Back in 2005, China’s state-owned oil company, CNOOC, made a very attractive and high-profile $18.5 billion bid for American oil company Unocal. Its attempt was blocked by the US Congress due to political concerns and Chevron acquired Unocal instead.
Chinese companies have learned their lesson since then and have succeeded in staking out a foothold in the US oil industry by following specific rules: “Seek minority stakes, play a passive role and, in a nod to US regulators, keep Chinese personnel at arm’s length from advanced US technology,” as the Wall Street Journal noted.
The History of China’s Energy Asset Acquisition
In fact, we’ve seen Chinese oil companies embark on an aggressive international energy asset buying spree. In 2012, China’s state-owned oil companies coughed out a record $35 billion buying oil and gas assets all over the world.
There was, for example, CNOOC’s $15.1 billion offer to buy Canada’s Nexen, Sinopec’s $2.2 billion purchase of Devon Energy’s shale gas assets in the US, and PetroChina’s $1.63 billion buyout of BHP Billiton’s holding in Woodside Petroleum.
Since 2009, Chinese oil companies have spent some $92 billion on energy acquisitions and joint ventures in countries as diverse as Angola and Brazil, as China moves to become a leading oil producer.
According to estimates by the International Energy Agency, China’s national oil companies will pump 3 million barrels of crude oil a day outside the mainland by 2015, which is twice their 2011 foreign output. PetroChina has already overtaken Exxon Mobil in daily oil production.
Why the Chinese Government Does Not Have to Rely on Traditional Financing Techniques
Because the Chinese firms that are acquiring global energy companies are state-owned, they have the backing of the Chinese government and do not have to rely on traditional financing techniques.
This enables them to pay above-market premiums to snap up assets, according to Alan Herbst, a principal at New York-based energy consultancy Utilis Advisory Group. The $15.1 billion that CNOOC paid for Nexen, for example, represented a 60% premium over Nexen’s share price.
Why is China Buying Up Foreign Assets?
Given the political significance of oil and especially since large energy multinationals cannot match government-backed Chinese bids, there have been concerns that China was trying to control global oil and gas supply through these acquisitions.
However, most experts say that Chinese oil companies have been snapping up foreign assets for two reasons: to secure its own domestic energy needs and to pick up expertise in shale gas and oil sands drilling and extraction.
“Over 90% of the energy used in China comes from low grade coal, and the Chinese are literally choking on it. Nuclear energy is on the way with more than 50 plants in operation or under construction,” said Karim Rahemtulla, the Investment Director at Oil & Energy Daily.
He continues, “However, they require oil now for transportation and infrastructure needs, and China, while it has oil of its own, does not have prolific oil fields or reserves and must look abroad for both technology and reserves.”
Even with all the energy deals China has conducted, the country will continue to be a net importer thanks to continued economic growth.
“The growth pattern for Chinese consumption is increasing, not decreasing as less than a quarter of the population has access or can afford automobiles today. That number will increase,” said Rahemtulla.
As a result, “China will continue to import oil for decades from the Middle East and its newest frontier, Africa.”
Other Players in the Energy Acquisition Game
China’s international energy acquisitions, while high-profile, are simply part of a global trend of large foreign oil companies buying out smaller resource players.
Australia’s BHP Billiton bought Texas-based Petrohawk in 2011, while Norway’s Statoil acquired another Texas-based firm, Brigham, in the same year.
India’s state-run Oil and Natural Gas Corp just completed the purchase of some of ConocoPhillip’s assets in Kazakhstan, too.
Which company might be the next bid for Chinese and other foreign energy firms? Herbst said that Range Resources was a possibility.
“Range Resources was a pioneer in the Marcellus shale, but it has gone at it alone without any joint venture support from larger firms. This makes them a potential acquisition target,” he said.
“The companies I would look at for further Chinese participation would be companies like Chesapeake, which is looking to shed assets,” offered Rahemtulla.
He continues, “And look to Africa for the next wave of Chinese energy plays, although that will come from foreign direct investment in African oil deals with more investor-friendly governments like Ghana and countries in East Africa.”
“What’s Driving China’s Global Oil and Gas Spending Spree? And Who’s Next?” was provided by Minyanville.com.