NOCs belonging
to it as well.
The other major oil company in China is China National Petroleum Corporation (CNPC)
with $425 billion revenue in 2014 and its traded arm PetroChina. Sinopec, being the largest NOC
out of two in terms of revenue, and the most actively internationalizing one, is the most
representative company to study. Its operations and strategy is similar to and aligned with that of
CNPC, and by focusing on Sinopec, we will be able to make generalizations for the whole
Chapter I. Literature review
1.1 Literature review
Theoretical materials related to our topic can be split into three groups: 1) general studies
on internationalization and internationalization of firms from emerging market economies 2)
studies on state capitalism and the specific features of the Chinese internationalization strategy 3)
studies on internationalization of Chinese NOCs. Since the developing capitalist economies with
strong state have become the talk of the town only in the 21st century, and the science of
management faced the rapidly internationalizing NOCs only recently, the volume of relevant
literature is rather limited, but the importance of the phenomenon suggests that a certain amount
of studies has been conducted.
1.1.1 Studies on the theory of internationalization
Internationalization can be defined in many ways, as increased international involvement
and the associated changes in organizational forms (Bilkey, Tesar 1977) or simply as outward
movement in a firm's international operations (Turnbull 1987). But whatever the definition, the
essence remains the same. When a company expands its operations into other countries
increasing its global presence it internationalizes.
Adam Smith was one of the first economists to discuss internationalization stating that it
results from the absolute cost advantage of one entity over the other. He claimed that a larger
number of the same goods or services can be produced with a different amount of labor. The
party that uses less labor has the absolute cost advantage and therefore can export at a
competitive price (Smith 1776).
David Ricardo thought that Smith’s concept was incomplete and didn’t account for the
opportunity costs. In Ricardo’s view expressed in ‘Principles of Political Economy and Taxation’,
under free trade, an agent will produce more of and consume less of a good for which he has a
comparative advantage. This way, the concept of comparative advantage was developed and
later became regarded as one of the main drivers for international trade.
Although Ricardo’s theory explained the case of international trade it didn’t address in a
comprehensive manner the reasons behind differences in transactions volume between different
agents. This gap was filled by the Gravity Model of Trade used by Jan Tinbergen in his work
‘Shaping the world economy; suggestions for an international economic policy’. The model
predicts trade flows between two agents based on the economic size and distance between them.
Another important theory that many later works were based on is the transaction cost
theory. Developed by Ronald Coase, it claims that internal costs of operations can be lower than
external ones due to a number of reasons (level of control, risks, opportunistic behavior of
suppliers, unpredictable market conditions, high interest rates etc.). This encourages firms to
integrate and internationalize (Coase 1937).
Later, more theories of international trade and internationalization were developed. The
most important ones are the Location theory, Heckscher-Ohlin model, behavioral theory of the
firm, Uppsala model and bargaining power theory. Location theory says that the main reason for
internationalization is maximization of profits due to choosing more favorable locations. The
Heckscher-Ohlin model can predict trade flows and production in particular regions. It was
created by Eli Heckscher and Bertil Ohlin when they expanded Ricardo’s comparative advantage
model and gave it a more scientific and mathematical outlook. Behavioral theory of the firm in
turn referred to the physiological side of the issue arguing that a firm consists of groups
(management, workers, suppliers etc.) who all influence decision-making which is based on a
negotiated compromise. The Uppsala model explains the process of internationalization: first a
company gains expertise in its domestic market then starts exporting to neighboring countries,
later switches to more distant importers, and eventually establishes subsidiaries. Bargaining
power theory assumes that there is correlation between bargaining power of a firm and its host
country, i.e. companies prefer strategies with high control and, ceteris paribus, choose countries
with lower bargaining power.
It is also very important to mention Porter’s diamond model first presented in ‘The
competitive advantage of nations’, and its later version the so-called double-diamond model
(Rugman 1993). Porter’s model generalizes factors that influence the competitive advantage of a
firm. The factors are: 1) factor conditions (human and knowledge resources, infrastructure etc.),
2) firm strategy, structure and rivalry (rivalry challenges the company forcing it to improve and
innovate), 3) demand conditions (a big and developed market pressures companies to innovate
and be proactive), 4) related and supporting industries (the existence and level of development of
industries that produce products and services important for innovation and internationalization),
5) government (obviously, it can influence everything) and 6) chance (uncontrollable events that
can interrupt the normal structure and thus create, enhance or decrease the competitive advantage
of a company). However, Porter’s model didn’t take into account the importance of international
activities. Double-diamond model was created to fix this problem. It consists of two diamonds,
one for home country, the other for host country. Complementary to it is another Porter’s model
referred to as Value Chain. It divides firm’s activities into two main segments, namely support
activities (e.g. HR, finance, etc.) and primary activities (in case of NOCs that would be
exploration, refining, marketing, etc.). This framework would be especially useful for us to see
the benefits brought along by the special relationship existing between Sinopec Group, which is
100% state-owned, and Sinopec Limited, which is partially freely traded on stock exchange.
The last theory is of the utmost importance for us. It is the so-called eclectic paradigm or
the OLI-Model developed by John H. Dunning in his work ‘Trade, location of economic activity
and the MNE: A search for an eclectic approach’. It takes into consideration the advantages of a
firm in relation to its ownership, location and possible international expansion, and helps to
determine the best internationalization option. One important advantage of this model is that it
incorporates a variety of other frameworks and gives a good understanding of a company’s
competitive position and potential as well as particular recommendations on its strategy.
Igor Ansoff (Ansoff 1970) has made the next step in internationalization theory and
focused on particular activities that a firm could focus on as an outcome of internal and external
factors. Although his framework is devoted to growth in general, it reflects the available
internationalization options very well. He developed four main options, that are market
penetration, market development, product development, and diversification. We will see that
Chinese NOCs tend to use employ all four options.
Researches on the general theory of internationalization are quite abundant, but studies on
the more recent phenomenon, that is internationalization of firms from emerging market
economies, are more limited. The rise of Japan and the Four Asian Tigers, that started in the
1950-60s, triggered the first wave of such studies (e.g., Lecraw, 1977, 1983; Wells 1983; Lall
1984), but the recent dramatic shift from socialism to capitalism in the 1980s and the rapid
expansion of Russian and Chinese firms in the 2000s made the matter even more urgent.
It has been widely accepted that firms from emerging market economies are forced to
quickly internationalize through brownfield investment, because their long-established rivals
have secured the most lucrative assets (Ning 2009; Fan et al. 2008; Deng 2007; Buckley et al.
2007; Cai 1999). The so-called ‘springboard perspective’ suggests that such firms acquire
strategic assets from the more mature companies ‘to facilitate their propulsion to the world
scene’. Seven reasons that motivate firms to apply the ‘springboard move’ are: 1) to compensate
for their weaknesses, such as lack of experience, technology and strong brand; 2) to
overcome their latecomer disadvantage; 3) to attack global rivals’ foothold in their own
home markets; 4) to bypass trade barriers; 5) to alleviate domestic institutional constraints;
6) to get preferential treatment offered by other/ their own emerging market government;
7) to exploit their competitive advantages in other emerging market economies (Luo, Tung
2007). Another aspect of internationalization, that has also been paid attention to, is the strategy
and its formation. Most studies on this topic (Luo, Rui 2009; Tsai, Eisengerich 2010; Child,
Rodriguez 2005; Fortanier, Van Tulder 2009; Cuervo-Cazurra, Genc 2008). Irina Mihailova &
Andrei Panibratov (2012) take the next step and develop a framework that enables researchers to
analyze the strategy of EMFs (emerging-market firms). According to it, the strategy should be
assessed along three dimensions: macroeconomic level, industry level and firm level, with
special attention paid to the government influence and firm-specific resources and capabilities.
All dimensions are interconnected and should be assessed together.
All these theories complement each other and help to understand the reasons behind
internationalization in general, and specific for the state-owned firms from the emerging market
economies in particular.
1.1.2 Studies on state capitalism and the specific features of Chinese
The second group of studies is dedicated to the issue of state capitalism and the related
specific features of Chinese companies’ internationalization strategy. One needs to have a good
understanding of China’s economy and politics, due to the intricate relationship between
the government and large businesses. This relationship has a profound impact on companies’
strategies, and is one of the most important factors defining their internationalization activity.
Very illustrative indeed is the fact that in majority of cases general managers of large enterprises
are also senior members of the Communist Party of China, and are therefore accountable to both
the various stockholders and the ruling party. When China started to reform its economy, the first
decade of the going-out policy ( 走 出 去 zouchuqu in Chinese) was shaped by political
considerations, rather than profit-maximization. State-owned companies were the only ones
allowed to invest abroad, and any foreign activity had to be checked and approved by the
Government. However, this regulation was gradually relaxed. In the mid-1980s, when Chinese
companies were allowed to operate abroad upon presenting the proof of possessing sufficient
capital, technical know-how, and suitable foreign partners (Tan 1998). Further deregulation took
place in the 2000s, when China joined the World Trade Organization, and Chinese firms were
encouraged to go abroad and invest. The approval ceilings were raised (that is companies had to
apply for state approval only if their activity would involve extremely large amounts of money).
Chinese businesses, having accumulated cash from export, immediately followed the global
trend and started to internationalize, however, the companies from pillar industries, including
Sinopec and other NOCs, have remained under tight control of the State (Hong, Sun 2006).
Ian Bremmer’s (2009) article ‘State Capitalism Comes of Age: The End of the Free
Market’, highlights the fact that what the world is experiencing now is the 4th wave of state
capitalism. The author claims that nowadays all major powers tend to tighten control over their
economies, even the US. However, he believes that this trend’s ‘future will likely prove limited,
particularly if it cannot provide even its two leading practitioners with a working model for
sustainable growth’ (p.54). ‘The two leading practitioners’ are Russia and China, for both of
which a number of examples is given. In the end, the author concludes, that ‘free market remains
the most powerful and the most durable alternative to state capitalism’. According to the article,
the primary actors in state capitalism are national oil corporations, state-owned enterprises,
privately owned national champions and sovereign wealth funds. All these actors form a
complicated net of joint businesses and related obligations, orchestrated by the government. We
will observe this situation happening in Chinese oil industry with the close ties between NOCs,
state-owned banks and the government.
The authors of ‘Governments as owners: State-owned multinational companies’ (CuervoCazurra et al. 2014) take a new approach toward SOEs saying that, ‘the time is ripe to revise this
classical view because in many of the market economies, SOEs have undergone enormous
change spurred mostly by the pro-market reforms that swept through Europe, Latin America and
Asia. Although SOEs have existed for a long time, these changes have heralded the rise of a new
breed of SOEs that have shed some of the shortcomings of their predecessors as they focus more
intently on the global arena’. This view indicates a new approach to state-owned enterprises in
general and NOCs in particular. The companies are regarded not as doomed dinosaurs, but as a
new and possibly revolutionary model that combines the best of the two worlds blending it into
the state capitalism phenomenon. It also stresses the fact that state-owned enterprises are
stepping into international business without fear and are ready to compete with the longestablished champions, exploiting the benefits that are brought along with the close ties with the
government and its financing capabilities.
Although state capitalism has become a usual occurrence, each country practices it in a
different way. The practice of internationalization with regards to the specific features of the
Chinese state and business has been studied by Libor and Korniyenko (2008) in their work titled
‘China’s Investments in Russia: Where do they go and how important are they?’ They argue that
Chinese SOEs OFDI is motivated by three factors: acquiring advanced technology through
M&As, increasing market share, and natural resource endowment. From the perspective of the
Chinese government, natural resources are the primary motivator, have been responsible for 81%
of loans issued for OFDI since 2002. As a growing energy consumer second only to the United
States, the country is currently dependent on oil imports — a dependence they would like to
mitigate by securing their own sources. Market share gain is the second largest incentive,
representing 15% of state-financed foreign projects.
