In a sign of changing times, Chinese oil firms are busy cutting global deals with resource-rich countries and western companies.
Chen Zhu 18 May 2009
(Caijing Magazine) This has been the busiest spring ever for the international affairs department at China National Petroleum Corp. (CNPC), where a sense of achievement brightens the daily bustle at the company’s new headquarters in Beijing.
In recent months, the department has sponsored a conference every day and a new round of negotiations every few days. For example, it helped arrange an agreement February 17 in which China will lend Russia US$ 25 billion in exchange for 300 million tons of oil over 20 years.
The Sino-Russian deal drew attention from Brazil, Venezuela and other countries eager to secure similar agreements. Brazil hopes to get US$ 10 billion to search for oil in its deep seas, while Venezuela and Angola would like US$ 4 billion and US$ 1 billion, respectively, in contracts with China. Kazakhstan wants US$ 10 billion to buy oil fields from foreign stakeholders and expand domestic infrastructure projects.
Resource-rich countries feasted when commodity prices were high. More recently, they’ve been pinched by falling oil prices. Oil cash accounts for 50 percent of fiscal revenues and 94 percent of the foreign exchange reserves in Venezuela, the world’s fifth largest oil exporter. Plummeting oil prices have not only forced governments to cut spending and decrease investments in oil exploration, but sparked social problems as well.
These fluctuating commodity prices, along with an international financial crisis, are subtly changing production and distribution mechanisms for oil and gas around the world. Consumers may benefit temporarily, but exporters may cut production and exploration, causing shortages in the future.
Against this backdrop, Chinese oil companies such as CNPC are stepping up their influence.
Energy tycoons such as Royal Dutch Shell and Exxon Mobil used to swoop in to help resource countries through investing. But these listed oil giants can’t offer long-term loans with below-market interest rates, especially in a period of sluggish demand and tight credit.
Resource-rich countries that have struggled to nationalize oil and gas fields for decades are not willing to abandon their efforts. Meanwhile, western oil companies face political and security risks in countries such as Iran and Venezuela. Furthermore, the International Energy Agency (IEA) predicts demand in Organisation for Economic Co-operation and Development (OECD) countries is still falling, and the refinery capacity for those countries is limited.
Emerging markets such as China and India are being targeted as centers of rising demand. China is hunting for resources around the world while its oil companies expand globally, building new models of cooperation linking Chinese firms, international oil giants and countries with resources.
Upstream, in resource-rich countries, CNPC has bid for projects with international oil giants. In the areas of downstream refining and sales, China has allowed state-owned oil companies and western oil firms to set up joint-stock projects. And everyone benefits.
Cooperative Deals
Chen Weidong, secretary of China Oilfield Services Ltd. (COSL), sensed China’s changing status at a Global Energy Forum in Houston in February. The forum, with more than 2,000 political and financial leaders as well as energy entrepreneurs from 55 countries, provided complete translation services into Chinese for China’s representatives, even though they accounted for less than 1 percent of the participants. The breakfast meeting for China was crowded with participants, while the hall for a gas seminar on Europe and Russia was half-empty.
In April, Beijing was a coincidental stopover for two oil executives -- Christophe de Margerie, CEO of the French oil company Total, and Jeroen van der Veer, CEO of Shell.
Margerie was frank about his lobbying mission, saying his company is keen to invest in the Guangdong Jieyang oil refinery plant jointly established by CNPC and Petróleos de Venezuela S.A. (PDVSA), a state-owned company in Venezuela. Margerie’s eagerness even embarrassed Total’s staff in China, since the company usually does not reveal intentions before negotiations.
After a hopeful Margerie departed, Veer arrived with Shell CFO Peter Voser, who will take over the CEO position in July. Veer said at a press conference April 14 that Shell is willing to bid for the Kirkuk oil field in northern Iraq together with several Chinese oil companies. Veer did not reveal the names of potential Chinese partners, but the foreign media said they are likely CNPC and China Petroleum and Chemical Corp. (Sinopec), and said Shell’s gesture to cooperate with China’s oil companies is tied to efforts to develop gas fields in Sichuan Province.
An analyst at Cambridge Energy Research Associates (CERA) told Caijing the exchanges of assets and interests have become more regular. Over the past two years, CNPC has signed strategic cooperation agreements or memoranda with Shell, Chevron, StatoilHydro and others.
“Foreign companies invite China to cooperate with them overseas in exchange for entry into China’s domestic market,” the analyst said. “China’s companies require overseas assets as the prerequisite for foreign company expansions into the domestic market.”
Margerie and Veer understand that China’s recognition of the model of assets exchange is a precious opportunity. They see it as an issue of now or never.
