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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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U.S. Oil Companies Under Threat From Chinese Drones

U.S. Oil Companies Under Threat From Chinese Drones

Perhaps the only major sector of the economy that has changed more than energy in the last decade is the defense industry. Military technology today differs radically from what was available a decade ago, with military news stories these days filled with talk of drones, rail guns, directed energy weapons, stealth fighters, stealth destroyers, and cyber warfare. Not all of these technological advances are staying limited to the defense industry though.

Take drones for instance. Drones represent a paradigm shift for military power – now aircraft and even some ground vehicles can be operated from thousands of miles away through a combination of remote human operation and preprogrammed computer routines. This type of technology is now radically altering many aspects of the oil and gas industry in ways that are both good and bad for U.S. companies. Related: Shell Hopes To Sell $30 Billion In Assets, But Timing Is Terrible

On the positive side, drones are quickly becoming one of the best cost cutting tools in the oil patch. Rather than paying people to travel from site to site or along pipelines looking for problems, oil companies can dispatch drones to do the dirty work. Site exploration, production monitoring, and security concerns can all be handled with drones, which in many cases are self-piloting and are available from a variety of U.S. suppliers at reasonable prices.

Yet there is also a darker side to drones for U.S. oil companies and one that could threaten their ability to compete in foreign markets in the future. That threat comes from China. Military drones are arguably most useful for carrying missiles to attack ground targets in a way that is very low cost compared to conventional field armaments. In the U.S., a typical military drone might retail for around $5M. In China, that same drone might cost $1-2M. Both sets of drones are a pittance compared to a traditional fighter aircraft, which almost universally cost tens of millions. U.S. drones are superior to Chinese drones on a variety of technical metrics, but both sets of drones are functionally very useful for third world militaries that are looking for cheap airpower. Related: Climate Action Could Save $250 Billion Per Year In 2030

The problem for the U.S. and American firms is that the country is a signatory to a defense treaty from the Cold War Era that was intended to curtail the sale of missiles to launch nuclear warheads. This treaty, called the Missile Technology Control Regime (MTCR), is now commonly applied by the government to stop the sale of drone technology even to U.S. allies. So far, only two major nations have been approved to buy U.S. drone tech – the UK and Italy.

How does all of this relate to oil?

The Chinese are not signatories to MTCR and thus face no such restriction on the sale of their drones. As a result, Chinese drones are turning up in the arsenals of countries like Iraq and Nigeria. But the Chinese are not just selling drones to these countries, they are also using these drone sales as a bargaining chip to secure advantageous terms related to oil in these countries. Related: Big Oil Eyes Upcoming Auction In Iran

Take Nigeria for instance. China is reportedly very interested in Nigeria’s oil. China has invested billions of dollars in hydrocarbon infrastructure in Nigeria because China sees Nigeria as having a rising degree of importance in the world and the oil markets. By 2050, some projections suggest Nigeria will have the third largest population in the world. As that development occurs, there will be more opportunities to exploit Nigerian oil and greater demand by the country for oil. The Chinese want a piece of both sides in that growth.

The Chinese demand for oil makes it second in the world behind the U.S. in consumption, and as a result Chinese involvement in foreign oil markets is not going to change anytime soon. From the American government’s perspective, this may not be a problem, but for companies like Exxon and Chevron that rely on fair access to overseas oil production opportunities, China’s drones may be the ace in the hole that gives the nod to Chinese firms over U.S. companies. And with the future of shale oil in question given current low oil prices, that advantage is definitely something that U.S. shareholders should care about when considering potentially cheaper foreign oil sources.

By Michael McDonald Of Oilprice.com

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  • Gantal on March 07 2016 said:
    Without links, statements like "U.S. drones are superior to Chinese drones on a variety of technical metrics" are simply annoying.

    Could OP authors start including links to such statements in future? It's helpful and it's good manners.
  • Karl on March 07 2016 said:
    The author apparently detached from present oil market, there are plenty good asset on Sales, unfortunately most oil majors cutting back on CAPEX.

    It is also obvious the author of the article greatly underestimate companies like Exxon. Exxon has deep and great relationship with producing countries. Nigeria formally was more Shell play, whereas Exxon had focus in other area. Shell is involved in lawsuit with regards to pollution in Nigeria, recently Nigerians affected had taken the lawsuit to London. Shell and other western oil majors had been criticized having double standard, especially in environmental safety practice and infrastructure. Whereas SINOPEC conducted its activities according to international requirements even in country like Nigeria. Maybe other countries do not like their country being polluted when suitable steps should have been taken.
  • Blur on March 08 2016 said:
    Maybe you should check the facts in this article full of misinformation. China has signed MTCR and how is it the US has sold drones to Great Britain and Italy violating the regime? Pretty hypocritical! How does selling drones have anything to do with oil? The US is energy independent as proclaimed by Obama due to fracking. So why would you care what business other countries do with each other? How does that affect the US economy when the US is energy independent? Unless it's not about oil and just the US wanting to control the world oil supply and determining who in the world gets oil. So who's the one that's devious?

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