Political risk and Chinese investments in the African oil and gas industry : the case of China National Petroleum Corporation in South Sudan

Du Toit, Gerda Maria (2013-03)

Thesis (MA)--Stellenbosch University, 2013.

Bibliography

Thesis

ENGLISH ABSTRACT: Chinese national oil corporations have increased their foreign direct investments over the last decade in Africa, where the political environment of oil producing countries often expose the firms to high political risk. The analysis of political risk is increasingly relevant for the investment decision-making process of Chinese corporations, as changes in political dynamics of host countries can affect the opportunities and profitability of investments. The study emphasises the need for firm-specific political risk analysis as a decision-making tool for international businesses operating in foreign countries. The main research question of the study is concerned with the main indicators of political risk that Chinese corporations may face in the African oil and gas industry. Chinese oil corporations may be affected by political instability, international and internal conflict, corruption, and poor economic and social development in African countries. The political risk they face may be influenced by indicators such as the location of the oil operations, the relative importance of the Chinese oil firm to the host country’s oil industry, the competitive advantage and technical abilities of Chinese oil firms, the support of the Chinese government to state-owned firms, and economic relations that the host government have with China and the oil firm. The study follows a qualitative research approach by way of an empirical case study of the political risk faced by one of China’s national oil corporations, China National Petroleum Corporation (CNPC), in South Sudan. A major part of CNPC’s business operations in Sudan was transferred to South Sudan after the country seceded from Sudan in July 2011. The political risk for CNPC in South Sudan is analysed and measured in accordance with an industry-specific political risk model for the oil and gas industry. The study finds that CNPC faces a high level of political risk in South Sudan since independence. An examination of the political risk analysis is done to serve as a basis for answering the main research question. The hostile relationship between South Sudan and Sudan in particular may expose CNPC to high political risk as it led to the shutdown of the oil industry and violent interstate conflict. However, CNPC’s political risk exposure may be mitigated by certain indicators, such as CNPC’s significance in the operation of the South Sudanese oil industry, CNPC’s attributes of being a Chinese state-owned enterprise, the availability of support from the Chinese government in the form of economic cooperation packages and CNPC’s technical abilities in exploration operations. Furthermore, while negative sentiments on the part of the South Sudanese government towards China and CNPC due to the latter’s close relations with Sudan might expose CNPC to high risk, the risk is mitigated by the high level of economic dependency of South Sudan on both China and CNPC.

AFRIKAANSE OPSOMMING: In die laaste dekade het Chinese nasionale oliekorporasies hulle buitelandse direkte beleggings in Afrika uitgebrei. Die politieke omgewing van hierdie lande veroorsaak egter dikwels dat hierdie firmas aan hoë politieke risiko blootgestel word. Omdat politieke dinamiek in gasheerlande die geleenthede en winsgewendheid van beleggings kan affekteer, is die analise van politieke risiko toenemend relevant in die beleggingsbesluitnemingsproses van Chinese oliekorporasies. Die hoof-navorsingsvraag in hierdie studie handel oor die hoofindikatore van politieke risiko waaraan hierdie korporasies in Afrika se olie- en gasindustrie blootgestel kan word. Politieke onstabiliteit, internasionale en nasionale konflik, korrupsie, asook swak ekonomiese en sosiale ontwikkeling in Afrikalande kan Chinese oliekorporasies affekteer. Die politieke risiko waaraan hulle blootgestel word, kan beïnvloed word deur faktore soos die ligging van oliebedrywighede, die relatiewe belangrikheid van die Chinese oliekorporasie vir die gasheerland se olie-industrie, die kompeterende voordeel en tegniese vermoëns van die Chinese oliekorporasies, die Chinese regering se ondersteuning van staatskorporasies en die ekonomiese verhoudings wat die gasheerland met China en die oliefirmas het. Die studie volg ‘n kwalitatiewe navorsingsbenadering by wyse van ‘n empiriese gevallestudie van die politieke risiko waaraan een van China se nasionale oliekorporasies, China National Petroleum Corporation (CNPC), in Suid-Soedan blootgestel word. Sedert Suid-Soedan se onafhanklikheidswording in Julie 2011 is die grootste gedeelte van CNPC se bedrywighede in Soedan na Suid-Soedan oorgedra. Die politieke risiko vir CNPC is volgens ‘n industrie-spesifieke politieke risiko-model geanaliseer en bereken. Die studie toon dat CNPC inderdaad aan ‘n hoë vlak van politieke risiko blootgestel is sedert onafhanklikheid. Die politieke risiko-analise word ondersoek ten einde as basis te dien vir die beantwoording van die hoof-navorsingsvraag. In die besonder kan die vyandiggesinde verhouding tussen Suid-Soedan en Soedan CNPC blootstel aan hoë politieke risiko, onder andere vanweë die sluiting van die olie-industrie en die gewelddadige interstaat-konflik wat dit meegebring het. CNPC se blootstelling aan politieke risiko kan egter verminder word deur sekere faktore soos CNPC se beduidende belangrikheid in die bedryf van die Suid-Soedanese olieindustrie, CNPC se kenmerke as ‘n Chinese staatsonderneming, die beskikbaarheid van die ondersteuning van die Chinese regering in die vorm van ekonomiese samewerkingspakette asook CNPC se tegniese vermoëns in die veld van eksplorasiebedrywighede. Alhoewel die negatiewe sentiment in die Suid-Soedanese regering teenoor China en CNPC as gevolg van hulle noue verbintenis met Soedan vir CNPC aan hoë risiko kan blootstel, word hierdie risiko verminder deur Suid-Soedan se hoë vlak van ekonomiese afhanklikheid van CNPC en China.

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