This type of project is dominated by
Chinese power companies. OFDI for technology acquisition purposes accounts for only 4% of
total OFDI, but this still represents a departure from how other ‘Asian Miracle’ countries
operated. China still has a sizeable surplus of foreign currencies in an economically depressed
global environment, making cheap acquisitions of Western enterprises an enticing option. One
disadvantage of this approach is prompting anti-Chinese sentiment in the host countries. The U.S.
Congress, for example, citing ‘national security threats,’ has blocked multiple Chinese attempts
to purchase American oil companies. To the chagrin of many global players, these focuses
indicate that China is not using OFDI for ‘industrial adjustment,’ or ‘efficiency-seeking.’ This
article sheds light on the mechanics of Chinese NOCs’ M&A deals and what obstacles they face.
internationalization is Randell Morck’s ‘Perspectives on China’s Outward Foreign Direct
Investment.’ It states that Chinese OFDI shows preference for countries with weak institutions.
Research indicates that ‘past experience in certain institutional environments significantly
predicts survival when a firm invests in another such environment’. While companies from the
developed world find it difficult to operate in markets with excessive bureaucracy, corruption,
low transparency, and political constraints, Chinese TNCs already have experience with such
1.1.3 Studies on internationalization of Chinese NOCs
Literature on internationalization of Chinese national oil companies is not extensive, and
primarily exists in the form of information papers and reports. They tend to focus on the
motivation for internationalization and/or the role of the government. Since Chinese companies
started to engage in internationalization activities about a decade ago, scholars have not yet
developed a consistent and inclusive model for the new phenomenon. However, a number of
studies have been conducted in order to fill the gap. Some of the most important sources of data
and studies are presented below.
International Energy Agency (IEA) keeps track of all major shifts and changes happening
in the oil and gas industry worldwide. It accumulates related statistics and is an invaluable source
of data. The Agency publishes reports on Chinese oil companies every year and is an excellent
tool to observe the long-term trends. According to one of the latest reports (IEA 2014), Chinese
energy sector outward investment has grown dramatically in the past 8 years following the
financial crisis in 2008, making Chinese NOCs some of the largest oil producers in the world
accounting for about 7% of total output. IEA reports also study NOCs’ relationship with the
government. For example, all NOCs foreign projects must be approved by the Chinese
Commission of Commerce, and larger projects (exceeding $300) require further approval of the
State Council. However, NOCs have recently gone public with a significant amount of shares
circulating in the market. This reflects the intricate and important relationship between the
government, internationalization, profits and reforms.
Two most prominent and comprehensive publications on China’s energy sector and the
NOCs are ‘The Strategic Implications of China’s Energy Needs’ (2002) and ‘China, Oil and
Global Politics’ (2011) by Philip Andrews-Speed and Roland Dannreuthner. The first book gives
a detailed description of China’s energy policy, while the second publication is more businessfocused and offers some valuable insights into the relationship between the NOCs and the State.
Other researchers take a descriptive approach and give an overview of the NOCs international
activity (Thomson, Boey 2015; Alon et al. 2015) or the misperceptions related to it (Alon et al.
Researchers have also paid attention to the motivation of Chinese NOCs to go abroad.
Some of them argue that acquisition of strategic assets is the main motivation, especially for the
downstream companies such as Sinopec (Lai 2014). However, they omit the fact that China’s
NOCs are seeking diversification and downstream companies are growing increasingly active in
the upstream sector which requires more natural resources. Others stick to the traditional set of
OLI framework’s ‘market, resources, efficiency, strategic asset/capability’ types of motivation
(Xu 2011). Altogether, most researchers tend to agree on the list of motivations for the Chinese
NOCs to spread their activities abroad. However, not enough attention has been paid to the
specific way they do it. This could be caused by the time lag, since active internationalization
and expansion has started after 2008, when Chinese NOCs emerged as one of the players who
had cash and desire to spend it.
Chih-shian Liou (2009) in ‘Bureaucratic Politics and Overseas Investment by Chinese
State-Owned Oil Companies: Illusory Champions’ looks at the obstacles that Chinese NOCs face
due to the complex nature of oil business and its ties to the so-called oil diplomacy. It takes the
NOCs a lot of skill and effort to successfully navigate between the short-term and long-term
interests as well as government directions and monetary considerations.
Researchers have also been exploring the role of various internal and external factors in
determining NOCs’ internationalization strategy. ‘China's Global Equity Oil Investments:
Economic and Geopolitical Influences’ by Wojtek M. Wolfe and Brock F. Tessman (2012)
explores various external political, economic and institutional factors that shape Chinese NOCs
foreign investment policy. They analyze oil-rich countries one-by-one assessing each along a list
of parameters that help to determine whether they are of interest to the Chinese NOCs and to
what extent. Another view on the same issue is presented in Chen Shaofengs’s article
‘Motivations behind China’s Foreign Oil Quest: A Perspective from the Chinese Government
and the Oil Companies’. The author looks at the internal factor of cooperation between the
government and the NOCs, discovering the underlying motives and reasons for particular moves
in China’s energy policy and consequently NOCs international strategy. Mr. Chen stresses the
benefits that such co-operation brings and generally speaks in favor of it.
1.1.4 Summary and research gap
The general process of internationalization has been studied quite well, however,
internationalization of state-owned companies from strong-state countries is a relatively new
phenomenon. Chinese NOCs are some of the most actively internationalizing state-owned
companies in the world and present an extremely interesting object of study, due to the scale and
scope of their operations, complicated relationship with the government, and struggle to secure
both profits and diplomatic victories.
Researchers have studied relationship between the NOCs and the government, generally
coming to the conclusion that the government owns, but does not run the companies. Motivation
behind NOCs’ international activity has been studied quite well, but most works fall within the
existing frameworks limited to identifying motivations. At the same time, they tend to be
outdated and focus on activity in the downstream sector without paying enough attention to the
upstream sector of the oil industry. The ‘market-, resource-, efficiency-, strategic
asset/capability-’ seeking motivation framework proves its validity and is widely applied to the
Chinese NOCs (Dunning 1998; Dunning, Lundan 2008). On the other hand, these four types of
motivations cannot fully reflect the strategy, since they do not include the incentives given by the
internationalizing firms to their partners and potential objects of M&A.. Thus, it can be stated
that no attempts have yet been made to interconnect the motivations, incentives,
relationship with the government, and data on particular cases of alliances, JVs and M&As,
to generalize and describe the patterns in internationalization strategy of Chinese NOCs.
This makes the studies incomplete and inapplicable to real-life situations, when strategic
managerial decisions must be based on a combination of factors.
To fill in the research gap up, an attempt will be made to answer the following question:
What are the internationalization strategies of Chinese NOCs,
and what factors determine them?
1.2 Research question and objectives
The goal of this study is to identify and generalize the experience of planning and
implementation of internationalization strategies among Chinese national oil companies to
improve the internationalization strategies for the industry in general and Russian national oil
companies in particular. To attain this aim we will pick the largest Chinese oil company Sinopec
Limited and its parent company Sinopec Group, which could be representative of the industry.
The questions that will be answered are as follows:
What are the internationalization strategies of Chinese NOCs?
What factors determine these strategies?
There are several reasons that contribute to the importance of study on the
internationalization strategy of Chinese NOCs. First of all, the size of these companies and the
scope of their operations produce a profound impact on the industry and the world economy.
Their increasing internationalization efforts have multiple directions and presently can be
observed on all continents.
Second, there exists a number of misconceptions about Chinese NOCs caused by their
unique features. General studies on the internationalization of emerging-market firms are unable
to address the complex nature of Chinese NOCs and their international activity.
Finally, Chinese NOCs started playing a prominent active role in international business a
decade ago, and the related managerial studies are incomplete due to the time lag. The
importance of the phenomenon suggests that more up-to-date studies should be conducted.
The research questions are aimed at fulfilling a few objectives. The first question implies
generalization and categorization of internationalization strategies, as well as preceding analysis
of particular cases and tools of internationalization. The second question requires defining the
factors that shape the strategies and the resulting causal relationship.
Several objectives have been identified in order to answer the abovementioned questions:
1. Draw up a representative case list illustrating attempts of Chinese national oil
companies (NOCs) to internationalize
2. Use the multiple case analysis to develop the internationalization theory:
to structure the internationalization strategy
to develop an algorithm of its formulation
3. Identify the internationalization strategies of Chinese NOCs
4. Create a framework to develop internationalization strategy for national oil
companies on the basis of Sinopec Group and Sinopec Limited multiple case study
5. Identify the internationalization activities of Chinese NOCs that could be adopted
by Russian companies
1.2.1 Research strategy and the structure of the study
This paper is structured with the use of abductive approach with a literature review in the
beginning and an extensive multiple case study following it. Hypothesis is not formulated until
the analysis of the cases has been carried out. This allows us to refer to the theory presented in
the literature review, and explore the multiple cases in an unbiased and thorough manner.
To conduct our study, we have chosen the qualitative explanatory multiple case study
methodology. This is the only methodology that would allow us to study NOCs strategies in
their contexts and complexity, going deep into each case and extracting its essence (Yin 2006,
Stake 2013). We believe that a national oil companies’ strategy is driven not just by financial
indexes and reports, but also by global political and social environment. The method also
enabled us to deconstruct and analyze the essence of each case, and eventually generalize the
internationalization strategy (Hancock and Algozzine 2006).
To make the research as complete as possible, multiple cases were used to reflect all
possible ways of internationalization. Cases of strategic alliances, JVs and M&A deals are
presented in the third chapter of this study. The findings will be tested against data on CNPC,
second largest NOC in China, to verify the results.
1.3 Summary of Chapter I
Active internationalization of Chinese national oil companies is a recent phenomenon
with great implications for the industry and the world economy in general. Having become the
largest net oil importer, China is becoming one of the largest oil producers, and this is to a large
extent done through the internationalization activity of its NOCs.
The process of internationalization has been studied thoroughly. However the recent
trend of actively internationalizing state-owned companies with governmental backing deserves
special treatment, due to its scale, scope, and unusual traits. Chinese NOCs, being some of the
largest state-owned companies in the world, present a particularly interesting case. Their
motivation to go abroad is generally well-understood and has been well-studied. But apart from
the motives, there is also execution and results. Combining the three, one can see the complete
picture and generalize the strategy of Chinese NOCs.
The unique structure of China’s oil industry has facilitated the research. Out of three
largest oil companies run by the same commission within the Communist party of China, one is
too small and the other two are very similar. This allowed us to narrow the research to Sinopec
Limited, the company that has the largest revenues and is the most actively internationalizing
NOC, and its parent company Sinopec Group controlled solely and directly by the state. Based
on the analysis of multiple cases describing the international alliances, JVs and M&A deals of
Sinopec Limited and Sinopec Group, we will be able to categorize and generalize the
internationalization strategy of Chinese NOCs.
Chapter II. Methodology and theoretical study of Chinese NOCs’
2.1 Determining the object of the study
China has vast oil and gas reserves. At some point back in the 1980s the PRC exported
oil to Japan, but then domestic demand started to grow at a much faster pace than production.
Finally in the early 1990s China became a net oil importer and remains in this position until
today. Although China is world’s 4th largest oil producer, most of its oilfields have reached their
peak and the efficiency is gradually declining.
