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China's upstream M&A activity on a roll

Chinese NOCs will continue their hunt for upstream assets this year. Miles Lang reviews where they've been so far

Foreing upstream mergers and acquisitions (M&A) activity by China's national oil companies (NOCs) reached a staggering $26bn in 2010 – up by 85% on 2009's $14bn. The 2010 figure represented 15% of global upstream deals, according to IHS Herold, a consultancy. With the economy forecast to keep growing rapidly, China's desire to secure long-term oil and gas supplies is as great as ever.

In January, state-owned CNPC said Chinese oil demand will rise by 6.2% this year, to 9.66m barrels a day (b/d). Although down by 5.2% on demand growth seen in 2010, the outlook is still a staggering one: the International Energy Agency forecasts OECD oil-demand will rise by just 1.4% this year.

To meet demand, Chinese companies will continue scouring the world for upstream assets. Strong capital inflows are keeping the country awash with money and the government will continue to back its NOCs as they maintain their upstream buying spree in 2011.

With the oil price flirting with $100/b, many companies will reign in spending because of the inflationary effect on asset values. But that will not affect China's NOCs, which are playing a much longer game. As crude rose above $80/b in September and moved towards $90/b later in the year, Chinese firms appeared unmoved, even if the central government has begun to worry about inflation.

China was the biggest buyer of Latin American upstream assets in 2010. In November, state-owned CNOOC and local Bridas (itself 50% owned by CNOOC since mid-2010) jointly paid BP $7bn for its 60% stake in Argentina's Pan American Energy. Then, in December, Sinopec bought all of Occidental's Argentine assets for $2.45bn.

But China's biggest deal, also in Latin America, was Sinopec's October move for a 40% stake in Repsol's Brazilian deep-water assets for $7.1bn. This followed Sinochem's $3.07bn purchase of a 40% stake in Statoil's Peregrino field, also offshore Brazil, where first oil is due to flow this year.

An indicator of China's intention to maintain its pace of foreign acquisitions came in January, when Fu Chengyu, general manager of CNOOC, told China Business News that his company alone plans to spend as much as $151bn by 2015 to boost production. Although it is uncertain how much of this amount would be spent on M&A, it confirms that China's NOCs mean business.

But where and what next?

In the wake of the Deepwater Horizon disaster, smaller independents are likely to sell assets in the US Gulf of Mexico (GOM), as insurance and, consequently, operating costs rise and industry regulations tighten. China's NOCs will be keeping a close eye on the region in 2011.

In November 2009, CNOOC bought 10-20% stakes in four GOM prospects from Norway's Statoil, opening US oil reserves to China for the first time. But as the country looks to increase its US presence, there is a question mark over whether the US authorities would welcome Chinese owners. In 2005, CNOOC's $18.5bn bid for Unocal was rejected under pressure from Congress – the US independent was later bought (more cheaply) by Chevron.

A recent deal may provide some encouragement, however. In mid-November, CNOOC secured a third of shale-gas specialist Chesapeake Energy's 0.6m net leasehold acres in south Texas's Eagle Ford Shale, in a transaction valued at more than $2.16bn.

Canada, too, is assessing the Chinese NOCs' move into the Canadian oil patch. In the past 18 months, CNOOC, CNPC and Sinopec have secured positions in the oil-sands – the biggest deal being Sinopec's $4.65bn purchase of a 9% stake in Syncrude Canada. Meanwhile, CNPC is tying up a $2bn joint venture with Encana to develop shale-gas deposits in British Columbia.

Taking on these unconventional assets – shale gas, Canada's oil sands and coal-bed methane (CBM) operations in Australia – secures new, large foreign reserves. Their output may never reach China, but can be traded for other products or used to support a market position.

But there are other reasons for this kind of asset grab. China has shale-gas reserves that it reckons could total more than 150 trillion cubic metres (cm) and through partnerships abroad it can learn the techniques and secure the technologies needed to tap those resources (PE 12/10 p31). And that gas will be needed – China's National Petroleum and Planning Institute says the country could face a gas shortfall of 5bn cm/y as soon as 2015.

In Australia, a PetroChina-Shell joint venture paid $3.1bn to buy CBM producer Arrow Energy. The partners are developing a liquefied natural gas (LNG) export project, based on shared, proved CBM resources of 140bn cm. The partners would share the output from the planned, 8m tonnes a year (t/y) LNG plant (eventually rising to 16m t/y), in Queensland. This deal also secures reserves and hedges against a future gas deficit, while at the same time enabling technology transfer. China's CBM resources are the third-largest in the world – possibly more than 36.8 trillion cm – according to China's Coal Information Institute.

On to Africa

China's NOCs have experienced a difficult couple of years in Africa, with previously pliant governments in Nigeria, Angola and Libya asserting their authority (PE 11/09 p9). And in November, CNOOC's and Ghana National Petroleum's (GNPC) joint $5bn bid for Kosmos Energy's Ghana assets failed. This followed the earlier failure of ExxonMobil's $4bn bid for the same assets, which include a 23.5% stake in the 1.8bn barrel offshore Jubilee field, which started flowing in December 2010.

But a deal with Kosmos could still go through. China entered an economic partnership with Ghana a month before the bid when – in September – China Export Import Bank lent the country $10.4bn for infrastructure projects and China Development Bank lent $3bn for development of the oil and gas sector. These Chinese investments could push Ghana's government into pressuring Kosmos to rethink the sale, giving first refusal to CNOOC and GNPC.

Jubilee was the first discovery in west Africa's transform margin (see p17), which runs almost 1,500 km from Ghana in the east, across Ivory Coast and Liberia to Sierra Leone in the west. Exploration is under way in all four offshore jurisdictions and gas discoveries off Sierra Leone have strengthened the sense that the entire stretch of coastline is live with hydrocarbon plays, drawing interest from the majors and, no doubt, China's NOCs.

Meanwhile, in the east of the continent, CNOOC is waiting for the settlement of a spat between Tullow Oil and the Ugandan government to be able to take a 33% holding, alongside Total, in Tullow's Blocks 1 and 3A (PE 10/10 p35). Tullow has discovered over 2.5bn barrels of oil in its Lake Albert acreage so far and exploration is continuing in this under-explored, but highly prospective region.

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