What Is an Extractive Industry?

Extractive industry is the basic industry of the national economy. At present, 93% of energy, 80% of industrial raw materials, and 70% of agricultural production materials in China come from extractive industry products. The development of the extractive industry has provided a wealth of mineral raw materials for various sectors, which has played a supporting role in the development of the national economy.

Extractive industry

There are three main types of oil and gas extraction, coal extraction and mineral extraction.

New Trends of Global Direct Investment in Extractive Industries

(I) Investment scale: rapid development and broad prospects

According to UNCTAD statistics, the stock of FDI (FDI means foreign direct investment) in the global extractive industry in 1990 was only US $ 158.2 billion, and by 2005 it had reached US $ 610.1 billion. Among them, from 2003 to 2005, the average annual FDI flow in the extractive industry reached 44.89 billion US dollars, which was a nearly five-fold increase from the 9.89 billion US dollars average annual during 1989-1991.

Extractive industry

From 2003 to 2005, the proportion of extractive industries in global FDI inflows has reached 12%. Although this proportion is still relatively low compared to the manufacturing and service industries, considering that the prices of mineral resources continue to rise and the profits of the extractive industry are considerable, the prospects for the development of FDI in the global extractive industry are very broad.

From the perspective of the participants in the global extractive industry FDI, both developed and developing countries have paid more attention to this area. Among them, the pace of investment in extractive industries in developing countries has been particularly rapid, increasing rapidly from an average of US $ 245 million per year from 1989 to 1991 to an average of US $ 3.723 billion per year from 2003 to 2005, an increase of 15 times; during the same period, the extractive industries in developed countries have increased by 15 times. Investment also increased from an average of US $ 9.235 billion to an average of US $ 41.634 billion. Taking the Netherlands as an example, the FDI stock of the Dutch extractive industry in 2000 was 51.045 billion US dollars, and in 2005 it reached 162.125 billion US dollars, which has tripled in just 5 years; the average annual flow of FDI in the Dutch extractive industry between 1998 and 2000 only USD 2.127 billion, which reached USD 39.305 billion from 2003 to 2005, which shows the rapid development of FDI in its extractive industry.

Extractive industry investment entities

Multinational companies in developing and transition economies are increasingly active

For a long time, developed countries have always occupied an absolute dominant position in extractive industry FDI. Take the metal mining industry as an example. Of the top 25 metal mining companies ranked by the world s total output value in 2005, 15 were from developed countries, of which the Netherlands, the United Kingdom, and the United States were the three major sources of FDI in the extractive industry. However, it is worth noting that in recent years, the share of developed countries in the global extractive industry FDI has declined, from 99% in 2000 to 95% in 2005; in contrast to developing countries and transition The economy is increasingly active in the field of extractive industry FDI. According to UNCTAD statistics, from 1990 to 2005, the global share of FDI stock in extractive industries in developing countries has increased from 1.2% to 5.5%.

This trend is mainly driven by multinational companies in developing countries such as Asia and Latin America, as well as countries with economies in transition, and it is particularly significant in the oil and gas sector. In Latin America, the extractive industry has become its main target for FDI in recent years. In 2006, Brazil's Vale acquired the British nickel company, the world's largest nickel trader, for $ 17 billion, the largest acquisition by a developing country company. In addition, Venezuela, Chile and Argentina are also important sources of investment. In Asia, overseas investment in extractive industries in countries such as China and India is also increasing. Between 2005 and 2006, India's ONGC Videsh Company made nine acquisitions of extractive industries overseas (Cuba, Egypt, etc.). As of March 2006, the oil and gas sector accounted for 19% of the total value of India's overseas acquisitions. In South-Eastern Europe, Russian oil and gas multinationals operate vertically integrated downstream operations in developed countries, while conducting upstream exploration and extraction activities in other developing countries. In this series of activities, developing countries and transition economies have gradually realized the internationalization strategy of extractive industry enterprises through FDI. The degree of international operation of enterprises has continued to increase, and they have gradually developed into global companies.