In spite of the recent economic slowdown, China’s expected growth rate for the next few
years is still impressive. At 6% growth per annum demand for oil and gas will continue to rise,
and as domestic traditional oil production is starting to shrink, three options are available. Oil
companies can increase production of nonconventional hydrocarbons (the most promising one
being resources trapped in shale), increase imports from other countries and thus expose
themselves to various risks, or shift toward alternative sources of energy. The last option doesn’t
seem feasible in the short- and medium-term due to the extremely high switching costs, high
investment and relatively low efficiency when compared to the conventional sources of energy.
We can therefore consider the first two options.
The key global players in oil industry are NOCs and a number of big private, publicly
traded international oil companies (IOCs) called ‘supermajors’. Chinese NOCs have been
cooperating with these companies for decades, both domestically and internationally. This
collaboration has intensified in the late 1990s and early 2000s, reaching unprecedented levels in
late 2000s due to China’s economic progress, market reforms, growing concerns about energy
security and large currency reserves. Besides, in the last decades many companies have reached
the point when it is often too expensive or too risky to explore and extract oil on their own, so
they started to form alliances that sometimes resulted in mergers and acquisitions.
Today’s oil & gas industry in China is dominated by three major companies, namely
China National Petroleum Corporation (CNPC) and its traded arm PetroChina, Sinopec Group
and its traded arm Sinopec Limited, and China National Offshore Corporation (CNOOC). The
first two are similar in organizational structure, size and position, and operate in both
upstream (exploration and production) and downstream (refining, marketing and
distribution) sectors, while the last one focuses on upstream activity is significantly smaller
in size and revenue. Sinopec Limited is the largest oil company in China by revenue ($440
billion in 2014), while its parent company Sinopec Group is one of the most active players in the
fields of international alliances and M&A (Sinopec Annual Report 2014). Sinopec Group and
Sinopec Limited have historically focused on the downstream sector of oil production and started
to actively internationalize earlier than other major Chinese NOCs. In the mid-2000’ the
company had a greater need to go overseas in order to level its downstream operations with
inputs, that is to have more crude oil to process. Sinopec Group and its traded subsidiary Sinopec
Limited, which is the largest NOC in terms of revenue, are internationalizing the most actively
among the three and thus are the most representative companies to study. Its operations and
strategy are similar to and aligned with those of CNPC and CNOOC, and by focusing on Sinopec
Group and Sinopec Limited, we will be able to make generalizations for the whole industry.
A total of over 100 major deals with foreign governments and companies have been
signed by Chinese NOCs from 2002 to 2015 (International Energy Agency 2012, 2015). Sinopec
Group and/or Sinopec Limited have participated in over 30% of these deals, the rest spread
between CNCPC/PetroChina, CNOOC and other less significant companies. Out of 100 deals,
about 10 can be referred to as mega deals (worth about or over $5 billion); Sinopec took part in 5.
The scale and scope of activity of Sinopec Group and Sinopec Limited, as well as their
background almost identical to that of CNPC and PetroChina, allow us to narrow down the
research on the internationalization strategies of Chinese NOCs to these two companies.
The cases represent all regions where the Chinese NOCs are most active, and have a
highly representative nature due to the scale of investment involved. Out of 100 major deals,
about 30% were related to the Middle East (3 cases out of 8 contain information on operations in
this region); 25% of deals were made in South America (3 cases involve companies from South
America); 15% were made in Africa (1 case); 10% in North America (1 case); 5% in Russia (1
case); the rest spread across China and its nearest neighbors (2 cases).
We shall look into major alliances, JVs, and M&A deals of Sinopec Group and
Sinopec Limited, and threat them as separate cases. As a result, we shall have a detailed list
of their internationalization efforts in the last decade, categorize them and draw
conclusions on the company’s strategy. Generalization of the strategy as well as
implications for the whole industry will follow.
2.2 Multiple-case study methodology justification
Uniqueness of Chinese NOCs is rooted in their size, behavior, and relationship with the
government. The vast number of factors that influence their internationalization activity makes
the study of their strategy quite a challenging task. The importance of context and in-depth study
of various factors and conditions have determined the methodology of this research.
The research method employed throughout the thesis belongs to the qualitative type,
which allows the cases to ‘unfold naturally’ (Patton 2001). The results produced with this
method ‘cannot be obtained by means of quantification’ (Strauss, Corbin 1990). One of the ways
to study a phenomenon is to observe it in a number of separate events, and then record the
process and outcomes. These are the characteristics of a multiple case study, when different
‘stories’ are recorded and compared to one another. However, observation and recording of
outcomes is not yet a research, since a research must include analysis and conclusions, an
explanatory part. This part implies a constructivist approach that is based on individual
understanding as well as on the facts from the cases. However, it does not exclude objectivity,
since the method makes use of pluralism and the broad variety of sources, which is unattainable
with other methods (Miller, Crabtree 1999). Ultimately, the qualitative method used ‘is great for
understanding the world from the perspective of those studied; and for examining and
interpreting the processes’ (Pratt 2009).
Still, a question arises: how to reach objectivity and extract facts that a weighted and
logical analysis could be based on? Main challenges, that a qualitative multiple-case research
faces, are the validity and the value of its results. The value lies within the analytical
generalizations that it can bring along (Yin 1994). Although we cannot extrapolate the results to
other cases, we can generalize the trends by observing a large number of cases. The validity of
research depends on the framework used to show the connection between the variables and
outcomes (Eisenhardt 2007; Yin 1994) as well as give a ‘thick’ description of the case. The latter
can be achieved by addressing various sources documenting details and verifying them against
each other. Creating a good framework is a more challenging task.
We have come up with a list of parameters to assess the cases and pull out the necessary
uniform data. The parameters making up the framework are essentially the variables that change
in separate cases. The distinguishing feature of these variables is that they are clear, accessible,
different in different cases, compatible and comparable to each other. The list of parameters we
have chosen is as follows:
Location (where the internationalization activity is taking place)
This parameter provides us with an understanding of geographical distribution of the
internationalization activity. Linked with the type of activity, its scale and scope, and other
variables, it is one of the most important parameters to generalize the strategy.
Date (when the activity started and/or ceased)
Formation date adds the temporal dimension to our study, helping to track the changes in
Goal of activity (what was the announced goal of activity)
The announced goal of activity provides us with an understanding of the reasons standing
behind it. Discrepancies between the announced goal and the actual outcomes can provide
further information on the actual goals and objectives.
Key activities (what the company and its partners were supposed to do and
actually did/are doing under the agreement)
This parameter allows us to look into the essence of each activity and draw parallels
between separate cases.
Ownership structure (who controls what)
Ownership structure reflects the position of the company within an alliance and may
reveal its attitude toward potential risks.
Benefits (how did the companies engaged in the deal benefit)
Documenting the benefits is of utmost importance for achieving validity of the analysis.
To see what each side of deal gained is to understand what incentives were present. This reveals
not only what the Chinese NOCs wanted to get, but also what they were ready to give away. This
parameter reflects the bargaining process and the trade-offs of each activity.
Risks (what risks the parties involved undertook)
This parameter is useful to assess the risks involved in each activity and NOC’s readiness
to take them.
Motives and growth options
According to the literature review, four main types of motives can be identified: resourceseeking, market-seeking, efficiency-seeking, and strategic asset/capability seeking activities.
Growth options categorized according Igor Ansoff are manifestations of the organizational
strategy specific to each case.
Important considerations that give a deeper insight into the deal.
Based on these parameters we could assess, compare and analyze individual cases of
internationalization activity of Sinopec Group and Sinopec Limited and eventually determine the
high-level plan that stands behind them and the key factors that define it. To make the contents
and the results of our research more accessible, we have put the most important details into a
table (see Table 1), and concluded it with notes and prognosis for each studied case. Table 1 may
serve as a reference list, if the reader wishes to trace the logic of the research, verify the data or
use it to draw up his or her own conclusions.
2.3 Validity and reliability of the research
A qualitative as well as a quantitative research is considered contributing to the research
field if it complies with a number of criteria, that is internal validity, external validity, construct
validity and reliability (Golafshani 2003). Some scientists argue that reliability is a characteristic
that can hardly be attached to a qualitative research, because it is hard to test the quality of its
data and results. Still, transparency of the research can increase its reliability, because it allows
others to repeat the process (Mariotto et al. 2014). Detailed description of each case and the
accessibility of collected data contribute to the transparency of this research and enable it to
reach a certain level of reliability.
Internal and construct validity depend on a consistent causal structure and the presence of
a clear chain of evidence respectively (Mariotto et. al 2014). The framework used to assess cases
and consistent with the extensive theory described in the literature review increases both internal
and construct validity. The framework enables the reader to trace the logic of the researcher and
explain the causal connections between variables and outcomes.
External validity is the greatest challenge for a qualitative research, because the statistical
generalization it requires is hardly achievable. However, in this thesis the number of cases is
relatively high, which helps to increase the validity (Mariotto et. al. 2014). Moreover, the results
of the research centered on Sinopec Group and Sinopec Limited are tested against data for
another company, namely CNPC. This helps to increase external validity even further.
2.4 Limitations of the research strategy
The unique nature of cases lead to what is considered to be the main drawback of a
qualitative research, that is ‘the inability to provide a basis for the generalization of results’
(Mariotto et al. 2012). It is hard to extend the findings to a wide population of cases. This
problem is quite severe in case of this research because only one company is studied. This is
compensated for by the representative nature of the company, the large number of case selected
and the test of results against another company.
Another problem is the challenge of presenting the findings in a clear and accessible way,
so that the reader could see the significance and the contribution of the research (Pratt 2009;
Strauss, Corbin 2003). To overcome this obstacle, we have attempted to present the research
process in a structured table with parameters that have been previously justified and explained.
This shifts the qualitative research toward the quantitative pole and increases the significance of
Finally, the data used to describe the cases is somewhat limited. Although extensive data
has been collected from analytical papers and business magazines (International Energy Agency,
World Trade Organization, Bloomberg, Wall Street Journal, etc.), as well as from databases
(Thomson Reuters, Bloomberg), the sensitive and politicized nature of the chosen subject means
that some details may have not been disclosed.
2.5 Summary of Chapter II
The object of this research was identified as the internationalization strategy of Chinese
NOCs. The unique nature of oil industry in China facilitated the work because one of the three
largest companies is significantly smaller than the other two. The remaining companies, namely
CNPC with its traded subsidiary PetroChina and Sinopec with its traded subsidiary Sinopec
Limited, are similar in size, revenue and are governed by the same state commission SASAC. To
narrow down the research, the revenue and the level of internationalization activity were taken
into account. As mentioned above, out of 100 major deals with foreign governments and
companies signed by Chinese NOCs from 2002 to 2015, over 30% involved Sinopec Group
and/or Sinopec Limited, and out 10 mega deals (worth about or over $5 billion) Sinopec took
part in 5. As a result, Sinopec Group and Sinopec Limited have been chosen to represent
Internationalization strategy can have multiple dimensions, and separate activities aimed
at internationalization require a detailed in-depth study that takes into account contexts specific
to each situation. This causes the need for a structured analysis of multiple cases describing
To increase the validity and reliability of research, multiple cases were selected, covering
a wide geographical and typological range. Furthermore, the results of the research are tested
against data for the other major oil company, CNPC. To make the logic and results more
accessible, all important details from all cases were presented in a table structured according to
certain parameters, that have been justified and selected based on theory presented in the
The qualitative nature of the research imposes a number of limitations onto it. However,
they are all addressed to and dealt with throughout the study.
Chapter III. Empirical study
How to read the cases
Cases are grouped by regions of activity. E.g. a total of two cases involve Saudi Aramco,
a company from Saudi Arabia. One case describes a JV that operates in Saudi Arabia and can be
found in the Middle East section, while another case is about a JV in China, and should be
looked for in the Asia section.
