This is Why We Drill: Chinese Company Aims to Buy Texas Oilfields

The U.S. may be winding down its fossil fuel dependency, but it appears that foreign companies have spotted an opportunity for investing in American oil and gas assets. In the latest development, the Chinese investment holding company, Yantai Xinchao Industry Co. Ltd., has filed documents indicating it will shell out $1.3 billion to buy oil fields in Texas.

The foreign ownership of U.S. oil fields adds a new twist to the political pressure that is being put to bear on lifting federal restrictions on crude oil exports from the U.S. Namely, for whom are the pro-export legislators speaking: their domestic constituents or their foreign investors?

China, renewable energy and fossil fuels

Before we get into the political implications, it's helpful to step back and look at the broader energy picture.

While China's carbon mismanagement has become the stuff of legend, more recently the country has taken action to pull itself into a clean energy future.

Among other moves, China's solar investments are skyrocketing, and just last month China reaffirmed that its cap-and-trade initiative, in the works since 2010, is on track for launch in 2017. The initiative will focus on key industrial carbon emitters.

One of China's more intriguing actions is a partnership with the Nature Conservancy announced last year. It involves an ecological mapping system aimed at generating innovative emissions-reduction strategies.

If China continues along this path, some observers anticipate that it could beat the U.S. to claim global leadership in carbon management. However, as with the U.S., China will need a relatively sizable fossil fuel supply chain for the foreseeable future -- and even if it doesn't, Chinese businesses will continue to seek profits wherever they are to be made, just as American businesses do.

Chinese company buys Texas oilfields

That brings us to the latest news out of Texas. With the U.S. oil and gas industry in free-fall, domestic oil and gas fields are in the crosshairs of global investors in search of a bargain. The energy journal Fuel Fix has been tracking the industry's shifting landscape under the pressure of declining prices. Earlier this week it noted Yantai Xinchao's oil field buy consisted of oil fields in the rich Permian Basin formation within Howard and Borden counties.

The deal involves a limited liability partnership called Ningbo Dingliang Huitong Equity Investment Center, the journal reported. That enables Yantai Xinchao to engineer the transaction through the newly created (as of June 2015) limited liability company, Moss Creek Resources, a subsidiary of Ningbo Dingliang. The Moss Creek connection provides the whole transaction with an address in Dallas, Texas.

So far, the deal is in the letter-of-intent phase, and it has gotten the seal of approval from the Committee on Foreign Investment in the United States, an inter-agency committee formed under the Treasury Department with the aim of ensuring that foreign investment in the U.S. economy does not compromise national security. (For more on the complexities of federal policies on foreign investment, check out this 2013 Congressional Research Service report.)

A wake-up call for the politics of U.S. energy production

The new transaction isn't the first time that China has cemented a position in U.S. fossil fuel production, though the trend is a relatively new one. China, as well as India, were reported to be on track for buying U.S. coal and shale gas assets back in 2010. One major transaction occurred in 2011, when China's Cnooc Ltd. nailed down a $570 million deal for oil and gas leases previously owned by the U.S. company Chesapeake Energy.

By 2012 the Wall Street Journal was reporting that Chinese companies had accumulated more than $17 billion worth of oil and gas deals in the U.S. and Canada, skirting around potential objections by working deals through minority stakeholder status.

As for the future, it's quite possible that the Committee on Foreign Investment will continue to approve additional deals for China-based companies in the U.S. oil and gas sector. The upside for local politicians would be an improved prospect for job retention and creation even as domestic ownership in the oil and gas industry shrinks.

There is a significant political downside, though. Evidence is accumulating that the local public health and safety impacts related to oil and gas extraction can result in more harm than good. Domestic oil and gas producers are already under increasing public scrutiny, and tracing responsibility for those impacts to foreign companies will further erode public support.

The growth of energy jobs in the wind and solar sectors also helps to weaken the job-creating argument for oil and gas. Texas is certainly no slouch in that regard. Just this week the state made waves for the spectacular growth of its renewable energy sector, and Texas municipal governments now own three of the top five spots in the nation for largest local user of clean energy.

In addition, the newly announced federal budget deal hints at a structural weakness in the pro-export argument. As part of the complex agreement to increase funding for non-defense programs the U.S. is selling down its Strategic Petroleum Reserve, which is a good indicator that the country has relaxed its overall dependency on oil.

TriplePundit has also noted that oil and gas operations in the U.S. have been marching into regions that previously hosted little or no such activity, leading to significant conflicts with existing economic activity that has already proven to benefit local communities. The involvement of Chinese companies in this sector could become particularly sensitive given ongoing tensions between that country and the U.S., most recently involving U.S. Navy maneuvers in the South China Sea.

The bottom line: we're guessing that the entry of Chinese companies into the U.S. oil and gas marketplace will draw more attention to the broader issue of foreign and global investment in extractive industries that involve significant risks and impacts for local communities. As public awareness of that trend grows, certain federal legislators will find it more difficult to make the case for supporting domestic producers by opening up the export market.

Of course, there's no harm in trying...

Image credit: East Texas oil well pump by Ray Bodden via flickr.com, creative commons license.