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The world’s most populous country continues to acquire assets overseas, boosting its oil and gas international investment portfolio.
China’s seemingly bottomless pockets when it comes to finding more cash for potential acquisitions has seen it offer billions of dollars for companies and assets within the past few days.
Its headline-grabbing, all-cash recommended offer to acquire Canada’s Nexen for US $15.1 billion would, if it is approved by the regulatory authorities, make it by far the largest Chinese overseas acquisition by value. It would, for example, more than double the $7 billion splashed out by Sinopec for Spanish Repsol’s Brazilian subsidiary.
The continued Chinese government-ordered expansion by its energy companies around the world over the past few years has seen the country lead the way – similar to its current dominance of the Olympic medal table – in terms of asset deals both large and relatively small. If the Nexen acquisition goes through it will add to more than $50 billion of overseas oil and gas deals completed by Chinese companies since 2009, according to securities firm Jefferies Hong Kong Ltd.
China’s state-run oil companies have unrivalled buying power compared to their peers at this current time, enabling deals to take place that for many other companies (whether NOCs or supermajors) would be major events.
How many people, for example, barely noticed just a few days ago when China’s Sinopec International snapped up a 49% stake in another Canadian company’s assets for $1.5 billion? Sinopec and Talisman Energy reached a deal for the former to buy the equity interest in the latter’s UK North Sea business, with Talisman very keen to stress the collective advantages of the deal.
“We are very pleased to reach this agreement with Sinopec for the next phase of development of our UK North Sea assets,” the company’s CEO, John A. Manzoni, said in its official release. “This will provide additional resources and energy to the talented team on the ground, creating an exciting future for this portfolio. Collectively, we will invest more in the UK than Talisman would have on its own, leading to a stronger, more sustainable business.”
The sale also brought Talisman’s total divestment proceeds to approximately $2.5 billion so far this year.
The transaction, similar to CNOOC’s acquisition of Nexen, is expected to close by year-end, subject to government and regulatory approval which is likely to be given without any debate (unlike the uncertainty surrounding the admittedly much larger Nexen deal). The joint venture in the North Sea will see the companies invest in improving ongoing operating performance, as well as infill drilling, exploration opportunities, and major projects, thereby extending field life and deferring decommissioning.
Sinopec has invested substantial cash in other similar ventures in recent years to help boost output in existing projects. Since acquiring Addax Petroleum in 2009 for $7.2 billion, the company has boosted crude oil output to 8.4 million metric tons from 6.8 million tons in 2009. And last year, it acquired 40% of the Brazilian assets of Spain’s Repsol YPF for $7.1 billion. The deal has helped to provide substantial funding for the Spanish company’s E&P activity offshore Brazil.
The investing power that CNOOC will bring to Calgary-based Nexen, if the deal does go through, will be just as extensive. The Chinese company is expected to increase its annual capital expenditure budget by up to 30% and give the Canadian company what most observers believe is a much-needed capital injection.
The acquisition also would mean increased investment in the development of resources that Nexen would not have been able to do on its own. This is not to say Nexen is in bad shape. The company produces 207,000 boe/d, has 900 MMboe of proved reserves, and 1,122 MMboe of probable reserves, giving CNOOC a significant boost in terms of production levels and proven and probable reserves.
For CNOOC, the deal also will give the company access to “good quality” oil sands assets in Canada and a portfolio of strong offshore projects in the North Sea, Nigeria, and the deepwater Gulf of Mexico, as well as the in-house expertise in those offshore, oil sands, and shale oil and gas assets it will access and apply to the development of its own high-potential acreage in China and elsewhere. The company was quick to state when the deal was first unveiled that it would be retaining Nexen’s current management team and all of its employees.
This is not CNOOC’s first attempt to do such a large deal, as the company did try to buy US-based Unocal in 2005 before that proposed acquisition was scuppered. After that the company adopted a policy of buying into various individual projects to build a foothold abroad. Its domestic peers PetroChina and Sinopec have followed a similar strategy, to the point where today all three companies have dramatically expanded their international assets.
But Canada has been a happy hunting ground for China, with CNOOC also late last year spending more than $2 billion buying OPTI Canada, once a partner of Nexen’s on its Long Lake oil sands project. It has invested $2.7 billion in Canada since 2005, including investment stakes in OPTI Canada, MEG Energy, and a 60% interest in Northern Cross (Yukon) Ltd.
However, China will not apparently be ending its international investment spree any time soon.
PetroChina last week also agreed to a deal with France’s GDF Suez to buy a 40% stake in the E&P rights for natural gas in Qatar’s Block 4. No financial terms of the deal were disclosed, with the Chinese company saying drilling will start in the block within the next few months. GDF Suez Qatar, which holds the remaining 60% stake in offshore Block 4, will continue to be the operator.
The farm-in is just two months after the state-owned oil company signed a similar deal with Royal Dutch Shell for gas exploration in Qatar’s Block D.
China also recently agreed with fellow consumer market giant India to tone down their competitive -- and expensive -- rivalry in terms of bidding for international oil and gas assets and instead partner up in certain ventures. In June, India’s state-owned ONGC signed an agreement with China National Petroleum Corp. on hydrocarbon exploration, crude oil refining, distribution of petroleum products, and in building oil and gas pipelines.
The move was logical, giving both companies the chance to cooperate in other countries in addition to their existing early partnerships in Sudan, Syria, and Myanmar. By not bidding against each other, each is likely to be able to keep potential asset acquisition costs lower, as opposed to the unwanted situation of artificially inflating asset prices in any bidding war between them.
By bidding jointly in certain projects, or agreeing to stay out of each other’s way in certain areas, each company will end up paying more reasonable prices for the acquisition of new reserves and resources.
Whether CNOOC’s deal to buy Nexen goes through or not remains to be seen, but there can be little doubt that this will not be the last multibillion dollar international acquisition by the energy-hungry Chinese state-run players.
Contact the author, Mark Thomas, at firstname.lastname@example.org.