Each case starts with a brief introduction titled ‘Background’, to provide insights into
the political, economic, and social environment surrounding the deal. Often, motives for Sinopec
Group or Sinopec Limited to undertake particular actions and factors that shape the company’s
strategy can be found in this introductory part.
To help reader get a yet better grasp of the deal, information on the partner company or
companies is provided in second part. It helps to see the internationalization activity manifested
in the deal from a different perspective, i.e. from that of a foreign firm. It also complements the
‘Background’ part and is useful for deeper understanding of the motives and factors driving the
The third part named ‘The Deal’ contains essential information on the outcome of the
activity: structure of the JV, price paid for an acquisition, institutes that helped to finance the
‘Opportunities and Threats’ provide author’s vision of the deal’s future that is based on
the information presented in the case.
The last part titled ‘Summary’ reviews the case and suggests an internationalization
strategy presented in it.
It is important to pay attention not only to the foreign firm or the internationalization
activity itself, but also to the Chinese agent, since cases involve either Sinopec Group, which is a
100% state-owned firm, or Sinopec Limited (or simply Sinopec), which is partially traded in
stock exchange. The name of each case contains the name of the Chinese agent.
Lastly, to facilitate the task of testing the final results of the analysis, each case is
followed by a short summary of a similar case that involves another major Chinese NOC, CNPC
and/or its traded subsidiary PetroChina. The only exception is the first case describing the
strategic alliance between Chinese NOCs and the Development Bank of China, since it was more
logical to include the deals of both Sinopec Group and CNPC into the body of one case.
Case 1. Strategic alliance with China Development Bank (Sinopec Group and CNPC)
Chinese state-owned banks are an invaluable source of capital for Chinese NOCs. These
banks provide money at low rates and cooperate with the companies during their international
operations. One of the most important banks for NOCs is China Development Bank (CDB) that
is often engaged in loan-for-oil and loan-for-gas projects. These deals are popular with other
developing nations that lack infrastructure or need cash, but are not able to raise money
internationally due to bad credit rating, slow growth, or sanctions. Venezuela, Brazil and Russia
are among the countries that have worked with CDB. In this type of deal, loan is provided
directly to the international partner who in turn agrees to sell oil at market price to the bank’s
Chinese partner. After oil or gas reach the Chinese company, it deposits money on CDB’s
account that withdraws a portion of payment for itself to cover the interest and gives the rest
back to the international partner. This way, the bank can be guaranteed secure and timely
payment, while the NCO gets a good leverage during negotiations.
China Development Bank (CDB)
CDB is a 100% state-owned bank. Its activity is centered around profiting from China’s
foreign and domestic policy objectives, such as strategic infrastructural change or energy
security, which is crucial for China’s economic development and stability. The bank was created
in mid-90’ to supply the pillar industries with cash. Back then the aim was to break the
bottlenecks in transportation and energy, which was triggered by the economic growth of the 80’
and 90’. In 2000’ central government got concerned with shortages of natural resources
including oil. This was also the point at which Chinese NOCs started to internationalize, initially
to secure resources for China abroad. CDB followed the national champions and actively
engaged in their overseas operations. Without this source of relatively cheap capital and the trust
rooted in the fact that both NOCs and the bank belong to one ‘club’, internationalization of
neither the oil companies, nor the CDB would have been possible.
China Development Bank and NOCs are part of a strategic alliance that secures profits
for both the financial institution and the oil companies, at the same time fulfilling China’s
foreign policy objectives. The scheme, widely referred to as ‘loan-for-oil’, has been implemented
in dozens of deals around the world, but almost exclusively in developing nations that experience
financing difficulties. Two of the largest deals include the deal with Rosneft and Transneft,
Russia worth $25 billion, and the loan given to Petrobras, Brazil that amounts $10 billion.
In the first case, China Development bank issued a long-term loan (25 years) to Rosneft
in 2009. The Russian company has to deliver a certain amount of oil annually to its Chinese
counterpart (CNPC), while CNPC deposits the payment in CDB. CDB conducts checks and
keeps the money that constitutes the interest payment, and only then transfers money to the crude
The second case is more recent and involves the troubled Brazilian NOC called Petrobras.
The company was close to collapse with its debt to various creditors totaling over $20 billion,
when CDB offered a $10 billion loan in exchange for oil supplied to Sinopec Group for a
number of years. Petrobras accepted the terms and entered the ‘loan-for-oil’ agreement. Brazil,
known for the relatively rigid rules for foreign companies working in its oil industry, also agreed
to give preferential treatment to Chinese service firms when choosing partners for construction
Opportunities and threats
The strategic alliance between CDB and Chinese NOCs has both political and
commercial objectives. First of all, it gives CDB opportunity to find clients and expand
internationally. Oil-exporting countries with non-diversified economies find themselves indebted
when the prices go down. At the same time they tend to rely heavily on the exports of a single
commodity, and the risk of giving up this business, especially when it is now financially tied to a
single customer, is very low. This partially explains the very low non-performing loan rate of
CDB that is about 1.2%. The NOCs, in turn, have their transactions secured, oil supplies
guaranteed, and receive an additional leverage when dealing with foreign partners. Ultimately,
this helps China tie oil producers to its finance and market, thus fulfilling the political agenda.
The main threat is the volatility in oil prices that leads to the lengthy process of
renegotiation. To mitigate the risks, oil companies agree to use the current market prices in their
transactions, except for when the volatility gets too rough.
Deals involving the alliance between CDB and NOCs present a unique case of unity
between state finance, government (which provides the political agenda) and oil companies, that
are at least partially commercial. Significant loans are given to developing countries with strong
state that do not allow foreign firms own strategic assets, but possess enormous resources.
Chinese NOCs can extract oil in other countries through JVs and even wholly-owned
subsidiaries, so why do they engage in financing the troubled companies? In case of Russia, one
of the reasons may be geographical proximity and possibility to directly transport oil to China. In
case of Brazil, geographic considerations do not seem to work. However, we know (and shall see
further) that Brazil possesses some of the largest oilfields in the world that could secure
uninterrupted supply for many years to come. Besides, China can afford lending money at low
rate which looks especially ‘heroic’ when other players withdraw. One can speculate that such
behavior may bring political benefits in the future. In fact, Brazil has already promised to give
preferential treatment to Chinese service companies as part of the deal, and this may prove to be
only the beginning.
Case 2. Yadavaran field deal in Iran (Sinopec Group)
Political and economic ties between China and Iran date back to the early 1970s, when
official relations were established, and China started buying hydrocarbons from the Middle
Eastern country. Today, trade between the two countries is based on oil import to China and
consumer goods/gasoline import to Iran. The latter is heavily dependent on China, because about
30% of export goods go to that country.
Iranian oilfields cannot be owned by foreign individuals or companies, but several
specific investment schemes have been established in order to attract foreign cash and develop
the Iranian oil industry. Almost all schemes include some sort of buyback, wherein investors
supply facilities for production in exchange for the products that are then produced. After a
number of years and upon completion of the buyback process, the facility is transferred to the
Iranian government. Recent trends, however, point towards a more liberalized approach to
investment, and most probably foreign companies will be allowed to eternally own and operate
oil facilities independently or with an Iranian partner (Economist Intelligence Unit).
National Iranian Oil Company (NIOC), Sinopec’s partner in the Yadavaran field deal, has
the 2nd largest proven oil reserves in the world (about 10%). It also enjoys exclusive rights to
explore, extract, transport and export Iranian crude oil. The company is a monopolist and has
unlimited control over Iran’s pillar industry. Currently, it is the 3rd largest oil company in the
world, after Saudi Aramco and Gazprom. The sanctions imposed on Iran over its nuclear
program, have hit NIOC, causing investment shortage and decline in the number of customers.
Yadavaran Field is a large oil field located on the border with Iraq and co-owned with it.
In December 2007 NIOC and Sinopec formed a joint venture with 51% belonging to the Chinese
party in order to jointly develop the site and extract oil. The Chinese party invested over 2 billion
dollars. China has been diversifying oil supply for more than two decades and access to the
immense Iranian resources could be a crucial step for enhancing national security.
Sinopec Group’s ‘brother’ from the SASAC-managed ‘family’, CNPC, had created a
number of joint ventures in Iran before, with some being unsuccessful (Iran terminated contract
for joint development of South Azadegan Field due to CNPC’s repeated delays on the project).
Still, as all Western companies withdrew from Iran following the sanctions imposed on the
country, Chinese companies have become dominant foreign actors in the country’s oil & gas
industry. However, they did not show enough commitment and scaled down their activity in the
country in the beginning of 2010s. Now as the sanctions are being uplifted, Chinese companies
fear revenge for their indecisiveness, because European companies are coming back and their
service level is generally much higher. To compensate for the possible complications, Sinopec
Group is starting to actively pump oil at Yadavaran, with the output already reaching 80,000 bpd.
The joint venture between Sinopec and NIOC illustrates how closely hydrocarbon
alliances are tied to politics. NIOC with its enormous resources was desperate to channel more
financial resources and technological know-how into its oil industry and increase its market
share. At the same time, the Iranian NOC needed a stable uninterrupted demand. Since the EU
and US could not be considered as safe options anymore, Chinese companies have become the
only viable opportunity. The timing was good, because Sinopec Group is constantly searching
for more suppliers, over whom they could exercise a higher degree of bargaining power. For
Sinopec Group, the Yadavaran deal was clearly a resource-seeking move. The company acquired
rights to jointly develop one of the largest oilfields in the world, and currently controls the JV.
The political factor, however, has slowed down the process, with almost no activity in 20102014. As soon as it was announced that the sanctions may soon be uplifted, Sinopec Group
renewed its activity to start producing more ahead of the change in political environment which
would bring more international oil companies into the game.
It may seem that the alliance may turn out unstable. Sinopec Group’s delays signal that
the US and EU political guidelines are something that the Chinese cannot ignore, and the
situation may repeat. Zhuhai Zhenrong company, a refined oil products exporter, was sanctioned
by the US for exporting gasoline to Iran, although the company claimed it never had done so. At
the same time, Beijing signed a deal with Tehran in 2011, that gave Chinese companies
exclusive access to several Iranian oil fields, Yadavaran being one of them. In exchange, China
promised to treat foreign military intervention into these territories as attacks against its own
sovereign land. This is an evidence of the ongoing political and military alliance between the two
countries, despite the bad relationships with the West.
Opportunities and threats
Chinese companies were the only ones who kept dealing with Iran when the international
oil industry literally pulled out from the country. This helped Sinopec secure a lucrative contract
over a huge oilfield, and even have the majority of shares in the JV. The $2-billion investment as
well as readiness to intervene militarily on Iranian soil in case of immediate threat to the project,
demonstrate how seriously Chinese companies regard the potential of their projects in Iran.
Low cost of extraction ($12 vs $9 in Saudi Arabia), the huge and relatively stable market
and good relationship between the two countries, have made the Iranian projects of the highest
priority for Sinopec. It can increase its market share, secure access to cheap oil, diversify
portfolio of Middle Eastern partners.
On the other hand, neither Sinopec Group alone, nor its Chinese ‘brothers’ are able to
provide the money and technology needed to take the Iranian oil industry to the next level. This
is why the uplifting of sanctions and inflow of Western IOCs with superior technology and
managerial capabilities, is a serious threat for Sinopec Group. Iran has recently announced that it
would increase oil production to over 4 million barrels/day, and none of the Chinese companies
are able to support such an increase. Although politically stable, Iran has tense relationships with
many of its neighbors, including Saudi Arabia and the UAE. Both countries are part of OPEC,
US allies in the Middle East and Sunni-dominated societies. This make the threat of political and
even military conflict and the resulting disruptions and sanctions quite high.