In addition, although the nature of ownership of investment entities varies widely in different types of extractive industries, transnational corporations in developing countries still show good momentum. In the metal mining industry, private companies dominate the world and dominate the production of metal minerals globally; but in the oil and gas industry, the opposite is true. Due to the emergence of OPEC and the wave of oil nationalization in developing countries, state-owned oil companies have gradually replaced the dominant position of private multinational companies, and this trend has been continuously demonstrated. In 2005, the top ten oil reserve companies in the world were all state-owned enterprises from developing countries, which accounted for 77% of the global oil reserves, while private multinational companies from developed countries accounted for only 10%.

(III) Investment location: The importance of developing countries and economies in transition is increasing

The geographical distribution of global extractive industries FDI also has a similar development trend, that is, although developed countries still attract the vast majority of global extractive industry FDI, their proportion has been declining; at the same time, developing countries and transition economies The importance of being an investment target country for extractive industries continues to increase. According to statistics, the proportion of foreign capital attracted by extractive industries in developed countries has fallen from 86% in 1990 to 71% in 2005, while the stock of foreign capital attracted by extractive industries in developing countries has not only increased by nearly 9 between 1990 and 2000. Times, and continued to grow by 50% between 2000 and 2005.

If the region is subdivided, it can be found that the FDI turnover in extractive industries has increased particularly rapidly in Africa and Latin America in recent years. In 2004, foreign countries such as Egypt and Angola in the oil and gas industry had more than 60% of the total foreign capital flow; in 2005, Venezuela's foreign capital flow in the oil and gas industry also reached US $ 1 billion. In addition, the Russian Federation and other CIS countries have also become important investment destinations. As of 2005, these countries have attracted US $ 36 billion in foreign investment in extractive industries, surpassing traditional mining countries such as South Africa (US $ 27 billion).

If the industry is subdivided, then in the oil and gas industry, UNCTAD's research on 27 oil and gas multinational companies found that its main developing countries are Indonesia, Kazakhstan, Venezuela, and the Russian Federation; in the metal mining industry, in 2006 In the exploration phase of metal minerals, the developing countries receiving the most projects are Peru (12), followed by Chile (6), Indonesia (4); in the mining production phase, Peru (8) and Chile (7) It is the host country of the top 25 mining companies with the most investment; in the refining phase, Chile also has the largest number of projects (7), followed by South Africa (4) and Peru (3).

(IV) Investment methods: Cross-border mergers and acquisitions in the extractive industry and the resurgence of alliances

Similar to the situation in the late 1990s, the wave of cross-border mergers and acquisitions has greatly promoted the development of global FDI. However, the difference is that the last wave of cross-border mergers and acquisitions mainly occurred in the information and communications technology industry, while the current wave of cross-border mergers and acquisitions was concentrated in the field of extractive industries. The driving factor was mainly the continuous increase in profits of global extractive industry companies leading to stock prices Up. Never seen, this trend may continue for quite some time.

According to UNCTAD statistics, the cross-border acquisitions of the global extractive industry in 2004 were only US $ 16.8 billion and surged to US $ 105.3 billion in 2005. Of these, about three-quarters of cross-border mergers and acquisitions are in the oil and gas sector; in contrast, mining and There are relatively few cross-border M & A activities in quarrying projects. But in the past two or three years, with the high price of mineral products, global mining has also become the focus of mergers and acquisitions. Since the end of 2005, there have been five cases of mergers and acquisitions exceeding US $ 10 billion. In 2006, cross-border mergers and acquisitions in the mining and quarrying industries hit a record $ 55 billion. Among them, the cross-border mergers and acquisitions in the mining industry sector in developed countries increased by nearly five times from 2005 to 2006 ($ 11.035 billion-$ 50.492 billion), and the purchases increased by nearly seven times ($ 4.858 billion-$ 36.903 billion). Similarly, developing countries have also played a pivotal role. For example, India's Tata Steel has acquired the Injocrus Group, Europe's second-largest steel company.

