China is using its financial reserves to secure oil supplies from a variety of producing countries, according to a recent report by Wood Mackenzie. The Chinese government in recent months has invested in some of the world’s leading oil producing countries through loan packages.
In April, China National Petroleum Corp. acquired a 50% share of upstream Mangistaumunaigaz of Kazakhstan for $3.3 billion and loaned $1.7 billion to KazMunaiGas. An additional $5 billion loan was agreed between the China Export-Import Bank and Kazakhstan Development Bank.
Through the deal, CNPC gained an estimated 420 million bbl of reserves and net production of 55,000 b/d. This production could be delivered directly to China with start-up of the Kazakhstan-to-China oil pipeline, expected in 2011.
In February, China Development Bank committed to loan $15 billion to Russia’s OAO Rosneft, majority-owned by the government, and $10 billion to OAO Transneft, Russia’s oil transport monopoly. In return, China will receive 300,000 b/d of crude from Russia at market prices, starting in 2011.
China Development Bank and Sinopec Corp., China’s leading refiner, signed a memorandum of understanding (MOU) with Petroleo Brasileiro SA for loans—reportedly $10 billion—to support future investment in upstream and refining by the Brazilian national oil company (NOC). Plans to increase oil exports from Brazil to China also were outlined with annual trade expected to increase to 100,000 b/d in 2010 and more thereafter.
Petroleos de Venezuela SA and CNPC agreed to increase oil sales to 80,000-200,000 b/d under another round of accords signed in February. Meanwhile, Sinopec and PDVSA signed an MOU regarding joint study of field development opportunities in Venezuela.
The Angolan experience
The recent deals mirror Sinopec’s successful strategy to obtain upstream holdings in Angola. Loans to the Angolan government and long-term crude supply deals helped Sinopec acquire 50% of deepwater Block 18 via Sonangol’s right to preempt.
Sinopec subsequently leveraged its relationship with Sonangol, the Angolan NOC, into new opportunities in development and exploration. In 2005, a Sinopec-Sonangol joint venture took a 25% stake in Block 3/80 upon expiration of Total SA’s development license. In Angola’s 2006 exploration licensing round, the Sonangol-Sinopec venture was the most aggressive of the bidding companies, submitting three signature bonus bids totaling $3 billion and capturing much of Angola’s remaining prime deepwater acreage. Angola is now second only to Saudi Arabia as an oil supplier to China.
Until the deals of 2009, Sinopec’s activities in Angola provided the most tangible evidence of Chinese “oil diplomacy” to develop overseas upstream interests. Chinese companies will seek to replicate Sinopec’s success in the resource-rich countries that recently obtained Chinese loans. For international oil companies (IOCs), it is this aspect of the recent Chinese loan-for-oil deals that provides the greatest potential for increased competition.
With Chinese influence spreading, the range of future opportunities available to others may diminish. As demonstrated in Angola, WoodMac says, this may even extend to more technically challenging areas such as deepwater exploration, previously the domain of major international oil companies.
Mergers on agenda
In the near term, CNPC-PetroChina Co., Sinopec Group, and CNOOC Ltd. are looking to mergers and acquisitions as ways to expand internationally. M&A investment by the Chinese companies since the start of the decade has been modest compared to outlays by their international oil company peers. However, the fall in oil prices over the last year has renewed Chinese interest in deal-making. By leveraging their financial strength and long-term outlook on the fundamentals of the oil and gas business, WoodMac says, China’s NOCs may expand their international holdings while the rest of the industry grapples with a weak near-term industry outlook.
Deals completed so far this year indicate that Chinese companies are taking a more aggressive approach to international acquisitions.
In June, Sinopec moved to acquire Addax Petroleum for a cash consideration of $7.2 billion representing the Chinese company’s largest ever acquisition. When completed, the deal will expand Sinopec’s upstream interests in West Africa and Iraq. CNPC also has been active. In February, it agreed to buy the Canadian company Verenex Energy Inc. for $361 million, thereby acquiring a 50% interest in Block 47 in Libya (albeit completion of the deal remains outstanding with possible preemption by Libya’s NOC).
The subsequent $3.3 billion acquisition of the 50% stake in Mangistaumunaigaz in Kazakhstan brought CNPC’s total acquisitions to nearly $3.7 billion, the highest since 2005.
In July, the Chinese companies continued their acquisition efforts. In Angola, Sinopec and CNOOC agreed to a $1.3 billion deal with Marathon to acquire a stake in Block 32. Recent press reports also point to the likely purchase of Talisman’s assets in Trinidad and Tobago by a CNOOC-Sinopec joint venture for $323 million.
Future activity
According to the WoodMac report, all three Chinese NOCs have the resources to make larger mergers and acquisitions.
CNPC-PetroChina can aim considerable financial firepower at M&A opportunities. Supported by a strong balance sheet and potential financing from the Chinese government, it might be able to make a deal worth in excess of $20 billion. With the market capitalization of many middle-size international companies falling well below this level, CNPC has many potential targets if conditions become conducive to a large deal.
However, Chinese companies may question the attractiveness of large corporate deals. Acquisition targets of sufficient scale, growth potential, and an operational fit with the Chinese companies are few. Identifying acquisition targets that align with the Chinese companies’ ambitions is challenging, said the WoodMac report.
This is particularly true for CNPC-PetroChina. It would take a major acquisition to impact its upstream business. With relatively few companies in the middle-capitalization category involved in oil and gas development outside North America, China’s super-major has scant pickings.
Even if the Chinese companies identify a compelling acquisition target, closing the deal could prove challenging. CNOOC’s unsuccessful try for Unocal in 2005 illustrated the political opposition that Chinese oil companies face in overseas takeovers. Reigniting political antagonism toward Chinese expansionism via another high profile takeover bid is not high on China’s political agenda.
With probably strong competition from IOCs for attractive acquisitions, it’s debatable whether Chinese companies would have the appetite for a major deal. Lack of experience in such deals and integration concerns are likely to subdue Chinese takeover desires. Nevertheless, WoodMac expects no let-up in China’s overseas oil and gas investment activities. A continued stream of acquisitions alongside further initiatives to access overseas resource opportunities, either independently or through joint ventures with leading IOCs, is expected.