To curb the threat of newcomers, Sinopec Group has been trying to form barriers to entry
by pumping more oil and increasing its involvement in Iran. However, as long as investment
stays at the present level, and technological know-how Sinopec Group brings in is not up to the
IOCs standards, the threat will keep rising. As for the threat of political and military conflict,
China has been trying to leverage Iranian influence in the region by creating a military alliance
and pumping money into the country’s economy.
Sinopec Group invested 2 billion dollars into a joint upstream oil venture in Iran which it
now largely controls. Foreign companies are not allowed to own or solely explore natural
resources in Iran, therefore the JV form was used. However, the size of investment, Iran’s hunger
for cash, and the ongoing sanctions helped Sinopec secure the majority of shares. The country,
although having a strong state, was in no position to dictate its terms, and Sinopec managed to
exploit the situation.
Sinopec Group benefited from the lack of competition in the 2010s, and had backing
from the China’s government, that allied with Iran both politically and militarily. Sinopec Group
was somewhat sensitive to the political factor and stopped its activity when the sanctions
imposed on Iran over its nuclear program were the toughest. However, the activity never stopped
completely, and Sinopec along with Zhuhai Zhenrong (state-owned oil trading company) are
now Iran’s largest crude oil buyers.
Both commercial and geopolitical factor play a significant role in this case. Sinopec
Group is successfully using the opportunities presented by the Iranian oil industry, however the
threat of new entrants is growing. To curb it, Sinopec Group has been trying to create barriers to
entry, but the current investment level and the know-how that the Iranians could acquire through
technology transfer are not enough to keep IOCs away from the lucrative market.
Finally, Sinopec Group’s strategy in Iran is resource- and market-seeking, since its
activity does not include construction of downstream facilities and most oil extracted in Iran is
then imported to the PRC and sold back as gasoline and petrochemicals.
CNPC and North Azadegan Field in Iran
The 100% state-owned CNPC has been present in Iran since mid-2000, but its best
contracts came in 2010’, following the withdrawal of Western companies. E.g. CNPC replaced
Total in one of the deals, getting its 12.5% stake worth $13 billion in South Pars oilfield JV with
NIOC. Even more representative of CNPC’s recent activity in Iran is a joint venture established
with NIOC to explore the giant North Azadegan field in 2009. CNPC owns a 70% stake in the
business under a buyback contract.
Case 3. Saudi Aramco and Sinopec JV YASREF refinery in Yanbu city, Saudi
Arabia (Sinopec Group)
Cooperation between Saudi Arabia and China has been intensifying throughout the last
decade reaching its high after 2010. At the moment, China is Saudi Arabia’s largest trading
partner and Sinopec is Saudi Aramco’s largest crude oil trading partner and onshore drilling
service provider (Bloomberg 2016).
A major deal was signed between Saudi Aramco and Sinopec in 2012 to create a JV
refinery called YASREF (Yanbu Aramco Sinopec Refinery) based in Yanbu industrial city in
Saudi Arabia. Both companies stated that they wanted to extract more value across the value
chain by developing their downstream capabilities. The investment was estimated to be $10
billion, with Sinopec having a 37.5% stake in the JV and Saudi Aramco 62.5%. The refinery was
supposed to start operations in 2014, but the first shipment was made in 2015. At the moment,
refining capacity of the YASREF refinery is estimated to reach 400,000 barrels/day by 2020,
which makes it one the largest in the industry.
The deal represents the deepening cooperation between China and Saudi Arabia. A
memorandum was signed between Saudi Aramco and Sinopec during president Xi Jinping’s
visit to Riyadh, which points out the importance of political factor involved in the process.
YASREF’s produce is distributed both domestically and internationally, with a major portion
being shipped to China.
Opportunities and threats
Sinopec’s JV in Saudi Arabia marks involves enormous investment, some degree of
political risk, and lack of control over the business. The fact that the company agreed to the
minority share signifies its willingness to expand into international downstream activity with
higher margins. Opportunities presented by the deal include acquisition of a larger stake in the
JV, accumulation of knowledge of international downstream operations and extraction of more
value from sales in China. Processing may also allow Sinopec benefit from the crude oil price
At the same time, the majority of shares held by Saudi Aramco enables it to control the
JV and may lead to an eventual takeover, which has already happened with American companies
in the 20th century. Saudi Arabia’s oil policy (the country’s ability to influence oil prices remains
very strong) can diverge from the JVs interests that focus on increasing sales and maximization
of margins and profits.
Sinopec’s deal in Saudi Arabia is one the largest overseas investment projects for the
company. It has multiple objectives, the main being expansion into downstream sector and
extraction of more profit from the value chain. More such projects may follow, as the YASREF
refinery has been operating successfully so far. At the same time, the deal is clearly aligned with
the government’s objective to diversify suppliers and enhance energy security, which is
highlighted by President Xi’s visit to Riyadh. The deal involves some degree of risk due to the
possibility of takeover (Sinopec owns 37.5% of shares, because no foreign companies can hold
majority in oil industry enterprises in Saudi Arabia) and diverging interests with Saudi Arabia’s
government. The first can be mitigated by leveraging projects involving Saudi Arabia in China,
while the latter requires political communication between the largest supplier and the largest
consumer of oil.
The prospects of cooperation are positive due to Riyadh’s ‘look east’ policy and its quest
for diversification of economy. Saudi Arabia needs stable markets for its oil and newly
introduced petrochemicals, that wouldn’t question its domestic policy, and Asia accounting for
2/3 of the country’s oil exports looks like the right choice. From the political point of view,
Saudi Arabia remains closely tied to the USA, because its military influence in the region
remains largely unsurpassed, and China is not ready to rival the Americans.
Sinopec’s strategy is multi-layered and involves vertical integration and strategic alliance,
while the political factor is not playing a very important role.
CNPC in Niger
While Sinopec Group holds a minority stake in the JV refinery in Saudi Arabia, CNPC
has managed to gain control over a large refiner in Niger. The company has a 60% stake in the
Zinder refinery project, the rest is owned by the Niger government. Having the majority of
shares allows CNPC to effectively control the venture, assigning top managers and setting up the
desired HR-policy. This is done to secure operations because of the political risks present in this
African nation with relatively weak institutions.
Case 4. Repsol Sinopec Brazil in Santos Basin, Brazil (Sinopec Group)
Brazil is one of the largest markets in South America and in the world, and has a long
history of official relations with the PRC dating back to 1974. Brazil-China relations have
reached a new level in the mid-2000s, when economic cooperation intensified. By 2009 China
had become Brazil’s largest trade partner and an important investor focusing on natural resources.
Today, Brazil has a relatively open oil and gas industry. Before 1997, Petrobras was the
only company that could own and operate oilfields, but the barriers were uplifted and foreign
NOCs and IOCs entered the country. In the 2010s, the ruling Worker’s Party issued a regulation
that considered offshore oil and gas reserves as highly strategic, and foreign companies operating
them were forced to establish JVs with Petrobras with the latter having at least 30% of shares. It
is worth mentioning that such regulations are common in South America: Mexican oil industry is
dominated by only one state-owned company, and Repsol’s largest asset in Argentina the firm
called YPF has recently been nationalized by the government (which agreed to repay Repsol, but
it declined on the grounds that the sum was insufficient). At the same time, requirements for
local content in Brazil (workforce and technology) were raised, which would drive up the costs.
Following the new regulations, Brazil’s state-controlled giant faced tremendous financial and
managerial challenges. In 2015 China Development Bank issued a $10 billion loan to Petrobras
with one of the terms being that the money would be used to purchase Chinese services and
Repsol is an integrated global energy company with headquarters in Spain. It operates in
Europe, Americas, Africa, and Asia. The company is very innovative and boasts a high
exploration success rate of about 38% (industry average is 20-25%).
Repsol is one the leading private energy companies in South America. It owned the
largest energy company in Argentina until 2012, when the government nationalized the asset
causing outcry among the shareholders and international business community. The company was
also one of the earliest entrants into the Brazilian market in 1997 following the liberalization of
country’s oil industry. Today, Repsol holds a vast portfolio in Brazil, and after entering a
strategic alliance with Sinopec and creating a JV called Repsol Sinopec in 2010, it received
additional funding. This has led to exploration of some of the largest offshore reserves in Brazil.
The deal between Repsol and Sinopec was signed in 2010. The former held a capital
increase of over $7 billion, while the latter subscribed to it entirely. The resulting company is
controlled by Repsol holding 60% of shares and now named Repsol Sinopec Brazil.
Additional funding that Sinopec provided was used to expand the operations and upgrade
the existing technology. Brazil’s oil reserves are immense, but most of them are hidden in the
offshore area about 5-7 kilometers deep, beneath a layer of extremely hard mineral salts. This
means that exploration and extraction of such oil is very costly and requires very good expertise
as well as stable funding and political guarantees. Repsol has some of the best technologies in
the field and had been working in Brazil ever since foreign companies were allowed to enter the
huge South American market. Sinopec, being backed by the government, has cash and political
leverage that such an undertaking would require. These considerations brought the two giants
together, and the JV turned out very successful. Repsol Sinopec Brazil has discovered its first
major oilfield in the offshore area of Santos basin, Brazil. Another big discovery was made in
2015. The regulations have made it obligatory for the company to operate the projects with the
state-owned company Petrobras (30%). Another company that joined the exploration is
Norway’s giant Statoil.
Opportunities and threats
Brazil is one of the major exporters and consumers of oil, and its role in the Americas
will keep growing, especially considering the closeness of Mexico’s oil industry and the
depleting resources in Argentina. For Sinopec, having a foothold in Brazil, means operating in a
low-risk, high-potential environment with access to some of the largest consumers, the USA.
Sinopec’s share in the JV is quite significant, and acquisition of Repsol’s shares seems to be a
viable option, especially given the complicated situation in South America the company is facing
at the moment (renationalization of its assets in Argentina). The operations also allow for a
technology transfer that could be used to develop offshore oil in China.
On the other hand, Brazil has entered a period of relative instability and the current
political environment in South America looks unwelcoming for foreign oil giants. Social
situation in Brazil may deteriorate and Sinopec’s efforts may be ruined just as Repsol’s were in
Therefore, the best option would probably be to keep operating as usual with attempting
to take over Repsol’s share. To mitigate the political risk, Sinopec should use its political
leverage provided by China Development Bank, but not push too hard, because the situation
remains somewhat unclear.
Sinopec entered the JV with Repsol trading its political and financial capabilities for
technology and access to Brazilian oilfields. Brazilian offshore resources are considered to be
some of the largest in the world, and are located in close proximity to customers with relatively
low political risk. In a few years after the JV was launched, Sinopec Repsol Brazil ended up
establishing a venture with some of the largest private and state-owned companies, some of
which possess the most modern oil exploration and extraction technology (Repsol, Statoil).
Repsol wouldn’t be able to carry out a project of this scale without Sinopec’s financial leverage,
while Sinopec could never explore such reserves on its own.
