China faces uncertainty in MENA, analyst says

Chinese companies are seizing their chances to build up strategic oil and gas holdings in the Middle East and North Africa, but all of these projects have elements of uncertainty, according to a report by analyst BME.

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Mar. 5 -- Chinese companies are seizing their chances to build up strategic oil and gas holdings in the Middle East and North Africa (MENA), but all of these projects have elements of uncertainty, according to a report by Business Middle East (BME).

"The acquisition by China National Petroleum Corp. (CNPC) of Canada's Verenex Energy, whose most promising area of activity is Libya, is part of a pattern whereby Chinese firms have shown themselves to be quick to grasp any opportunities thrown up in the region's oil and gas sector," BME said.

The fall in the oil price and the credit drought have made it hard for smaller Western oil companies to finance new development work—constraints that weigh less heavily on Chinese corporations looking to build up their overseas oil and gas assets.

Verenex won one of the 15 oil and gas exploration permits that were awarded in 2005 as part of the first bid round governed by Libya's EPSA-4 model.

The Canadian firm, holding a 50% stake in Block 47 in the Ghadames basin was the operator of the block in northwestern Libya. The remaining equity was taken by Indonesia's Medco Enerji.

"The new production-sharing bidding model provided for a much higher degree of transparency than in previous rounds, but also engendered ruthless competition," BME said.

It was noted at the time that the commercial terms that bidders had quoted to secure permits could pose problems in the development phase, because the investors might find that their potential rewards would not justify the financial commitment required to bring any discoveries on stream.

Finders not keepers
Verenex has had a string of successes in its drilling program, and has made 10 discoveries of oil and gas, producing an aggregate of 98,000 b/d of light, sweet, crude and 76 MMcfd of gas.

The company estimates that the block contains 2.15 billion boe and had announced plans to commence commercial production in 2011 at 50,000 b/d and 50 MMcfd of gas.

However, in September 2008, Verenex said it was considering various options to maximize shareholders' value. This process culminated in the Feb. 26 announcement that the company was to be sold to the international arm of CNPC for $499 million (Can.).

The main condition that has to be met before the sale can be confirmed is to secure the approval of Libya's National Oil Corp. (NOC). According to BME, "This is likely to be a formality—the NOC has been kept informed at all stages of the sale process and has not raised any objection so far."

Canadians sell assets
Verenex is the latest in a series of Canadian oil companies working in the MENA region to have sold assets to Chinese and other investors.

The most recent acquisition was Sinopec's takeover of Tanganyika Oil Co. in late 2008 for $1.9 billion. Tanganyika's principal assets were oil fields in Syria that produce about 23,000 b/d of heavy crude. A $400 million investment program aimed at enhancing the fields' output is under way.

Sinopec's move followed CNPC's acquisition (in partnership with India's ONGC) of a minority, nonoperating stake in Syria's Al-Furat Petroleum Co. from Petro-Canada at yearend 2005.

ONGC earlier had bought a 25% stake in Sudan's Greater Nile Petroleum Co. from Talisman Energy Inc., another Canadian company. According to BME, however, "the main reason for this deal was domestic Canadian criticism of investment in a country with a bad human rights record rather than any financial issues."

CNPC is the main foreign operating partner in the Sudanese venture.

In a deal with some parallels with the Verenex case, Italy's Eni last year took over Canada's First Calgary, which had faced insurmountable obstacles in raising the estimated $1.3 billion it needed to proceed with a major gas field development in Algeria.

Acquisitions: short cuts
Such acquisitions have provided a short-cut for oil companies, in particular energy-hungry Chinese firms, to gain access to the MENA region's vast oil and gas reserves. Chinese companies have also targeted fresh exploration and production opportunities, but as yet with limited returns.

Sinopec is exploring for gas in Saudi Arabia, and CNPC at the end of 2008 signed an agreement with Iraq for development of Ahdab field.

Sinopec also signed a deal 4 years ago to develop Yadavaran oil field in Iran, with the aim of eventually producing 300,000 b/d, and CNPC was reported earlier this year to have signed a deal to produce 75,000 b/d from another Iranian field, North Azadegan.

However, according to BME, all of these projects have elements of uncertainty:

-- The Saudi venture has yet to turn up any significant amounts of gas.

-- Work on the Iraqi project, based on a service contract, was reported to have got under way in January, but the first oil is not scheduled to come on stream until 2011, and it would not be surprising to see some slippage, given Iraq's track record.

-- In Iran, it is not clear how much progress Sinopec has been able to register with the Yadavaran project since it was announced in 2004, and many of the details of CNPC's contract are still to be clarified.

Contact Eric Watkins at hippalus@yahoo.com.

More in General Interest