It is worth noting that with the intensification of competition, multinational companies are gradually inclined to strengthen their overall scale, market share, and technological control through strong alliances. For example, Rusal, the world's third-largest aluminum producer, is the product of a strong alliance; in 2007, Bhp Billiton, the world's largest mining company, also launched Rio Tinto, the third-largest mining company Acquisitions, etc. With the increasing frequency of cross-border M & A and restructuring activities, the industry concentration of the global extractive industry has increased significantly. In the field of metal minerals, in 2006, the top ten companies controlled 33% of the total value of all non-energy minerals in the world, compared with 26% in 1995. In the oil and gas industry, the top 25 companies' industries in 1995-2005 Concentration also rose from 59% to 63%.

2. Feasibility Analysis of Domestic Enterprises' Participation in Extractive Industry Outbound Investment Through the above analysis, we find that the current prevalence of FDI in the global extractive industry is an inevitable result of the current world's energy constraints, and its development prospects are very broad. For Chinese companies, this is undoubtedly a rare development opportunity. On the one hand, developing countries and transition economies are increasingly active in this wave of extractive industry FDI. In contrast, as one of the world's largest developing countries, the scale of extractive industry FDI is still small. In 2005, China's extractive industry FD1 was equivalent to 1.4% and 3.6% of the global extractive industry FDI flows and stocks, respectively, far lower than the share of developing countries (8.3% and 5.5%, respectively). On the other hand, with the rapid development of China's economic development, the energy demand gap will increasingly widen. Due to the limited domestic energy extraction, the import of mineral resources will further increase China's dependence on external resources. Therefore, in order to ensure the sustainable development of the national economy and national economic security, it is necessary for Chinese enterprises to actively develop and promote FDI in the extractive industry in the new global situation. The analysis of Dunning's OLI paradigm also shows that not only must Chinese enterprises actively participate in it, but also they have basically the conditions to enter the overseas extractive industry.

(I) Ownership Advantage

In terms of funds, China's resource-based enterprises, especially oil companies, are state-owned or state-controlled enterprises with strong capital. In China, the three major oil giants (CNPC, CNOOC, and Sinopec) not only have extensive financing channels, can obtain loans at low interest rates, but also can enjoy government subsidies and investment insurance provided by the government. Investment in extractive industries. Overseas, PetroChina, CNOOC, Chinalco and other companies have successfully listed overseas, and can rely on good reputation and management capabilities to raise funds in international capital markets.

In terms of technology, patented technology is also one of the sources of ownership advantages of internationalization of resource-based enterprises, especially for some technologically advanced projects, such as deep-sea oil and gas drilling and production of liquid natural gas. The three major domestic oil companies currently have technological advantages in areas such as upstream exploration and development and downstream smelting, especially CNOOC, which has accumulated rich experience in difficult offshore oil exploration and development, has first-class technology and a large number of world-class technical personnel .

In terms of economies of scale, after decades of capital accumulation, the scale of domestic oil companies and mining companies has continued to expand, and has already enjoyed the advantages of economies of scale. For example, PetroChina ranks eighth among the world's top 50 oil and gas mining companies, and has oil and gas assets in 23 countries, while Sinopec is also on the same list as CNOOC.

(II) Internalization Advantage

The internalization advantage refers to the internal transfer of products and technologies between the parent company and its subsidiaries in order to avoid the increase in transaction costs caused by defects in the external market. First, the current surge in international mineral resource prices has brought more and more instability to China's economic construction. Second, some oil-rich host countries have considered the strategic importance of energy resources and high resource rents. Increasing control over oil and gas production. Finally, the situation in the Middle East and Africa, which is the main source of China s imported oil, is volatile, and European and American countries often implement policies that curb China s access to overseas energy. In this case, China's transaction costs for energy acquisition are relatively high, and the national economy is also facing major strategic security issues. If domestic enterprises adopt foreign direct investment and adopt internalization strategies such as vertically integrated operations, not only can they effectively control the company's supply and trade of raw materials, they can stabilize production and sales and resource allocation, but they can also minimize transaction costs.