Another important factor that influenced the successful outcome of the project was China
Development Bank’s giving loan to Petrobras, Brazil’s major state-controlled oil company. It
promised to repay the $10 billion loan with oil that would be sold to Sinopec. This way, Sinopec
acquired political leverage over Petrobras, which must be included into any offshore project in
CNPC and the Libra Oilfield in Brazil
In 2013, CNPC has won a bid as a part of consortium to explore the giant offshore Libra
field in Brazil. The consortium is comprised of the state-controlled Petrobras (40%), Shell (20%),
Total (20%), CNOOC (10%), and CNPC (10%). The oilfield lies beneath a layer of mineral salts
and is very challenging, however, the technical expertise of the IOCs will help to overcome the
difficulties and eventually reach an output of 1.5 million barrels/day, according to the Brazilian
Case 5. Devon Energy, USA (Sinopec Group)
World economy and politics largely depend on the relations between China and the
United States. First comprehensive contacts between the two nations date back to the 19th
century. After the revolution in China and the long period of infighting that ended in 1949, the
relations became somewhat tense, because China went the socialist way and partnered up with
the Soviet Union. In the 1970s, the United States government, recognizing the importance of
China’s role in the modern world, finally established official diplomatic relations with the PRC,
and the long story of both aligned and conflicting interests started.
One important issue between China and the United States arises from the difference
between the two economic systems. US is an opened market economy that allows investment
and JVs in virtually all industries, as long as the business does not pose immediate danger to
national security. Chinese economy is more regulated, and no free investment is allowed in a
number of strategic industries. Energy sector is controlled by the government and any deal taking
place on Chinese soil requires approval.
US energy sector is run by private companies, which results in US customers paying
market prices for energy sources. Chinese state-controlled companies started to make big-scale
acquisitions in the mid-2000’ causing concern among many Americans. However, historians and
economists reminded them of the recent past when the Japanese started buying assets, importing
goods, and even establishing production in the country. Eventually, when the boom ended, it
turned out that the US customers enjoyed an improved competitive market, and the some of the
precious assets the Japanese had bough, were being transferred back.
Devon Energy is a major US company specializing in exploration and production of oil
and gas in North America. It is a major shale oil and gas producer, and is listed in Fortune 500.
The company was started in 1971, and has accumulated vast experience in the industry. At the
moment, it holds considerable stakes in some of the US largest shale gas- and oilfields and
operates them successfully using the hydraulic fracturing technique.
Sinopec Group acquired a 1/3 stake in five major projects carried out by Devon Energy in
2012. The deal worth $2.5 billion was the second such investment by a Chinese company in the
US, the first being an acquisition made by CNOOC (3rd largest NOC in China). The latter also
acquired a 33.3% stake in a number of projects belonging to Cheapsake Energy, another major
private oil and gas company listed in Fortune 500.
The deal went through a smooth approval process with no concerns raised over a
minority stake in a limited number of projects. According to analysts, Sinopec Group paid a 20%
premium, because the market expectations were that the deal would not exceed $2 billion. The
deal was signed in 2012, when the fracturing fever almost reached its high, and the premium can
be explained by Sinopec’s desire to have access to the best technology. Under the agreement, the
two companies were supposed to jointly explore 5 drilling sites, moving facilities from one site
to the next one if the desired conditions are not found.
At the moment (2016) Devon Energy is seeking to sell off of part of its assets to lower
debt in the wake of the ongoing oil price crisis. Sinopec Group, however, hasn’t yet taken its
chance because of the oil price uncertainty, China’s economy slowdown and the ‘surprisingly’
high prices for the US assets.
Opportunities and threats
A joint venture with a US-based company required thorough preparation, because the
Americans have blocked major deals before (CNOOC, a smaller NOC from China, has
attempted to buy California-based Unocal for $18 billion in 2005, but the deal was blocked by
the US government). To keep a low profile, Sinopec Group agreed to a minority stake in the
project. The deal also implied higher costs due to strong institutions related to workers’ rights
and environmental regulations. However, the company went on with the JV in order to get access
to the strategically important technology that could be used in China for domestic shale oil and
gas. A takeover of Devon’s stake does not seem as a feasible opportunity, but technology
transfer that will lead to Sinopec’s own progress, is almost certain.
The main threat is Sinopec’s lack of experience of working in North America. Cultural
distance may lead to complications when it comes to legal compliance, which in turn may result
in fines and reputational damage. However, the strategic importance of deal implies that the
Chinese will do their best to establish a solid foothold in the highly competitive nd
technologically advanced North American market.
The deal between Sinopec Group and Devon Energy deserves special attention because it
is the first case of internationalization in a developed free-market economy. It clearly
demonstrates that Sinopec Group can comply with the necessary regulations and operate in an
environment with highly developed institutions.
At the first glance, the deal does not involve political agenda. The nature of the US
energy market implies that China wouldn’t be able to have any significant influence over the
highly diverse and competitive industry in that country. China’s partner is major Fortune 500
company, yet it is one of the many similar firms. The premium Sinopec Group paid for the
minority stake hints at the reasons behind the deal. Devon Energy, being one of the earliest
companies to start using hydraulic fracturing to extract the so-called tight oil and gas, has some
latest drilling technology and knows how to efficiently manage unconventional oilfields. China,
in turn, has the world’s largest known shale oil and gas reserves in the world (more than US and
Canada combined), but most of them belong to the ‘tight’ type and require application of
sophisticated technology. Hence, internationalization into the relatively unfamiliar free US
market helps to kill two birds with one stone. First, Sinopec Group diversifies its business by
investing into a JV with a highly-efficient private company. Second, the Chinese can acquire
technology by looking over Devon’s shoulder. This technology will help Sinopec Group develop
its own projects in China, which is of strategic importance for the government. Therefore, the
political agenda is still present, and the interests of the company and of the government are
PetroChina in shale gas deal with Shell in Canada
PetroChina, a traded arm of CNPC, paid over $1 billion for a 20% stake in Royal Dutch
Shell’s shale oil and gas project in Canada in 2012. The company’s representatives
acknowledged that one of the main reasons was technology transfer that would happen through
the venture. The company could then bring the technology back to China and explore its local
resources. Other considerations were the production and access to the North American market.
Case 6. Acquisition of Addax Petroleum (Sinopec Group)
China first entered African oil and gas in 1990’, but Middle East remained its main
supplier of hydrocarbons until 2000’. 9/11 and the war in Iraq have influenced China’s decision
to diversify from the turbulent region and engage more actively in expansion into Africa, despite
the risks involved. The first operations were launched in Sudan notorious for its instability, and
by 2009 the PRC had business in over 20 African nations.
Most of the times, Chinese companies form joint ventures with local players and IOCs to
secure access to the upstream sector. Downstream activities are confined to nations that possess
both significant resources and large markets, such as Nigeria, Angola, Algeria, and Egypt. Since
China was a latecomer to the African oil and gas, it had to offer something that its rivals could
not. To increase competitiveness, Chinese NOCs entered a strategic alliance with state-owned
banks with China Development Bank as the main partner. The banks would give loans to local
firms and governments without transparency or human rights requirements, unlike the IMF or
other Western institutions. This fuelled corruption, but helped China gain a foothold on the
However, it was relatively difficult for Chinese NOCs to compete with IOCs that had
been present in Africa for decades. To overcome the problem, another tool was applied, namely
acquisitions. One of the most significant ones was the acquisition of Addax Petroleum, a
company that had rights to many oilfields across Africa and the Middle East.
Addax Petroleum is an integrated oil company with international operations based in
Switzerland and publicly traded in the UK and Canada. It was a part of Addax and Orix Group of
companies also based in Switzerland, and became an independent company in 1994. The parent
company had business all over the world, including West Africa and the Middle East. Addax
Petroleum used the know-how it inherited from the Group and expanded rapidly. By the time of
Chinese takeover, it accumulated extensive assets in Nigeria (since 1998, shared production
agreements with Nigerian National Oil Company, various other projects, some with 100%
ownership), Cameroon (since 2002, offshore sites, varying degrees of ownership, up to 70%),
Gabon (since 2006, onshore and offshore, varying degrees of ownership, up to 100%), and Iraq’s
Kurdistan region (since 2005, joint venture with Iraqi government). Company’s total daily output
reached 136,000 barrels and it had more than 500 million barrels of reserves by 2009.
Addax Petroleum was going through a hard period in 2009 when Sinopec contacted the
company and offered what would become Chinese NOCs’ largest foreign acquisition up to date.
The acquisition cost Sinopec $8.27 billion. The company retained its name but changed the logo,
and continued its operations as if nothing happened. Sinopec continued to finance the ongoing
projects and even expanded their scope, especially in Iraq, where China’s presence is the most
significant among all other nationals. China opposed military intervention into Iraq in 2003, and
after the war ended it became largest importer of Iraq’s oil (1/2 in 2013). Addax’s assets were
the first major foothold of Chinese NOCs in the country, and other companies followed the lead
(CNPC in 2014).
Opportunities and threats
Sinopec has secured significant resources in Africa and the Middle East. They can be
regarded as ‘leftovers’ because of the political and social instability the region has become
notorious for. However, the lack of institutions may be beneficial for the Chinese, who know
how to operate in such environments and can establish wholly owned subsidiaries or joint
ventures with majority shares here. This will increase the stability of crude oil supply. Another
important consideration is the market size of the nations where the oilfields are located. Not only
will the company benefit from the supply, but it can also build more refineries and sell final
products in local markets.
However, the turbulent regions of Africa and the Middle East will remain high-risk
environment for many years to come. High levels of corruption, a direct result of
underdeveloped institutions, can make any business unprofitable. Chinese NOCs are currently
contributing to further deterioration of the situation by providing low-interest loans from CDB
without requesting disclosures and transparency. Therefore, the main threat remains political
instability that is a curse of almost any ‘failed state’. To mitigate the risk, Chinese NOCs need to
manage their financial aid and investment very carefully delivering at least part of them through
secure channels that will reduce social tension.
Acquisition of a European company with extensive assets in the developing world is not
an end in itself. The deal fully complies with Sinopec’s strategy of direct geographical expansion
into countries with weak institutions, and Chinese government’s energy security policy that
implies diversification of supplier nations.
Sinopec’s acquisition is highly representative of the magnificent turn that the Big Chinese
Business took following the world financial crisis. China’s government accumulated vast cash
deposits and was able to give loans at incredibly low rates. The NOCs took advantage of cheap
money and low prices for high-class assets, and made a strategic move that worked both
financially and politically.
Addax’s portfolio looks as if it was tailored for Sinopec. Decent oilfields in African
countries with relatively poor institutions – the environment the Chinese can comfortably fit in,
and Iraq, feeling betrayed by the West. China’s investment the three countries Addax has
business in (Nigeria, Cameroon, Gabon) is jaw-dropping, it seems that the PRC is omnipotent
and is building local infrastructure out of good will. Of course, the Chinese are getting paid, with
their own money though, that is given to African nations beforehand on the condition that the
capital is used for Chinese goods and services. Some argue that this is neo-colonialism, but at
least the Chinese and their NOCs exercise a very high degree of bargaining power over the
African nations, and it is hard to overestimate their dependence on the Asian giant.
Sinopec’s loyalty to its Iraqi partner (i.e. the Iraqi government) can be observed in the
low-margin agreements that the company has signed with it after the acquisition of Addax
Petroleum. The fact that the Western companies were not willing to get involved in risky
business without being guaranteed high returns, while their Chinese peers (CNPC purchased
oilfields in Iraq from ExxonMobil in 2013) lined up for the treat, reveals the political agenda
behind the deals and highlights its significance.
CNPC in Africa and Iraq
In Africa, CNPC is present in Chad, Niger, Nigeria, South Sudan and Sudan. The latter
two are some of the least stable countries in the world. So far, CNPC had built one refinery in
Chad, in which it owns 60%, the rest belonging to the Chad government. The refinery and a
power generation station attached to it supply the country’s capital with electricity and are
crucial for Chad’s security. CNPC’s degree of participation in projects in other African countries
varies, but is usually below 50% if the other company is an IOC such as Shell. When the other
party is local government, CNPC usually controls the joint venture by holding the majority of
shares. CNPC’s involvement in Iraq has also been rather significant, but since no major
acquisitions were made and the Chinese company has been a latecomer to the Middle east, most
of its projects are minority-share joint ventures with IOCs, such as BP or ExxonMobil.
