China: and its rush for foreign oil

This year we see a major new player take to the stage of international oil production.  China’s purchases over the past year have secured it a newfound place amongst the top oil producers, yet while even this accolade may not sate the needs of China’s domestic market, it brings with it new technologies and capabilities that could propel China even further in acquiring and developing foreign output.

China’s Foreign Oil Acquisitions and Outputs

China has made sensational efforts to produce so much crude oil overseas that it is expected to rival high-profile oil-producing nations such as the UAE and Kuwait in the near future. State-owned oil organizations in the county spent around $35 billion in purchasing foreign rivals during 2012. In the initial estimations made on the effect of the country’s recent foreign oil investments, it is forecast that the oil companies in China will produce three million barrels per day overseas in 2015. The International Energy Agency said that China’s foreign oil production in 2015 will be double its 2011 output which was a little over 1.5 million barrels per day, and almost the same as Kuwait’s yearly output.

The International Energy Agency’s Chief Economist, Fatih Birol said that China is expected to become one of the major overseas oil producing countries, revealing that a large part of the surges in overseas oil production stems from acquisition and merger transactions made during 2012. The increase in acquisition activity by oil companies in China, along with their investment in modern drilling technologies, are identified as factors responsible for restructuring the international oil industry.

National oil firms in China, such as Sinopec and CNOOC, have been actively involved in foreign acquisitions over the past few years, spending around $92 billion on gas and oil assets since the end of 2008. Dealogic reported that Chinese oil companies have explored all markets, from Angola to the US, and that 2012 witnessed a record in terms of the amount of money spent on acquisitions – a handsome $35 billion! Transactions involved outright purchases and joint ventures.

Foreign Oil Acquisition Cannot Help Meet Domestic Demand

Some policy makers and analysts feel that China is purchasing oilfields in order to secure the country’s energy needs. However, the International Energy Agency and other similar organizations analyze that oil companies in Beijing usually sell their foreign production in the global market, instead of delivering the crude oil inside its borders. Meanwhile, oil executives in China revealed that the demand for oil in the country is so high that even foreign acquisitions may not be able to help them meet domestic energy requirements. China is currently the second-largest crude importer in the world.

Fatih Birol said that energy firms in China, like many other companies, are also making efforts to purchase production units outside the country. “Commercial interests” are said to be the main drivers for Chinese oil companies.

Annual Requirements and Depleted Domestic Fields Forcing Foreign Acquisitions

Beijing has established a mandate for the state-owned energy companies in China, which requires them to achieve production targets on an annual basis. As the largest local fields in China are depleted, energy companies in the country turn their attentions to overseas options to reach their targets.

The acquisitions are not made with the intention of securing foreign oil alone, but also to acquire key technologies that will enhance oil production overseas. It doesn’t come without risk, however.  Beijing has been exposed to several political risks following China’s increasing worldwide energy presence, forcing the country to assume a more proactive part in overseas conflicts like the dispute between South Sudan and Sudan.

Largest Overseas Investment Yet

China National Offshore Oil Corporation (CNOOC), one of China’s biggest oil companies concluded its $15.1-billion acquisition of Nexen – a Canadian energy group during February 2013. Analysts say that it is the country’s largest overseas investment so far. CNOOC was given the green light in December 2012, after the US and Canada approved the deal. Nexen confirmed that the acquisition was complete by releasing a statement and noting that the company’s shareholders were receiving $27.50 for each share – an increase of $10 in comparison to the price per share during July, when the transaction had not yet been announced.

Wang Yilin, CNOOC’s Head, said that the acquisition is believed to be a fantastic strategic fit for China as well as the state-run company, and that it will help in creating long-term value for the company’s stakeholders. Dealogic confirmed that the deal is the largest in China’s foreign investment history. It is also the biggest energy deal in the world. Until Nexen was purchased by CNOOC, it was the tenth largest petroleum company in Canada (based on sales). Acquisitions such as this are expected to pave the way for China as the nation hopes to compete with the OPEC members in the not-too-distant future.

 


Resources Quarterly - Summer 2013

This feature originally appears in the Summer 2013 edition of Resources Quarterly.

Click here or on the cover to view the entire issue.