A senior manager at Shell’s branch in China said the company’s biggest regret was missing out an east-west gas transmission project in 2004. China was eager to attract foreign capital at that time. However, China’s enterprises now have abundant capital, so foreign capital is no longer as attractive.
According to petroleum and chemical industry guidelines issued by the Chinese government, China will limit the increase of refinery and ethylene production capacity in the future. Therefore, foreign capital is eager to get into the Chinese market now.
But China craves resources, raising the stakes for cooperation. In 2007, Sinopec joined with Exxon Mobil and Saudi Aramco to set up an oil refinery and ethylene project in Fujian Province. Sinopec controls 55 percent while Exxon Mobil and Aramco each hold 22.5 percent. Last year, CNPC with Shell and Qatar Petroleum set up a refinery and sales project with an equity distribution of 51 percent, 24.5 percent and 24.5 percent.
A cooperation deal for downstream refining between CNPC, Total and PDVSA is moving forward. Meanwhile, these parties are cooperating for upstream exploration.
Resource-holding countries and western oil firms hope Chinese partners can help them get involved in the whole industry chain, from upstream to downstream businesses.
Partnerships between Chinese oil companies and western firms in bidding for overseas projects are considered win-win situations. The CERA analyst told Caijing several resource countries have tight connections with China, and western oil companies hope to get China’s support in these areas.
On the other hand, Chinese oil company technology and management levels cannot meet the requirements of large overseas projects, making overseas partners necessary. “Some resource countries ask China to bring in a western cooperator to ensure profits for projects,” the analyst said.
Flagship CNPC
Since the end of last year when oil prices fell below US$ 50 a barrel, questions at home and abroad have risen over how China’s companies can obtain resources at bottom-line prices. International investment banks and accounting firms have been quite active in promoting small oil firms to Chinese buyers. Although bankers and accountants have been trying to convince buyers that the prices and timing are best, China’s companies have shown little interest.
The CERA analyst told Caijing that CNPC is interested in medium-sized oil firms with daily outputs of between 20,000 and 60,000 barrels. Ideal targets are oil fields with proven reserves that have started producing in key areas including Central Asia, Africa, South America, the Middle East and Asia-Pacific. Over the past dozen years, CNPC has gradually established strongholds in Kazakhstan, Sudan and Venezuela. CNPC has not only obtained panoramic pictures of geology, oil reserves and labor-related laws in these areas, but also established stable relations with governments and oil companies. CNPC’s cooperation has always been on the agenda when China’s high-level government officials visit these areas. And advantages including government support and internal expertise have helped CNPC score.
Many companies involved in overseas energy investments have realized that capital alone cannot help them realize expansion strategies. Citic Resources Holdings Ltd., which wants to be China’s fourth largest oil company, acquired the Karazhanbas oil field in Kazakhstan from Nations Energy Company Ltd. at the end of 2006 for US$ 1.91 billion. However, oil output has been lower than expected. At the end of November 2008, daily output was only 36,000 barrels, less than the goal of 60,000 barrels. The firm Moody’s lowered Citic Resources’ rating to Ba3, and the company’s net profits in 2008 fell 27.8 percent.
A senior manager at Citic Resources told Caijing they were misled by Nations Energy, which had pumped oil unscrupulously to unsustainable levels. But Nations Energy criticized Citic Resources, calling it unprofessional and saying an abundant oil field dried up after its transfer to the Chinese.
A senior Korean researcher at the Oxford Institute for Energy Studies (OIES) told Caijing that investment companies such as Citic Resources can easily be bullied, and that Nations Energy would not have dared sneered at CNPC.
Sinopec’s drawbacks include shortages of talent and expertise. Insiders say the company has specialized in downstream refinery business, and that its senior managers had given a cold shoulder to overseas expansion ideas for a long time.
Sinopec finally decided to expand overseas in 2004, setting aside 5.5 billion yuan for investment. But its timing was wrong. At that time, high oil prices were fanning nationalism in resource-rich countries. Sinopec has been able to start some projects over the past five years in Asia-Pacific, Central Asia and the Americas, but the scale of each project is considered too small for synergy.
As good opportunities are rare, Sinopec shrugged off controversy when it acquired Tanganyika Oil Co. at the end of 2008 when oil prices were high. An insider told Caijing the acquisition was a bad deal because Tanganyika’s two oil fields in Syria do not have proven reserves. Several billion yuan will be needed.
China National Offshore Oil Corp. (CNOOC), considered the country’s most open oil company, is quite cautious about overseas expansion during the current low-price era. Fu Chengyu, CNOOC’s president, told Caijing at the 2009 Boao Forum that his company does not intend to expand overseas at this time. “Do not rush into deals simply because of low prices,” he said. “We have to analyze whether assets can appreciate.”