Case 7. Exxon Mobile, Saudi Aramco, and Sinopec JV refinery in Fujian Province
Diplomatic relations between China and Saudi Arabia were established in 1990, when the
Middle Eastern country already had 40 years of relations with Taiwan. Saudi Arabia is
considered to be China’s ‘strategic partner’, although the backbone of cooperation is oil (AlTamini 2012). Other important spheres of cooperation include aluminum, air transportation,
railroad construction and weapons trade. In most cases, the PRC provides technology and knowhow to its partner.
The only entity that owns, explores and operates oilfields is Saudi Arabia is Saudi
Aramco, the largest oil company in the world and the most influential member of the OPEC. The
company is owned by the royal family of Saudi Arabia, but originally it belonged to several US
firms (hence the name ‘Aramco’ – Arabian American Oil Company), that started exploration in
the beginning of the 20th century and brought in the necessary technology and know-how. United
States used to be Saudi Aramco’s largest partner, but the ‘look east’ policy adopted in mid-2000s
led to China becoming the largest consumer of Arabian oil. Today, the company invests into
China to create a network of refineries to process its crude oil and get closer to the market.
Exxon Mobil, descendant of John D. Rockefeller’s Standard Oil, is the world’s largest
supermajor (i.e. IOC or internationally owned company), although it accounts for only 3% of
total oil production in the world. At the same time, it is one of the most profitable companies
according to Fortune 500, and the largest oil refiner in the world with some of the most advanced
knowledge and strongest brands in the industry.
The refinery in Quanzhou, Fujian province, has raised nearly $4 billion and is the largest
Sino-foreign financing project on Chinese soil up to date. The deal was signed between Sinopec,
Exxon Mobile, and Saudi Aramco to modernize and triple the production capacity of the existing
oil refining facility to 240,000 barrels/day (Saudi Arabia’s total output is about 10 mln
barrels/day) by 2009, and add a number of production units (polyethylene, polypropylene, etc.).
The project was partially financed by Saudi Arabia ($1 billion), while the rest was provided by
11 Chinese state-owned banks, including China Development Bank. Sinopec owns 50% of the
JV, Exxon Mobil and Saudi Aramco each hold a 25% stake. In addition to the refinery and
production, the companies also entered a marketing JV that would operate 750 filling stations
across Fujian. The project is unique because it brings together the largest producer from the
Middle East, the largest refiner in China, and the largest market. The companies are putting their
strengths and know-how together to operate with the largest possible profit.
It is important to note that the production units of the updated refinery are able to process
some kinds of Arabian oil that could not be processed before (the so-called distressed oil), which
highlights the fact that the facilities were built specifically to deal with imports from Saudi
The refinery has reached the planned output, and the JV is functioning as of April, 2016.
Opportunities and threats
Although Saudi Aramco is the largest oil exporter in the world, it finds the growing
competition from other companies and unconventional oil producers more and more threatening.
It is therefore trying to expand into sector. However, access to the most lucrative markets is quite
limited and the deal with Sinopec and Exxon Mobile presents a very good opportunity.
Sinopec has exploited its home country benefits (market size) and attracted Arabian
money and international expertise to expand its own business in China. At the same time, a JV
between the largest exporter and the largest importer could add stability to the value chain and
make the relations with Saudi Arabia more predictable. From this perspective, political and
commercial interests are aligned with each other. Expertise from Exxon Mobil must have been
an important consideration for the other two companies, since its knowledge of the downstream
sector and the valuable brands it has are an invaluable asset for a refining project.
On the other hand, a big-scale deal with a Sunni-dominated country claiming leadership
in the Middle East may hurt relationship with Iran, another big player in the region and a
potential major partner of China in oil trade. Obviously, the political factor plays a less important
role in the deal, but it could turn into an obstacle in the future.
Oil and gas being one of China’s pillar industries crucial to its energy security is a
relatively closed market with foreign companies not allowed to hold majority in big projects.
The creation of a JV between ExxonMobil (25%), Saudi Aramco (25%) and Sinopec
(50%) was therefore the only option for the foreign companies to directly enter China. The scale
of investment implies commitment from all parties, which is an evidence of good intentions of
Saudi Aramco, China’s largest oil supplier. Upon the completion of project, another JV was
launched, only this time in Saudi Arabia and with Sinopec Group (see below). Hence, the JV in
Fujian province can be regarded as a part of mutual investments made to cement the ‘oil
friendship’ between China and Saudi Arabia. At the same time, the fact that the two companies
lack expertise to produce and operate downstream facilities at a highly profitable international
level led to ExxonMobil’s participating in the deal. Its importance is embodied in the 25% share,
the same as Saudi Aramco’s. ExxonMobil is also a long-established trusted partner of the
Chinese oil industry, especially of PetroChina, CNPC’s traded arm.
Through the JV, Sinopec cemented its relationship with its biggest supplier while
securing supply for many years to come, gained more international-level expertise in
downstream sector and opportunity to benefit from ExxonMobil’s strong brand, and found
investment needed to set up giant production that would increase company’s market share and
Saudi Aramco and PetroChina JV Refinery in Yunnan province
State-owned Saudi Aramco representing the top oil exporter in the world has signed the
deal with CNPC’s traded arm PetroChina to construct a large-scale refinery in the southern
province of Yunnan, China. The deal took place in 2011, and the refinery was successfully
launched some years later. The value of the deal has not been disclosed, however construction of
a refinery of such scale (200,000 barrels per day refining capacity) would cost several billion US
dollars. Under the agreement, PetroChina would act as an investor and a distributor of the final
product, while Saudi Aramco would also invest into construction and supply crude oil under a
separate long-term contract. The former holds 51% of the JV, Saudi Aramco has 39%, and the
rest belongs to a local firm. The deal is very similar to that signed between Aramco, Sinopec
Limited and ExxonMobil, and helps to cement the ties between the largest exporter and the
largest importer of crude oil.
Case 8. Royal Dutch Shell in China (Sinopec Limited)
Most IOCs in China operate in the downstream sector (Exxon Mobil, Shell, Eni, etc.),
however, the recent findings that put China on the 1st place by proven shale oil and gas reserves,
have attracted these companies into the upstream sector, while opening up local companies to
cooperation at the same time. China does not possess the necessary technology to explore and
operate shale reserves on its own and has to consider giving part of its resources ‘away’ under
joint exploration or shared product agreements. The active phase of cooperation started in 2010’
when the US shale boom proved successful. Given the stable and predictable demand for oil and
gas in the local market, as well as the protectionist nature of Chinese economic system,
exploration within the country looks like a sure bet for IOCs.
Royal Dutch Shell
Royal Dutch Shell (Shell) is an integrated oil company that operates in about 90 countries
and covers all sectors of the oil industry. It produces over 3 million barrels of oil/day and is one
of the most profitable organizations in the world. Shell’s expertise in all sectors of the industry
can be attributed to its long history that dates back to the beginning of the 20th century, when its
first operations started in Georgia that was then a part of the Russian Empire.
Shell has been present in China since early 20th century. The company has maintained
good relations with the government after the PRC was established in 1949. Its office in Shanghai
remained open until 1966. In the 1980’ Shell was one of the first supermajors to re-enter China.
After the US market – main focus of shale oil and gas exploration companies – became
too competitive, major players started looking for investment opportunities in other parts of the
world. Shell chose China because of its long history of successful cooperation with local firms,
and the fact that this Asian country has tremendous unexplored proven resources.
In 2012, Sinopec and Royal Dutch Shell agreed on a shared production contract that
would require the IOC to invest about $1 billion/year into exploration of shale oil and gas in
China’s Western regions. The company would be get paid back by the to-be extracted oil and gas.
This could then be transported to ports and shipped elsewhere or directly to Shell’s JV refineries
set up with other Chinese NOCs. Sinopec would exclusively operate the fields.
Shell became the first international oil company to secure a contract in China’s shale oil
and gas sector. Others, such as BP, Exxon Mobil, Eni, Total, etc. followed.
The deal happened the same year Sinopec Corporation’s parent company Sinopec Group
purchased a 1/3 stake in 5 of US-based Devon Energy’s major shale oil and gas projects. This
shows the NOC’s appetite for shale gas projects and its eagerness to have the necessary
Opportunities and threats
Clearly, one of the main drivers for Sinopec is the opportunity to get the necessary
technology and share the risks of early exploration with a major foreign company. There is an
industrial approach to drilling, and the learning curve applies to it as well. As soon as Shell and
Sinopec drill enough probes, the Chinese company will be able to replicate the technology in its
other projects, while keeping the original deal going.
On the other hand, shale oil and gas is more expensive to explore and extract than the
conventional reserves, and even the slightest price fluctuations may affect the attractiveness of
such ventures. This is happening now, when Shell is scaling down its originally $1 billion/year
investment and looking for other opportunities elsewhere. The risk for Sinopec is not very
significant though, because under a product sharing agreement, the domestic party does not
invest and pays its partner back by sharing the oil extracted from the jointly discovered fields.
Oil and Gas is one of the strategic pillar industries that the Chinese government pays a lot
of attention to and generally does not allow foreign companies operate in. The recently
discovered shale oil and gas reserves in China are the largest in the world, but local players do
not have enough expertise to efficiently explore them. Commercial companies can benefit from
extracting oil in such proximity from a huge market that also strives for energy security.
Therefore, IOCs were eager to enter joint ventures with Chinese companies to secure ‘seats in
the front row’. Although the political agenda behind the deal is quite transparent, the commercial
factor plays the leading role, which is highlighted by the fact that the partially traded Sinopec
Limited is taking part in the venture, not its state-owned parent Sinopec Group. Regarded as a
‘sure bet’, the joint venture may increase Sinopec’s value tremendously and benefit its main
shareholder, the government.
Royal Dutch Shell and PetroChina
Shell and PetroChina have a number of JVs across China. Most projects involve
unconventional oil and gas, which implies the use of Shell’s sophisticated technology and knowhow. PetroChina holds majority stake in all projects or cooperates with Shell under productionsharing agreements.
Sinopec Limited was established as an independent company in 2000 and was
simultaneously listed in Hong Kong, New York, London, and later in Shanghai. It received its
asset base from Sinopec Group, China’s main oil refiner and distributor at that time, and focused
on operations in the domestic downstream sector. Over 70% of shares of Sinopec Limited are
currently held by Sinopec Group, which is state-controlled through SASAC (State-owned Assets
Supervision and Administration Commission of the State Council). Other major shareholders
include JP Morgan Chase & Co., Blackrock, and Schroders.
Sinopec Group and Sinopec Limited act as separate entities, however a careful analysis of
the most significant deals of the two companies reveals that their internationalization strategies
complement each other and can be treated as one. The same can be applied to the other major
Chinese NOC: CNPC and its traded arm PetroChina, the latter formed in 1999 and granted with
the bulk of parent company’s assets.
Sinopec Limited obviously benefits from finance and HR activities of Sinopec Group.
The companies share top management and enjoy preferential treatment from the state-owned
China Development Bank, which provides loans for both them and their partners under the socalled ‘loan-for-oil’ agreements (case 1). Access to cheap capital is a very important resource for
both companies that helps them increase bargaining power and overcome the challenges that are
typically faced by late entrants into the energy sector. Finance and HR can be regarded as
support activities shared by both companies across their value chains and serve as evidence of
the strategic alliance existing between them.
