The Chinese central government, obsessed with energy security, is pressuring state-owed oil companies to intensify merger and acquisition activity abroad to help meet the country’s growing oil and gas demand.
The Asian giant’s appetite for energy raises eyebrows in the US, the world’s largest oil consumer.
Observers question whether state oil companies can separate economics from politics in their investments (OGJ, Apr. 18, 2005, p. 18). The world watched China National Offshore Oil Corp. Ltd. (CNOOC) bid and then withdraw its offer for Unocal Corp., citing “unprecedented political opposition” (OGJ, Aug. 8, 2005, p. 29).
CNOOC since has acquired oil and gas assets elsewhere. The company’s latest announcement involves plans to acquire 45% interest in Oil Mining License (OML) 130 off Nigeria (OGJ Online, Jan. 9, 2006).
In an interview with OGJ, Steven W. Lewis, director of the Asian Studies Program at Rice University, provided a broad perspective into the Chinese M&A activity.
A research fellow at Rice’s James A. Baker III Institute for Public Policy, Lewis studies China’s energy policy and privatization efforts.
M&A candidates
The Chinese state-owned oil companies and the central government see Africa and Latin America as priority areas, Lewis said.
M&A activity will help the Chinese diversify their oil and gas sources, Lewis said. “In particular, it will help them to get away from the Middle East and to be less dependent on that region.”
When asked about Chinese investment in Canadian oil and gas, Lewis said it was logical, noting the Chinese already understand the Canadian legal system from previous nonenergy investments there.
Chinese companies have shown an interest in Canadian oil sands. Sinopec Group paid $105 million for a 40% interest in Synenco Energy Inc.’s proposed $4.5 billion Northern Lights project (OGJ, Apr. 25, 2005, p. 20).
CNOOC paid $122 million for a 16.69% share of private MEG Energy Corp., which plans a 3,000 b/d steam-assisted gravity drainage pilot and a 22,000 b/d commercial SAGD project at the Christina Lake project near Fort McMurray, Alta.(OGJ Online, Apr. 13, 2005).
China’s NOCs
Compared with China National Petroleum Corp. (CNPC) or China Petrochemical Corp. (Sinopec), CNOOC has the most expertise with international transactions.
“CNOOC was set up in the late 1970s for the express purpose of working with foreign companies and working offshore,” Lewis said. “It is harder for Sinopec and CNPC to go overseas because of the way they were built from the 1960s.”
Sinopec and CNPC subsidiaries are run by executives appointed by the Communist Party’s central committee, he said. The subsidiaries still call themselves “administrations” rather than companies because of political affiliation with Beijing leaders.
“Some of these people have party ranking that is higher than most ministers,” Lewis said. “To change the Chinese oil industry also means changing the structure of the central committee and all the connections there.”
The former chief executive of CNOOC was a member of the central committee, but the current chief executive is not, he said. “That is a change. But CNPC and Sinopec still are very much tied in with this.”
In another trend, India is moving toward cooperative upstream agreements with Chinese companies.
“This largely has been motivated from the India end,” Lewis said. Mani Shankar Aiyar, India’s petroleum and natural gas minister, wants to emulate the Chinese model and also believes that it’s easier to work with the Chinese than to compete with them.
“India realizes it also has to deal with the security situation of Asia,” Lewis said. “Officials are saying they need a lot more discussion of cooperation, and energy is an easy one.”
Earlier this month, the state-owned Gas Authority of India Ltd. signed a memorandum of understanding with Sinopec and CNOOC. GAIL and Sinopec plan to cooperate in exploration, development, and production efforts in India, China, and elsewhere. GAIL and CNOOC plan to work jointly on exploration projects.✦