CNOOC sources told Caijing the company has a clear picture of itself as a shrewd negotiator, good at cost-control and profit-making. But CNOOC is not as aggressive or as experienced as CNPC when evaluating overseas assets and operations. CNOOC has only one domestic refinery in Huizhou, Guangdong Province.
Besides, CNOOC has its eyes set on the South China Sea. As the country’s only offshore oil company, CNOOC plans to invest 200 billion yuan to explore the sea over the next 10 to 20 years – a strategic priority that makes full use of CNOOC’s resources.
Political Risks
Over the past three years, China’s oil companies have nailed down only a few overseas projects, as resource holders raised investment thresholds. But the financial crisis forced doors to open wider.
But will China’s rising presence lead to resentment in resource countries after the world economy recovers and oil prices start climbing again? Some experts say China may spend more than its companies can get back from expensive infrastructure projects such as a Central Asia gas pipeline and another east-west transmission line if resource countries cut supplies.
The OIES researcher, a Central Asia specialist, warned that China’s emphasis on Kazakhstan may backfire after he learned that China would offer more than US$ 10 billion for shares of JSC Mangistaumunaigas, an oil company in Kazakhstan.
The oil pipeline transmission capacity between China and Kazakhstan is 20 million tons per year. Currently, China’s equity in Kazakhstan can supply 13 million tons, while the rest is based on purchases. CNPC aims to continue expanding in Kazakhstan to secure 20 million tons. The researcher thinks CNPC has already grabbed a large portion of the country’s limited oil resources, and that further efforts may be met with resistance.
Some experts said political power shifts in unstable countries poses another potential risk for China’s oil companies. A senior CNPC manager said his company a tracking system that to evaluate political risks so that investment in high-risk areas can be avoided. Terrorism, political swings, protectionism and resource nationalism are taken into consideration.
“CNPC requires taking the interests of resource countries into consideration, so that they can accept us,” the manager said. “CNPC helps increase local employment and develop public facilities.”
The manager said foreign employees account for 95 percent of CNPC’s overseas investment, and that 70 percent of the employees at its engineering service projects are non-Chinese.
1 comment:
New Strategies for China’s Energy Quest
In a sign of changing times, Chinese oil firms are busy cutting global deals with resource-rich countries and western companies.
Chen Zhu
18 May 2009
(Caijing Magazine) This has been the busiest spring ever for the international affairs department at China National Petroleum Corp. (CNPC), where a sense of achievement brightens the daily bustle at the company’s new headquarters in Beijing.
In recent months, the department has sponsored a conference every day and a new round of negotiations every few days. For example, it helped arrange an agreement February 17 in which China will lend Russia US$ 25 billion in exchange for 300 million tons of oil over 20 years.
The Sino-Russian deal drew attention from Brazil, Venezuela and other countries eager to secure similar agreements. Brazil hopes to get US$ 10 billion to search for oil in its deep seas, while Venezuela and Angola would like US$ 4 billion and US$ 1 billion, respectively, in contracts with China. Kazakhstan wants US$ 10 billion to buy oil fields from foreign stakeholders and expand domestic infrastructure projects.
Resource-rich countries feasted when commodity prices were high. More recently, they’ve been pinched by falling oil prices. Oil cash accounts for 50 percent of fiscal revenues and 94 percent of the foreign exchange reserves in Venezuela, the world’s fifth largest oil exporter. Plummeting oil prices have not only forced governments to cut spending and decrease investments in oil exploration, but sparked social problems as well.
These fluctuating commodity prices, along with an international financial crisis, are subtly changing production and distribution mechanisms for oil and gas around the world. Consumers may benefit temporarily, but exporters may cut production and exploration, causing shortages in the future.
Against this backdrop, Chinese oil companies such as CNPC are stepping up their influence.
Energy tycoons such as Royal Dutch Shell and Exxon Mobil used to swoop in to help resource countries through investing. But these listed oil giants can’t offer long-term loans with below-market interest rates, especially in a period of sluggish demand and tight credit.
Resource-rich countries that have struggled to nationalize oil and gas fields for decades are not willing to abandon their efforts. Meanwhile, western oil companies face political and security risks in countries such as Iran and Venezuela. Furthermore, the International Energy Agency (IEA) predicts demand in Organisation for Economic Co-operation and Development (OECD) countries is still falling, and the refinery capacity for those countries is limited.
