Hong Kong (Platts)--13Jul2009

China National Petroleum Corp.'s (CNPC) successful bid for Iraq's Rumaila
oil field in partnership with BP was the latest in a string of overseas
successes for China's cash-rich energy companies, which have turned the global
financial crisis to their advantage in an aggressive bid to secure future
energy supplies.
China's growing demand for energy has seen Chinese state-controlled oil
companies scouring the globe in recent years for upstream and downstream
acquisition targets and joint investment opportunities and 2009 has proved to
be a particularly good year for the Chinese.
In the second quarter alone, state-owned giants CNPC, China Petrochemical
Corporation Group (Sinopec Group) and their subsidiaries have acquired
upstream assets worth $14.6 billion in the Middle East, West Africa and
Central Asia, as well as a substantial stake in a refinery in Asia's oil
trading hub Singapore.
China's shopping spree was well timed. Backed by the central government,
China's "Big Three" -- CNPC, Sinopec Group and China National Offshore Oil
Corp. (CNOOC) -- have access to billions of dollars that the central
government made available to them just as their competitors are having to cut
costs and reconsider investments.
As oil prices plummeted from last year's record and the economies of
other major powers shrank, the price of oil assets became more affordable for
China, which experienced strong economic growth in the last decade and was
therefore well placed to cope with the global downturn.
At the same time, opportunities began to open up for the Chinese
companies in areas that were once unattainable. Only four years ago, fears in
Washington over China's growing political and economic clout sank an attempt
by CNOOC to take over the US' Unocal.
But as credit has dried up since the financial crisis, many cash-strapped
oil companies and producing countries became more receptive to foreign
investors, including the Chinese, taking stakes in their businesses, acquiring
some of their lucrative assets, forging oil investment joint ventures, or
borrowing money in exchange for oil supplies.
Already in the bag are the $7.24 billion acquisition of Geneva-based
Addax Petroleum by Sinopec Group late last month, the biggest foreign
acquisition by Chinese oil companies so far in terms of value (see table in
Feature 2).
Addax has projects in Nigeria, Cameroon and Gabon and licenses in Iraqi
Kurdistan, where it is developing the Taq Taq field. It has a total of 214.2
million barrels of proved oil reserves on its books but believes its total
reserves plus resources amount to 1.9 billion barrels of oil equivalent.
State oil giant CNPC and its publicly listed business arm PetroChina
teamed up with Kazakh state oil company KazMunaiGaz in April to buy
MangistauMunaiGaz (MMG) for $3.3 billion.
The biggest independent oil producer in Kazakhstan, MMG has rights to
explore and develop 15 oil and gas fields in Central Asian nation. Through its
subsidiary, MMG also owns licenses to tap other oil fields in the Caspian Sea
and onshore gas fields in western Kazakhstan.
Another advantage for the Chinese is their lower pain threshold when it
comes to risk. The state oil companies are known to be aggressive bidders,
willing to pay a high premium in order to secure a deal, as they have access
to low-interest loans from Chinese state banks to fund their investments.
The BP-CNPC joint venture bid for a 20-year service contract to develop
Iraq's Rumaila oil field, one of the biggest in the world currently producing
just under 1 million barrels/day, is a case in point.
The consortium had sought remuneration of $3.99/b but in the end
agreed to accept the Iraqi oil ministry's offer of $2/b for each incremental
barrel above baseline production in order to clinch the deal. Analysts doubt
that BP would have conceded on the point were it not for its Chinese partner
with the deep pockets.
In fact, Chinese state-owned companies were involved in 12 of the total
21 bids for the six oil and two gas fields offered by Iraq in its first bid
rounds, though only one was successful.
CNPC was also the first foreign oil company to renegotiate an upstream
contract that had been awarded to them by the Saddam Hussein government with
the post-war Iraqi government for the al-Ahdab field and has already started
drilling work on the field.
Nor are the Chinese Big Three shy of working in high risk areas shunned
by the Western majors as long as the assets offer world-class oil reserves and
production.
While Western oil companies have pulled out of Iran or are sitting on the
sidelines waiting for the international nuclear dispute with Tehran to be
resolved, Chinese companies have stepped in to fill the gap. CNPC has already
clinched two deals with National Iranian Oil Company (NIOC) so far in 2009 for
the development of the North Azadegan oil field and the South Pars gas field's
phase 11. NIOC also signed a deal in March with CNOOC to develop the North
Pars gas field as an LNG export project.
When French oil major Total failed to commit to the Pars LNG project in
Iran, CNPC snapped up a stake in the multi-billion project and took over as
operator in a deal which might see China secure more crude oil for its fast
growing market.
Iran was China's second largest supplier of crude imports in the first
five months of this year. Iranian crude exports to the Chinese market rose to
11.26 million mt (548,000 b/d), accounting for 15.2% of China's 74.16 million
mt of imports in the period January-May.
The Addax acquisition gives Sinopec a foothold in Iraq's northern
Kurdistan province and the Taq Taq oil field, which is currently exporting
crude oil and is capable of producing 180,000 b/d in the future.
However, the Iraqi government still considers the more than 20
production-sharing agreements granted by the Kurdistan Regional Government to
foreign oil companies to be illegal in the absence of a federal hydrocarbon
law and any company doing business with the Kurds has been banned from bidding
for Iraqi oil and gas fields.
China, sitting on the world's largest foreign exchange reserves of almost
$2 trillion and desperate to guarantee future energy supplies, adopted a new
strategy this year to give its state oil companies more leverage in their
negotiations abroad.
Since February, Beijing has lent a total $47 billion to oil producers
Russia, Brazil and Venezuela in exchange for oil supplies.
China's ambition dovetails nicely with the expansion plans of the Chinese
oil majors. Senior managers of CNPC and Sinopec have stated repeatedly their
intention to increase their production capacity by exploiting prevailing low
valuations of upstream assets overseas.
Early this year, China's Ministry of Land and Resources (MLR) forecast
the country's dependency on oil imports to rise to 60% by 2020.
The world's second largest oil consumer after the US, China already
relies on imports to meet around half its crude processing needs as domestic
crude output lags demand growth.
MLR predicted China's annual crude consumption to exceed 500 million mt
(10 million b/d) by 2020, while domestic production would only reach about 200
million mt/year, thus leaving a shortfall of about 300 million mt to be
satisfied by imports. Last year, China produced 189.7 million mt of crude and
imported 178.9 million mt (3.6 million b/d). Domestic refiners processed a
total 342 million mt (6.87 million b/d) in 2008.
With crude processing demand growing by an average of more than 13
million mt a year between now and 2020, Chinese state oil biggies' incremental
domestic crude output over the period could only meet less than 7% of the
projected consumption.
--Winnie Lee, with Kate Dourian in Dubai; winnie_lee@platts.com,
kate_dourian@platts.com