Because of the U.S. trade deficit with China ($273 billion at the close of 2010), China is awash in dollars - our dollars. Much of this windfall is being used to buy U.S. Treasury bonds, causing much consternation in the minds of voters and leading to cries of "China owns us!" This is ridiculous, as China owns only about $1 trillion of our $14 trillion debt. But the cry continues, not only from voters but also from politicians who are more concerned with the country's budget deficit than growing the nation's economy.
More interesting, however, is what else China is doing with the flood of dollars we are sending them every time we buy Chinese-made goods. Recent reports give us a glimpse into some of the assets the Chinese are buying: rights to U.S. domestically-produced oil and gas leases as well as the most modern drilling technology fielded from Montana down through Texas and all the way to the Mexican border.
In June, 2005, China National Offshore Oil Company Ltd. (CNOOC), a subsidiary of the state-owned China National Offshore Oil Corporation, attempted to buy U.S. oil company Unocal for $18.5 biillion. Forty days later CNOOC withdrew its offer citing unprecedented political opposition, political pressure and a political storm in the U.S. The Chairman of the Chinese company was quoted at the time, "The bid met unexpected political opposition from the US political circle, where certain people had viewed the proposed merger as a threat to American security."
But political times change, and in October, 2010 the same Chinese company bought one-third of the 600,000-acre Eagle Ford, Texas, shale oil and gas project from Chesapeake Energy Corp of Oklahoma City for $1.08 billion. The deal was described at the time as “a pact which was the first major investment by a China state-run company in onshore energy reserves in the U.S.”
"The climate is much more hospitable now," said Juli MacDonald-Wimbush, a partner with Marstel-Day, an energy and environmental security consulting company in Fredericksburg, Va. Amid low natural gas prices and a largely difficult drilling climate, she said highly liquid Chinese companies will find willing partners among onshore oil and gas companies hurting for capital to drill. "They have the cash, and energy companies in the U.S. are looking for the cash to develop these reserves," MacDonald-Wimbush said.
Aubrey McClendon, CEO of Oklahoma City-based Chesapeake, said at the time that he had not heard any objections to the sale. CNOOC chairman Fu Chengyu described the deal as being "mutually beneficial to both parties as well as for both Sino-US energy industries."
In January of this year, news came from Shanghai that another deal had been struck between CNOOC and Chesapeake Energy allowing the Chinese company to buy "a two-thirds share of a number of shale oil and gas leases," for $570 million, as well as financing "drilling and other costs" up to $697 million. The deal involved CNOOC's taking a 33% stake in Chesapeake leases covering 800,000 acres in the Denver-Julesburg and Powder River Basins in northeast Colorado and southeast Wyoming states.
"We don't see any U.S. regulatory concerns judging by the prior approval of the Eagle Ford deal, as Cnooc is only acquiring minority stakes, and the oil/gas produced will remain in the U.S. supply system," said Mirae Asset management analyst Gordon Kwan.
Shale gas is trapped in tight rock formations and previously this had proved very difficult to extract. U.S. companies have now developed technologies to crack open these formations, making output of the gas economical, and in so doing they have transformed the country's energy profile.
Rapid growth in shale gas output in the U.S. has displaced imported liquefied natural gas, making more LNG available for other countries and keeping a lid on U.S. domestic and international gas prices.
At the present time, China is heavily dependent on imported oil and gas, but the country enjoys enormous shale reserves: the International Energy Agency estimates China has reserves of 26 trillion cubic meters of shale gas, which it hasn't been able to access due to its lack of technical know-how.
Since other political concerns in the U.S. have taken precedence over energy security worries, China is hoping to replicate the success seen in the U.S. with their own shale reserves. But to do this they will need access to the latest drilling technology.
Both China and neighbor India, which are heavily dependent on imported oil and gas, are hoping to replicate the success seen in the U.S. with their own shale reserves, but to do this need access to that technology.
So they are buying that access with dollars supplied by consumers in this country who buy the "Made In China" label.