The past few months have seen a stream of oil&gas deals involving Chinese NOCs. In August 2009, Sinopec announced the completion of its takeover of Addax petroleum for $7.2billion.
This was the largest successful acquisition of overseas oil&gas assets by a Chinese company and included Addax’s significant assets in the Iraqi Kurdish region.
In June, it was announced that CNPC had secured a deal to develop phase 11 of Iran’s South Pars gas project, while in November, CNPC partnered BP in its successful bid to develop the giant Rumaila oilfield in southern Iraq.
Latest reports suggest that CNOOC leads a consortium including Sinochem which is emerging as the top candidate to develop the Missan oilfields, also in southern Iraq.
In January 2010, the Canadian government approved PetroChina’s $1.8billion farm-in deal with Athabasca Oil Sands, and the latest deal is the joint Shell and PetroChina offer for Arrow Energy, a big holder of Australian coal-seam gas reserves.
Other deals may be in the offing, with recent suggestions that CNOOC may partner Tullow in Uganda, while ExxonMobil’s $4billion deal to buy Kosmos Energy, owner of some significant discoveries in Ghana, is apparently also under threat from a rival bid from CNOOC.
Should we fear the extent of Chinese expansion into overseas oil&gas reserves?
For some reason, the activities of the Chinese NOCs appear to garner much more attention than the direct supply deals done by the Chinese government with oil&gas exporters in the Middle East or elsewhere, such as the 30-year gas-supply deal with Turkmenistan last year.
The Chinese NOCs are, in many of the cases I have mentioned, purchasing assets on the open market in competition with other national and independent oil companies.
Their success is an example of the capitalist system in action, one might say. Others retort that they have overbid for these assets, although whether this is a result of inexperience, different views of future oil prices, the low cost of capital resulting from their high cash reserves or just a different view of acceptable rates of return is open to interpretation.
China is often portrayed as a dragon with an insatiable appetite and deep pockets able to outbid other nations for reserves at a time when overall global oil reserves may have peaked, or may soon do so.
It is undoubtedly true that Chinese economic expansion produces a demand for oil&gas which long ago outstripped domestic supply – China is the world’s second largest oil consumer and has a significant effect on global oil&gas prices. This creates exactly the same energy-security challenge for China as the UK now faces.
China has, over the last decade, chosen to tackle this challenge, in part, through strategic use of its national energy companies rather than simply through market mechanisms – those of us who pay the utility bills in the UK might suggest that they have a point.
Market mechanisms can have serious social impacts unless the government is prepared to regulate and, if necessary, subsidise consumer prices.
While some may fear that the Chinese NOCs follow a state agenda (and, indeed, they have undoubtedly been encouraged and supported by the Chinese state in recent years to secure overseas assets), experts in the Chinese energy sector (including our colleagues at the Centre for Energy Law at Dundee University) argue that while, in the past, the interests of the NOCs and the Chinese government have been largely aligned, this alignment may be reducing and the corporate ambitions and commercial agendas of these NOCs may increasingly come into tension with the political interests of their government.
The NOCs remain convinced that overseas expansion is crucial to their growth as their domestic potential is constrained by declining domestic reserves and controls on consumer prices.
What is not so clear is whether they will continue to garner the same degree of state support in future. First, analysts are questioning whether, in practice, overseas energy reserves can contribute to energy security in a global crisis.
When China begins to look to the NOCs primarily to boost its overseas earnings, its tax income or its technical know-how then they are simply developing from domestic to global players on the oil&gas markets like other companies with a history of state control, such as Petrobras or Statoil.
Second, China is not oblivious to the risk of its approach to its overseas oil&gas activities damaging its reputation, and has also discovered that relations with host nations are not always straightforward.
It may be less anxious to buy up assets in developing countries in future. Moreover, progressive privatisation of the state oil companies may mean that the Chinese government’s ability to control the behaviour of its NOCs reduces over time, as will their ability to pay over the odds.
The pace of deals may have been driven by a sense within the NOCs that they had to take advantage of a window of opportunity to establish their position in the global industry, the duration of which was uncertain – affected by Chinese state policy on tax and dividends, high crude prices which forced many out of the market, especially as debt dried up, and the availability of state support.
We will watch with interest to see if they are right.
Penelope Warne is a partner and head of energy at international law firm CMS Cameron McKenna
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