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Get Four
|  | JANUARY 23, 2006
By Brian Bremner China: A Bull in the Energy ShopIts growing clout is clear in two events: A visit to Beijing by Saudi King Abdullah, and the hot bidding over Westinghouse and the chance to build nukes for ChinaThe world rightly marvels at China's rapid economic ascendancy, but far less appreciated is how its modernization strategy hinges on access to energy. As the Chinese economy continues to expand, so does its thirst for oil, gas, coal, and electricity. China is a major importer of Middle East oil, and today it accounts for 12% of all world energy consumption, second only to the U.S. at 24%. For the rest of the world that means two things. First, count on China to continue controversial petro-diplomacy and to lay out mega-yuan on oil and gas abroad in its quest for energy security. Second, it will spend lavishly on power infrastructure deals at home to improve its remarkably inefficient use of the energy it has. You can see both forces at work in two unrelated events this week. There's the visit of Saudi King Abdullah to Beijing this week as part of a larger four-nation swing through Asia -- his first foreign trip since becoming monarch last year. And there's the ongoing global bidding war for the Westinghouse nuclear reactor business, which is largely about supplying Chinese demand for new power plants. "The government has put a big priority on diversifying its energy resources" and getting its energy efficiency up to international standards, notes Li Yong, an energy specialist with the Asian Development Bank in Beijing. SHIFT OF INFLUENCE. Let's start with the Saudi monarch. On Jan. 23, King Abdullah met with Chinese President Hu Jintao in Beijing to discuss the mainland's energy security and possibly sign a pact that would increase Chinese investment in Saudi oil, natural gas, and petrochemical assets. If you're wondering what he's doing there, consider this: Not long ago, China was a net exporter of oil, but it now imports about 40% of its crude, thanks to falling output at its big northeastern oil fields. By 2025, China likely will import 75% of its oil, the U.S. Energy Dept. estimates, and the Saudis are a key Chinese supplier. So good relations with them are a huge priority for China, while the Saudis want to build ties to Asia to offset U.S. influence. Precise details of the energy pact haven't been disclosed. But a report by Arab News on Jan. 23 suggested that three Saudi companies -- MIDROC, Sara Development, and House of Invention -- are teaming up with an undisclosed Chinese partner to build a $6 billion petrochemical complex in Jubail Industrial City on the Persian Gulf. "LEAPFROG STRATEGY." And in recent years, cooperation has picked up in other areas. Saudi Aramco is already in a joint venture with ExxonMobile (XOM ) and Sinopec to build a $3.6 billion refinery and petrochemical complex in China's Fujian Province that will use Saudi crude. And two years ago, Sinopec was one of several foreign companies that agreed to explore in Saudi Arabia's Rub al-Khali gas fields. The deals are part of a global search for oil by China's state-controlled energy giants. In early January, CNOOC, China's biggest offshore oil producer, agreed to pay $2.3 billion for a 45% stake in a Nigerian oil field from South Atlantic Petroleum. (CNOOC caused a furor in the U.S. when it made an ultimately unsuccessful $18.5 billion bid for Unocal last summer.) The diplomacy and dealmaking are part of a two-year-old "leapfrog strategy in the energy field" by China's all-powerful State Council. That means locking up secure supplies abroad, while dramatically increasing natural gas facilities, hydro generators, and nuclear reactors at home. Indeed, potential demand from China is reviving the once sleepy nuclear energy industry. Executives from the likes of General Electric (GE ), France's Avera Group, and Japan's Mitsubishi Heavy are all salivating as China embarks on one of the biggest buildouts in the industry's history. The mainland is expected to spend $50 billion-plus on some 30 new reactors over the next 14 years to add to the nine it already has in operation. IS TOSHIBA THE WINNER? And that's why everyone wants Westinghouse, which is in a heated race with Areva (the world's biggest nuclear engineering outfit) to build four pressurized-water reactors worth $8 billion in southern China. Westinghouse wants to sell its new AP1000, which execs say is much safer than the '70s-era reactors that China already has in place. Beijing indicated early on it wanted this type of technology for the current round of reactor contracts: two in Zhejiang province and another pair in Guangdong. So the bidding for Westinghouse has been heating up lately. Mitsubishi Heavy is in the chase, and Hitachi (HIT ) and General Electric have made a joint offer. But it appears that Toshiba has won the bidding, with the Japanese giant reportedly ready to pay about $5 billion for the unit. Shares of Toshiba Plant, the nuclear unit that trades separately from the chipmaking and consumer-electronics giant, shot up by more than 10% in Tokyo trading on Jan. 23. "If Toshiba can get Westinghouse, it will be basically qualified to build reactors in China," says Naoki Sato, an analyst with Morgan Stanley in Tokyo. An official announcement of the winner of the Westinghouse auction isn't expected until after a Jan. 26 board meeting of British Nuclear Fuels, which currently owns Westinghouse. THRILLED AND CHILLED. But Toshiba's celebration could be premature. Areva is still in the running, and Arnaud de Bourayne, head of Areva's China operations, last fall pointed out that his company's latest pressurized-water reactors have 1,700 megawatts of capacity per unit, vs. 1,000 Mw for the Westinghouse offering. Also, Atomic Energy of Canada, which uses a rival heavy-water technology, and GE, which specializes in boiling-water units, continue to lobby the Chinese to get in on contracts later in the decade. "There is a high risk in the $5 billion" Toshiba is paying for Westinghouse, says Hiroshi Yoshihara, a Merrill Lynch analyst in Tokyo. Trade officials in the U.S., Europe, and Japan are no doubt thrilled by all the potential deals. China is likely to hand out billions of dollars in contracts as it builds nuclear and conventional power plants, and makes huge investments in energy pipeline, liquid natural gas facilities, and refining capacity. Diplomats in the West, on the other hand, will be less thrilled by China's growing trade and energy ties with Iran, Venezuela, and the Sudan. Yet when it comes to energy, Beijing has far too much to lose by not going full-tilt. So expect the news coming out China this year to reflect the mainland's continued quest for energy security.  With Stanley Reed in London Bremner is BusinessWeek's Asia Regional Editor based in Hong Kong
BW MALL
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