Emerging markets such as China and India are being targeted as centers of rising demand. China is hunting for resources around the world while its oil companies expand globally, building new models of cooperation linking Chinese firms, international oil giants and countries with resources.
Upstream, in resource-rich countries, CNPC has bid for projects with international oil giants. In the areas of downstream refining and sales, China has allowed state-owned oil companies and western oil firms to set up joint-stock projects. And everyone benefits.
Cooperative Deals
Chen Weidong, secretary of China Oilfield Services Ltd. (COSL), sensed China’s changing status at a Global Energy Forum in Houston in February. The forum, with more than 2,000 political and financial leaders as well as energy entrepreneurs from 55 countries, provided complete translation services into Chinese for China’s representatives, even though they accounted for less than 1 percent of the participants. The breakfast meeting for China was crowded with participants, while the hall for a gas seminar on Europe and Russia was half-empty.
In April, Beijing was a coincidental stopover for two oil executives -- Christophe de Margerie, CEO of the French oil company Total, and Jeroen van der Veer, CEO of Shell.
Margerie was frank about his lobbying mission, saying his company is keen to invest in the Guangdong Jieyang oil refinery plant jointly established by CNPC and Petróleos de Venezuela S.A. (PDVSA), a state-owned company in Venezuela. Margerie’s eagerness even embarrassed Total’s staff in China, since the company usually does not reveal intentions before negotiations.
After a hopeful Margerie departed, Veer arrived with Shell CFO Peter Voser, who will take over the CEO position in July. Veer said at a press conference April 14 that Shell is willing to bid for the Kirkuk oil field in northern Iraq together with several Chinese oil companies. Veer did not reveal the names of potential Chinese partners, but the foreign media said they are likely CNPC and China Petroleum and Chemical Corp. (Sinopec), and said Shell’s gesture to cooperate with China’s oil companies is tied to efforts to develop gas fields in Sichuan Province.
An analyst at Cambridge Energy Research Associates (CERA) told Caijing the exchanges of assets and interests have become more regular. Over the past two years, CNPC has signed strategic cooperation agreements or memoranda with Shell, Chevron, StatoilHydro and others.
“Foreign companies invite China to cooperate with them overseas in exchange for entry into China’s domestic market,” the analyst said. “China’s companies require overseas assets as the prerequisite for foreign company expansions into the domestic market.”
Margerie and Veer understand that China’s recognition of the model of assets exchange is a precious opportunity. They see it as an issue of now or never.
A senior manager at Shell’s branch in China said the company’s biggest regret was missing out an east-west gas transmission project in 2004. China was eager to attract foreign capital at that time. However, China’s enterprises now have abundant capital, so foreign capital is no longer as attractive.
According to petroleum and chemical industry guidelines issued by the Chinese government, China will limit the increase of refinery and ethylene production capacity in the future. Therefore, foreign capital is eager to get into the Chinese market now.
But China craves resources, raising the stakes for cooperation. In 2007, Sinopec joined with Exxon Mobil and Saudi Aramco to set up an oil refinery and ethylene project in Fujian Province. Sinopec controls 55 percent while Exxon Mobil and Aramco each hold 22.5 percent. Last year, CNPC with Shell and Qatar Petroleum set up a refinery and sales project with an equity distribution of 51 percent, 24.5 percent and 24.5 percent.
A cooperation deal for downstream refining between CNPC, Total and PDVSA is moving forward. Meanwhile, these parties are cooperating for upstream exploration.
Resource-holding countries and western oil firms hope Chinese partners can help them get involved in the whole industry chain, from upstream to downstream businesses.
Partnerships between Chinese oil companies and western firms in bidding for overseas projects are considered win-win situations. The CERA analyst told Caijing several resource countries have tight connections with China, and western oil companies hope to get China’s support in these areas.
On the other hand, Chinese oil company technology and management levels cannot meet the requirements of large overseas projects, making overseas partners necessary. “Some resource countries ask China to bring in a western cooperator to ensure profits for projects,” the analyst said.
Flagship CNPC
Since the end of last year when oil prices fell below US$ 50 a barrel, questions at home and abroad have risen over how China’s companies can obtain resources at bottom-line prices. International investment banks and accounting firms have been quite active in promoting small oil firms to Chinese buyers. Although bankers and accountants have been trying to convince buyers that the prices and timing are best, China’s companies have shown little interest.
The CERA analyst told Caijing that CNPC is interested in medium-sized oil firms with daily outputs of between 20,000 and 60,000 barrels. Ideal targets are oil fields with proven reserves that have started producing in key areas including Central Asia, Africa, South America, the Middle East and Asia-Pacific.
