China Vs. India: The Next Heavyweight Fight For Oil

Todd Shriber
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If you actively follow the oil market, there are a couple of themes that probably have become pretty obvious to you lately. First, when the weekly oil inventory data is reported for the U.S., regardless of what agency delivers said data, inventories have been steadily rising. The obvious reaction to that news is that demand for oil in the U.S. is waning. That scenario is also playing out in select markets in Europe.

The second theme, and perhaps the new battle cry of oil bulls, is that oil prices can continue to move higher even in the face of sluggish demand from the U.S. and developed Europe. The reason being is that emerging markets (read: China) still want oil and they want it in a big way. It is hard to argue with that point. China's oil imports surged 29% in March from the year-earlier period. China imported was a net importer of 20.8 million metric tons of crude oil in March. That total is surpassed only by the December 2009 record of 20.9 million metric tons.

But China is not the only game in town in when it comes to rising oil demand. Far from it in fact. Statistically speaking, China is the second-largest energy consumer in the world behind the U.S., but China's biggest competitor for oil assets and resources in the coming years may not be Uncle Sam, it very well could be India.

The popular anecdotes may highlight that India is constantly playing second fiddle to China. India is Asia's second-fastest growing economy behind China. It is the second-biggest energy consumer in Asia and India, like China, is home to millions of manufacturing jobs, which only serves to increase India's oil demand.

What both countries share in common is that neither will be mistaken for an OPEC member, meaning they will likely remain net importers of oil for the foreseeable future and the best way to ameliorate this situation is through acquisitions of international oil assets. China's stance on this issue is well known. As we have mentioned many times recently here on OilSlick, Chinese energy firms have spent $32 billion on international acquisitions in the past year.

Add another $4.65 billion to that total. That is what Sinopec, Asia's largest oil refiner, paid for ConocoPhillips' (COP) 9% stake in the Canadian oil sands project Syncrude. Many analysts were expecting ConocoPhillips, the third-largest U.S. oil company, to sell that stake for $4 billion, so it is fair to say Sinopec might be overpaying a little bit, but hey, China needs oil and if it has to overpay for an asset or two, so what?

For its part, India is not going to let China scoop up all the good assets. Last weekend, India's Reliance Industries, the country's largest company by market value, said it will acquire a 40% stake in 300,000 Marcellus Shale acres owned by Atlas Energy (ATLS) for $1.7 billion. Reliance is now the largest foreign energy company to make a move of this size into U.S. shale formations.

India's oil demand is expected to account for over 13% of total demand in the Asia Pacific region by 2014 and that is not surprising given the economic growth forecasts for India. Sure, these estimates will probably trail China, but India's economy is expected to growth at an impressive clip. The OECD expects India's GDP to grow by 7% this year and by 7.5% in 2011. That means India is going to need more oil and the competition with China should only grow.

India's government, the world's largest democracy, realizes this and has told its two state-run oil companies, Oil India and Oil & Natural Gas Corp., to each make at least one acquisition this year. Oil India has said it has $2.5 billion in cash to go shopping with and has been trying to acquire a 50% in Gulfsands Petroleum, a company with operations in Syria and the Gulf of Mexico.

Keep in mind that over a billion people already live in India. Actually, India's current population is 1.15 billion, which trails China's 1.3 billion population. There is an important difference as it pertains to oil demand. China's population is expected to remain flat in the coming years, while India's headcount is expected to grow to 1.7 billion by 2035. Those new additions to the population tally will consume more oil, raising the specter of supply shortages.

No, China and India will not gobble up all the world's oil on their own, but the competition for new oil assets between these emerging market titans will be worth watching.