(3) Location Advantage

The location advantage is mainly due to the host country's favorable investment conditions in terms of investment environment, such as local foreign investment policies, infrastructure, and resource endowments. On the one hand, considering the characteristics of the extractive industry, the host country's resource endowment is the most important location factor. According to current statistics, the economically recoverable petroleum resources to be discovered worldwide are mainly distributed in the Middle East, accounting for about 30.5%; followed by the former Soviet Union, North America, Central and South America, and Africa, all of which are above 10%; and Asia Pacific And Europe accounted for 5.5% and 3.9%, respectively. Most of these oil-rich countries lack the ability to fully develop themselves, which provides sufficient conditions for Chinese enterprises to enter these countries. On the other hand, in each stage of the extractive industry's activities, the host government's policies and systems are also important, such as foreign investment policies and mining policies. A 2006 UNCTAD survey showed that 80% of the 184 policy changes in various countries are conducive to attracting foreign investment in the host country. For example, Egypt reduced corporate tax from 40% to 20%. Gulf oil-producing countries have also formulated preferential policies to attract international oil capital policy. Therefore, Chinese enterprises can effectively use these preferential policies to carry out FDI in the extractive industry, which can not only ensure the long-term stable supply of domestic resources, but also be a good profit opportunity for the investment enterprises themselves.

Policy recommendations for extractive industries

For China, where foreign direct investment has just started, although domestic extractive industry enterprises have initially possessed the above-mentioned ownership advantages, internalization advantages, and location advantages, there is still much work to do in promoting FDI in the extractive industry. To this end, we should take The following related policies and measures.

First, in terms of the role of the government, world experience shows that in the initial stage of overseas investment, companies often rely on strong government support to succeed, especially in FDI in the extractive industry. Therefore, our government should gradually improve the FDI's promotion policies and support system, especially strengthen the relevant foreign investment legislation, and encourage and protect the motivation and interests of Chinese companies' international operations. At the same time, compared with FDI in other industries, entering the extractive industry requires stronger financial resources and financial guarantees. Financial support can be provided through financing subsidies, or measures such as export credits, loan subsidies, and investment guarantees can be used to directly participate in project financing. So that Chinese enterprises can afford to take greater risks when investing overseas, thereby obtaining energy at a lower cost.

Second, in terms of the choice of investment areas, on the one hand, Chinese enterprises should actively promote investment in the extractive industries of developed countries in order to acquire strategic assets such as knowledge and technology, and further enhance the existing ownership advantages of enterprises. (Such as the Netherlands, Germany, and the United Kingdom) as a focus area for energy sector mergers and acquisitions. On the other hand, the growth of world petroleum resources in the next 20 years will mainly come from the Middle East, Russia-Central Asia, South America, North Africa and other regions. Therefore, these regions should become China's strategic regions for the development and utilization of world petroleum resources. , South America, Asia-Pacific, Eastern Europe-Russia, Africa and North America should be the key regions.

Third, in the selection of investment methods, accelerating mergers and acquisitions in foreign and domestic areas is currently the preferred method of FDI in the extractive industry. Domestic enterprises can actively acquire companies that are complementary in terms of market, resources, technology, management, etc., by fully understanding the host country's enterprise situation, economic management system, and legal system, to achieve economies of scale and synergies, and improve domestic enterprises in the international market It can also enhance its own technical strength and strengthen its influence and control over overseas investment markets through strong alliances with large domestic enterprises.

Fourth, in terms of prevention of investment risks, overseas operating companies should try their best to avoid a series of risks such as market risks, political risks, social and environmental risks caused by the uncertainty of investment in extractive industries. First, domestic enterprises should increase investment in research and development, accelerate technological innovation, and create a monopoly advantage in the international market to respond to competition, because advanced technology plays a decisive role in finding mineral and oil and gas resources, reducing investment risks, and controlling product costs; Second, enterprises should strengthen training to accelerate the training of multinational business professionals proficient in law, economy, and management. Third, enterprises should conduct feasibility analysis of investment projects before investing, including the evaluation of host country's mineral quantity and quality, and investment. Evaluation of profitability and expected risk return.