Over the past dozen years, CNPC has gradually established strongholds in Kazakhstan, Sudan and Venezuela. CNPC has not only obtained panoramic pictures of geology, oil reserves and labor-related laws in these areas, but also established stable relations with governments and oil companies. CNPC’s cooperation has always been on the agenda when China’s high-level government officials visit these areas. And advantages including government support and internal expertise have helped CNPC score.
Many companies involved in overseas energy investments have realized that capital alone cannot help them realize expansion strategies. Citic Resources Holdings Ltd., which wants to be China’s fourth largest oil company, acquired the Karazhanbas oil field in Kazakhstan from Nations Energy Company Ltd. at the end of 2006 for US$ 1.91 billion. However, oil output has been lower than expected. At the end of November 2008, daily output was only 36,000 barrels, less than the goal of 60,000 barrels. The firm Moody’s lowered Citic Resources’ rating to Ba3, and the company’s net profits in 2008 fell 27.8 percent.
A senior manager at Citic Resources told Caijing they were misled by Nations Energy, which had pumped oil unscrupulously to unsustainable levels. But Nations Energy criticized Citic Resources, calling it unprofessional and saying an abundant oil field dried up after its transfer to the Chinese.
A senior Korean researcher at the Oxford Institute for Energy Studies (OIES) told Caijing that investment companies such as Citic Resources can easily be bullied, and that Nations Energy would not have dared sneered at CNPC.
Sinopec’s drawbacks include shortages of talent and expertise. Insiders say the company has specialized in downstream refinery business, and that its senior managers had given a cold shoulder to overseas expansion ideas for a long time.
Sinopec finally decided to expand overseas in 2004, setting aside 5.5 billion yuan for investment. But its timing was wrong. At that time, high oil prices were fanning nationalism in resource-rich countries. Sinopec has been able to start some projects over the past five years in Asia-Pacific, Central Asia and the Americas, but the scale of each project is considered too small for synergy.
As good opportunities are rare, Sinopec shrugged off controversy when it acquired Tanganyika Oil Co. at the end of 2008 when oil prices were high. An insider told Caijing the acquisition was a bad deal because Tanganyika’s two oil fields in Syria do not have proven reserves. Several billion yuan will be needed.
China National Offshore Oil Corp. (CNOOC), considered the country’s most open oil company, is quite cautious about overseas expansion during the current low-price era. Fu Chengyu, CNOOC’s president, told Caijing at the 2009 Boao Forum that his company does not intend to expand overseas at this time. “Do not rush into deals simply because of low prices,” he said. “We have to analyze whether assets can appreciate.”
CNOOC sources told Caijing the company has a clear picture of itself as a shrewd negotiator, good at cost-control and profit-making. But CNOOC is not as aggressive or as experienced as CNPC when evaluating overseas assets and operations. CNOOC has only one domestic refinery in Huizhou, Guangdong Province.
Besides, CNOOC has its eyes set on the South China Sea. As the country’s only offshore oil company, CNOOC plans to invest 200 billion yuan to explore the sea over the next 10 to 20 years – a strategic priority that makes full use of CNOOC’s resources.
Political Risks
Over the past three years, China’s oil companies have nailed down only a few overseas projects, as resource holders raised investment thresholds. But the financial crisis forced doors to open wider.
But will China’s rising presence lead to resentment in resource countries after the world economy recovers and oil prices start climbing again? Some experts say China may spend more than its companies can get back from expensive infrastructure projects such as a Central Asia gas pipeline and another east-west transmission line if resource countries cut supplies.
The OIES researcher, a Central Asia specialist, warned that China’s emphasis on Kazakhstan may backfire after he learned that China would offer more than US$ 10 billion for shares of JSC Mangistaumunaigas, an oil company in Kazakhstan.
The oil pipeline transmission capacity between China and Kazakhstan is 20 million tons per year. Currently, China’s equity in Kazakhstan can supply 13 million tons, while the rest is based on purchases. CNPC aims to continue expanding in Kazakhstan to secure 20 million tons. The researcher thinks CNPC has already grabbed a large portion of the country’s limited oil resources, and that further efforts may be met with resistance.
Some experts said political power shifts in unstable countries poses another potential risk for China’s oil companies. A senior CNPC manager said his company a tracking system that to evaluate political risks so that investment in high-risk areas can be avoided. Terrorism, political swings, protectionism and resource nationalism are taken into consideration.
“CNPC requires taking the interests of resource countries into consideration, so that they can accept us,” the manager said. “CNPC helps increase local employment and develop public facilities.”
The manager said foreign employees account for 95 percent of CNPC’s overseas investment, and that 70 percent of the employees at its engineering service projects are non-Chinese.
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