Besides this, Sinopec Group, being the main shareholder of Sinopec Limited, provides it
with political leverage. The state-owned company is directly governed by SASAC and has longestablished and politicized relationship with China Development Bank. Virtually every deal of
Sinopec Group and Sinopec Limited is saturated with if not driven by the political agenda. In
fact, mutually beneficial relationship with the government it is a type of support activity that is
not directly mentioned in Porter’s value chain model, but is evident in case of Chinese NOCs.
Sinopec Group is very active outside of China and pursues an expansion growth strategy.
It is present overseas in various forms and focuses on market development (cases 2, 6) and
diversification (cases 3, 4, 5). The geography of its deals is spread across all continents and is
concentrated in the Middle East (cases 2, 3), South America (case 4), and Africa (case 6),
regions with high political risk and often very weak institutions. Sinopec Group’s presence in
developed markets, such as the USA, is limited by the host countries’ economic and energy
The listed Sinopec Limited is mostly active within China and almost exclusively engages
in low-risk joint ventures with foreign firms to either get access to their technology or secure oil
imports by establishing joint refineries that require high commitment from all parties (cases 7, 8).
These kinds of low-risk undertakings in China with its monopolized oil market and huge
growing demand support financial health and stability of the traded company that must take into
consideration the interests of all shareholders. From the perspective of growth, Sinopec Limited
focuses on market penetration (case 7) and product development (case 8).
It can be observed that the political agenda is highly important for both Sinopec Group
and Sinopec Limited. The former acts on behalf of the government and secures oil supply and
technology transfer in both high-risk (cases 2, 3, 4, 6) and low-risk (case 5) environments. The
latter ties suppliers to local Chinese market through JVs (case 7), and develops technology that
will benefit the company financially and the country politically (case 8). The two entities often
engage in deals with the same foreign firms, but the cooperation is manifested in different forms
(cases 3, 7).
It has been noticed, however, that the Chinese NOCs’ internationalization strategy is not
entirely uniform. PetroChina, the traded arm of CNPC, is active abroad as well as at home. The
scope of its business overseas can be hardly compared to that of its parent company, however, it
suggests that the strategy is constantly evolving and should receive sufficient attention from
practitioners and scholars. Sinopec Limited has recently announced that it may purchase
overseas upstream assets from Sinopec Group and turn into a major international player itself,
just as PetroChina. This may bring the internationalization strategies of Chinese NOCs back to
the entirely uniform state again, but will certainly require additional study.
Findings and discussion
The researched has revealed the following:
1. Both domestic and international economic policies of the PRC are the ultimate drivers
for Chinese NOCs’ internationalization activity. As a result, their internationalization
strategies are not only tied to, but also facilitated and directed by the government. This
relationship shapes the strict top-down hierarchical structure of the strategies and leads
to their having a clear algorithmic nature.
2. Internationalization activity of Chinese NOCs can be split into support activities
(shared HR, political facilitation, state financing and so on), which are applied to all
projects, and primary activities. Primary activities of various business units differ in
each case and depend on the nature of particular deals.
internationalization strategies and lead the NOCs to undertake particular projects at the
business unit level. The current strategy of Sinopec Group, Sinopec Limited, CNPC,
and PetroChina (major Chinese NOCs) is the expansion strategy.
4. The expansion strategy manifests itself differently in different types of deals. To
describe particular modifications of the strategy, Igor Ansoff’s product-market
framework can be employed.
5. To attain the objectives of expansion strategy, the so-called functional project strategies
are developed and implemented: production strategy, financial strategy, and some other
strategies, which are not covered in this research.
Financial strategy is shaped at the support activities level.
Production strategy is shaped differently for every given type of project and
includes several dimensions:
What entity is engaged in the deal, i.e. a 100% state-owned NOC (Sinopec
Group, CNPC) or its traded arm (Sinopec Limited PetroChina), depending on
the risk level (the higher the risk the more likely a 100% state-owned entity is
What kind of legal form does the activity take (JV with majority/minority of
Detailed layout of the particular factors that are taken into consideration when the
production strategy is being formed can be found in Table 1.
It becomes evident that the internationalization strategies of Chinese NOCs should be
studied at two levels: the corporate level that covers support activities, and the project level that
describes primary activities. This can attributed to their specific structure, i.e. a 100% stateowned entity passes down the directives it received from the government to its traded arm, after
which internationalization ‘manuals’ tailored to each particular case are developed. This
approach can be applied to all state-owned companies functioning within industries considered
strategic by respective governments.
China’s policy of energy security in the 1990’ has pushed local NOCs to develop outside
of China, while vast cash deposits facilitated their progress. Next step was taken in the 2000’,
when NOCs established their traded arms (Sinopec Limited and PetroChina) to increase
efficiency and monetize on the domestic market.
The analysis of cases has revealed that there is a strategic alliance between Chinese stateowned banks, national oil companies and their traded arms, with distinctive role assigned to each
member. The alliance in general balances between political and commercial interests, with the
former mostly pursued by the state-owned Sinopec Group and CNPC, and the latter driving
Sinopec Limited and PetroChina.
Despite being different legal entities, all Chinese NOCs are controlled by the government
through a special body that provides the ultimate agenda. This leads to their having a shared
strategy that has been revealed in this study.
Oil industry can be roughly divided into the upstream and downstream sectors. The
upstream sector covers exploration and extraction of oil as well as the related technology, while
the downstream sector is centered on refining, marketing and distribution. It can be easily
deducted that the upstream sector has more strategic significance, because oil can be used
without a refinery (e.g. sold as crude or refined by small grassroots factories), but refineries
cannot run without oil supply. Quite unfortunate for the Chinese NOCs, there were late entrants
in the international energy market and faced the challenge of securing resources. This forced
them to internationalize into the high-risk areas of the world such as some parts of the Middle
East or Africa.
The combination of high strategic significance of the upstream sector and high risk of the
available options define the first level of the internationalization strategy of Chinese NOCs:
overseas expansion is almost exclusively conducted by 100% state-owned entities, namely
Sinopec Group and CNPC. Their traded arms, Sinopec Limited and PetroChina, are mostly
responsible for the less risky and well-controlled domestic operations.
Different motives for internationalization lead to a variety in geographical locations.
Downstream sector implies resources as the primary motive, and leads to expansion into
countries that allow large-scale extraction of strategic resources by foreign NOCs. It happens
that such countries have weak institutions and high political risk (Nigeria, Cameroon, Sudan,
Iraq, Iran, Russia). There, Chinese NOCs may partner up with local governments or local NOCs
to establish joint ventures or even invest into a wholly owned subsidiary. The choice depends on
whether the host state is strong enough to secure the majority of shares in the JV or at least not
allow the Chinese to create a WOS.
Technology can also drive expansion into downstream, especially when it has to do with
challenging oilfields. In this case, geography does not play a significant role, unlike the choice of
partner. Major IOCs or technologically developed ‘niche’ and service firms possess the desired
technology, and Chinese NOCs agree to hold minority stakes in JVs with such enterprises (Brazil,
Apart from the upstream sector, downstream sector has also become increasingly important
for Chinese NOCs. As a part of the expansion strategy, it allows them to diversify, i.e. refine
crude oil and sell new products in new markets. The amount of resources and the market size
define the choice of host country for the downstream internationalization activity (Nigeria, Saudi
Arabia, Russia). Whenever possible, the NOC tries to establish a WOS or a JV with a majority
stake, but the particular form depends on whether the local state is strong (Russia) or weak
Domestic internationalization activity is primarily driven by technology-seeking motives.
Chinese NOCs represented by their traded arms engage in low-risk joint ventures with
international oil companies or service firms that can bring in the necessary know-how and
transfer it to their Chinese counterparts. Another motive is the creation of a seller lock-in
situation, when a major oil supplier invests into a large refinery in China and signs a long-term
contract. As a result, the supplier becomes dependent on the Chinese market and takes up
significant fixed costs. All JVs on China’s soil are controlled by local companies that motivate
their partners by allowing access to the immense domestic market.
The summary of the strategic framework is presented in Table 1.
The framework may also help us make assumptions about potential deals in various
locations, e.g. Russia, a country with significant resources and large population, but high
political risk and weak institutions. Our strategic framework implies that since the deal is to take
place overseas, a 100% state-owned company will participate. The potential deal would be
driven by resource-seeking or market-seeking motives, but the political and economic
vulnerability of Russia implies that most probably the resource-seeking motive would take over
as the more profitable option, given the weak domestic demand and the government’s need for
investment (see case 2 on Iran). The counterpart would be the Russian government or a local
NOC, and the deal would be financed by Chinese state-owned banks, Sinopec’s own capital or
CDB, very likely through a loan-for-oil contract. Sinopec Group would attempt to establish a
WOS or have the majority stake in the JV, but since Russia does not allow foreign companies to
operate strategic assets alone, the Chinese party would have to agree to a minority share.
However, the vulnerability of the Russian counterpart and the political/financial leverage would
help the Chinese get a significant stake in a JV they would consider important enough.
A good illustration to the explanatory and predictive power of the resulting framework can
be observed in the recent deal between Rosneft and Sinopec Group over the Russkoye and
Yurubcheno-Tokhomskoye oil fields in East Siberia. The Russian company was looking for a
partner to co-develop the fields in order to decrease the operational risks, and as a result a joint
venture between Rosneft and Sinopec Group was established, the latter holding a significant
stake, but not the majority (49%).
The framework could be further employed by Russian companies to:
1) Asses and predict Chinese NOCs’ international behavior
2) Develop attractive investment projects for Chinese NOCs domestically and abroad
3) Develop more efficient internationalization strategies that would cover both primary
and support activities and involve co-operation between state-owned banks, NOCs, and
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Appendix1. Table 1 - Internationalization strategy of Chinese NOCs: the summary
high risk areas with
areas with large resources & large
low to high (depends on region)
technology seeking, lock-in;
100% state-owned firm
JVs with minority
shares if strong-state
JVs with majority or
WOS if institutions
JVs with minority
traded arm of 100% state-owned firm
JVs with minority shares if
JVs with majority shares
JVs with majority shares
state-owned banks, private banks,
state-owned banks, private banks,
JVs with majority shares or WOS
if institutions weak
state-owned banks, own capital
Appendix 2. Table 2 - Sinopec Group and Sinopec Limited Internationalizion Activity: Summary of Cases
Sinopec Group and Sinopec Limited Internationalizion Activity: Summary of Cases
(D) Goal of
CDB provides a
and helps to tie
Access to and
knowledge of the
state in China
Access to market
(partners of NOCs;
leverage, access to
Sinopec Group (stateowned); Sinopec
National Iranian Oil
Sinopec Group (stateowned)
Saudi Arabian Oil
Access to one of the
largest oilfields in
the Midle East,
cheap oil, control
over the JV
Access to market
and operation of
refinery and a
chain of filling
Access to market,
tying a customer to
facilities can only
use Arabian oil)
Stable supply and
financing from Saudi
Saudi Arabian Oil
Sinopec Group (stateowned)
Sinopec Group (stateowned)
Sinopec Group (stateowned)
Royal Dutch Shell
and operation of
a refinery in
financing, tying a
Access to market,
tying a supplier
Santos basin in
Scaling up shale
oil and gas
33% in 5
shale oil and gas
and drilling of
Sinopec the only
access to Chinese
stable supply, access
to South American
access to market
Iran factor, no
control over the
Saudi Arabia's oil
control over the
expertise in South
Access to and
knowledge of the
state in China
institutions in the
price of the
Access to China's
shale gas reserves,
access to market
low risk contract
Sinopec Group (stateowned)
Get access to
Africa and the
Acess to reserves
and markets in
Africa and the
operations of such
scale in the