Dramatic growth and changes in the overseas portfolios of China’s national oil companies

In my column of six months ago I described how China’s national oil companies (NOCs) had spent about US$ 15 billion between the middle of 2009 and July 2010 acquiring assets in North and South America.  This spending spree has continued with further acquisitions and investment commitments in the Americas.

CNOOC has taken its first onshore position in the USA by purchasing a 33.3% stake in Chesapeake Energy’s Eagle Ford Shale project. This project, which lies in South Texas, is particularly attractive because it promises to yield not only shale gas but also natural gas liquids, which will add considerable value to the investment. CNOOC has agreed to pay US$ 1.08 billion for its share of the project and a further US$ 1.08 billion towards development costs over the next two years. Though all three major Chinese NOCs hold stakes in Canada’s tar sands, CNOOC has been the first to move into the USA’s shale gas.

This project should not only provide CNOOC with a profitable asset, but will give it direct access to the technologies and skills being developed to extract shale gas in the USA which it then can apply back in China. At almost exactly the same time as the Chesapeake deal was being concluded, China’s government was embarking on the process of licensing shale gas exploration blocks to Chinese companies.

All three major NOCs (CNPC, Sinopec and CNOOC) have concluded agreements in Venezuela. CNPC and Sinopec will work with the Venezuelan NOC, PdVSA, to develop a total of three blocks with heavy oil (Junin 1,4 and 8) in the Orinoco Basin. CNOOC will join in the development of the offshore Marical Sucre project which will produce both natural gas and natural gas liquids. These investments build on a long tradition of engagement with Venezuela’s petroleum industry which goes back to the mid-1990s and which has been supported by a number of loans-for-oil, of which the latest, in April 2010, amounted to US$ 20 billion.

In Brazil, after eighteen months or more of seeking opportunities, Sinopec was the first Chinese NOC to make a major move when it agreed to invest US$ 7.1 billion in the Brazilian subsidiary of the Spanish company Repsol. This sale will help provide Repsol with the capital it needs to develop its new oil discoveries deep offshore, below the salt. In making this move, Sinopec obviated the need for Repsol to raise the cash through a stock market offering, though the price paid by Sinopec was considered high by some commentators.  

Further south, in Argentina, both CNOOC and Sinopec have been active. CNOOC has taken advantage of BP’s desperate need to raise capital by agreeing, along with Bridas, to buy from BP a 60% stake in Pan American Energy for US$ 7.1 billion. This followed CNOOC’s purchase in March 2010 of a 50% stake in Bridas for US $ 3.1 billion.

At the beginning of December 2010 Sinopec announced that it was to pay US$ 2.45 billion for the Argentine assets of the US company, Occidental Petroleum.  The commercial logic behind these aggressive moves into Argentina is not so clear, for the assets are mature, are of modest size and yield low returns, and the regulatory environment in  the country is tough. But Argentina does show potential for shale gas, and the Chinese NOCs may see that as the main prize.

These recent investments take the total value of acquisitions by Chinese NOCs in the Americas since July 2010 to about US$18 billion. Added to the estimated US$15 billion for the previous twelve months, the total investment directed to acquisition in North and South America alone probably exceeds US$ 30 billion since mid 2009.

The last few months have also seen additional investments in Indonesia and Australia. Sinopec paid US$ 680 million to Chevron for a 18% stake in the deep-water Gendalo-Gehem gas project in East Kalimantan, Indonesia. This could provide Sinopec with LNG for export to its planned plants in China.

CNOOC has boosted its presence in the Australian coal-bed methane business by acquiring a 50% stake in five projects from the local company, Exoma Energy, for US$50 million. PetroChina has agreed to work with the Australian company, Lakes Oil, to explore for tight gas. This complements its wider partnership with Shell to develop coal-bed methane resources across Australia through purchasing Arrow Energy earlier in 2010. In this way both CNOOC and PetroChina can make money through profitable projects, can add to the supplies of gas being shipped to their growing number of LNG plants in China, and can continue to develop their technical expertise in unconventional gas extraction.

But these purchases, together with acquisitions elsewhere in the world, pale into insignificance in comparison with those in the Americas. The last two years have seen not only a dramatic growth in the scale of overseas investments in oil and gas exploration and production, from about US $ 40 billion to what I roughly estimate to be in excess of US $ 80 billion, but also a massive shift in the balance within this portfolio of investments. The significance of the Americas has soared from about 3% in March 2009 to possible as high as 30-35% today.  The relative significance of the Former Soviet Union, the Middle East and North Africa, and Sub-Saharan Africa as investment destinations for Chinese NOCs has therefore declined in relative terms, though they still each account for 15-20% of total investment by Chinese NOCs, down from 25-30% two years ago.

Far from showing that China’s government is becoming ever more desperate to seek overseas source of oil and gas to import to China, I believe that the last two years show that the China’s NOCs are becoming progressively more ambitious and more active in pursuing their quest to become major international oil companies.

Since the financial crisis of the summer of 2008 they have taken advantage of the moderating levels of oil price, the weakness of the western banking sector  and their financial and political support from China’s government to embark on a massive spending spree. The last two years of investment has brought them to the Americas in a big way. This not only improves the balance of their investment portfolios but brings a host of new commercial opportunities, especially in the technical frontiers of deep-water and of unconventional resources, and also gives them the chance to work closely with the established players which will allow them to enhance their technical and managerial skills.

This overseas expansion on the part of China’s NOCs will continue. CNPC/PetroChina alone is said to be planning to spend a further US $ 60 billion over the next ten years. In 2009, the company’s share of oil production from its overseas assets amounted to 34 million tonnes, which was equivalent to 25% of the company’s total crude oil production and 17% of China’s total crude oil imports. These numbers are set to continue growing, but it is important to remember that much of the oil produced overseas by China’s NOCs does not go home to China. Rather, the first priority of these companies is to make money.


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