China Bids High For Foreign Oil – Analysis

By Michael Lelyveld

China’s deal to buy Canadian oil company Nexen has renewed questions about the country’s practice of paying high prices for overseas assets, analysts say.

The $15.1-billion offer by China National Overseas Oil Corp. (CNOOC) to acquire the Calgary-based company for $27.50 a share on July 23 topped the market’s previous closing price by 61 percent, The Globe and Mail said.

While Nexen is Canada’s 12th largest energy company, it has struggled with problems at holdings ranging from the Gulf of Mexico and West Africa to Long Lake, Alberta, where it has been working to turn oil sands deposits into crude oil, the paper said.

If approved, CNOOC’s deal would give it 100 percent of the technically challenging Long Lake venture after its $2.1-billion purchase last year of Opti Canada, which held 35 percent of the project. Nexen controls the remaining 65 percent.

For state-owned CNOOC, the investment means access to new technologies including horizontal drilling and extraction of crude oil from bitumen, a tar-like source of viscous petroleum.

But CNOOC’s price offer may be prohibitive for most international oil companies. The transaction will cost CNOOC about 20 percent more than Nexen’s oil and gas reserves are worth, said analyst Laban Yu at Jefferies Hong Kong Ltd., Reuters reported.

While the Nexen agreement stands out due to its blockbuster price, it is only part of a new wave of energy deals that China has announced in recent weeks.

New wave of deals

Since mid-July, China’s Sinopec has raised its stake from 10 percent to 25 percent in the Australia Pacific LNG project for supplies of liquefied natural gas. Sinopec also bought a 49-percent share in North Sea assets from Canada’s Talisman Energy for $1.5 billion.

In the same week, Ecuador said it was holding talks with China National Petroleum Corp. (CNPC) for a $12.5-billion refinery project, the official English-language China Daily reported, while subsidiary PetroChina signed another deal for 40 percent of an offshore block in Qatar.

On the same day, CNOOC inked contracts with Royal Dutch Shell to explore for oil and gas in the South China Sea and off the coast of Gabon, China Daily said.

The barrage of deals comes during a pause in oil price growth as the global economy stumbles. Despite the surge in investment, China’s oil demand declined in June for the first time in three years, Platts news service said.

Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies, said China has seized the opportunity of the weaker market for its latest buying spree.

“My general view of the recent wave of Chinese deals is that it results from Chinese eagerness and anemic financial performance by target companies, now that rising oil prices can no longer be counted on to bail out high-risk, high-cost projects,” Chow said in an e-mail message.

“Whether Chinese national oil companies are overpaying depends on one’s view of the future,” said Chow. “The sellers are short of investment funds and the Chinese are willing to spend to capture value in their opportunities.”

Bids too high?

The Nexen deal may also serve a reminder that Chinese companies have frequently been criticized for pushing up energy costs by paying too much for overseas oil assets.

The practice first surfaced in 1997 when CNPC promised to spend $9.5 billion on oil projects in Kazakhstan, driving other international companies out of the bidding. China then put the investments on hold when the Asian currency crisis struck in 1998.

In 2005-2006, a second wave of high bids greatly expanded China’s international presence in oil-producing regions ranging from Central Asia to Africa and South America.

Alexandros Petersen, an adviser to the European energy security initiative at the Woodrow Wilson International Center for Scholars, said China’s oil giants have become accustomed to paying premiums for foreign assets rather than bidding competitively like Western companies and walking away when prices get too high.

“From the Chinese point of view, they’re trying to make sure that the deal actually goes down, so they’re looking for security and predictability in the transaction,” he said.

Petersen said there may also be validity to reports that CNOOC is hoping to offset political opposition to the sale, which is subject to regulatory approvals in both Canada and the United States.

‘Rare leverage’

Past experience may also be driving the price. In 1995, the company withdrew its $18.5-billion offer for California-based Unocal in the face of stiff congressional opposition.

This time around, CNOOC’s bid for Nexen has drawn the attention of New York Democratic Senator Charles Schumer, who wrote to Treasury Secretary Timothy Geithner regarding the sale on July 27.

“It is rare that we have so much leverage to exert upon China. We should not let this window of opportunity pass us by,” said Schumer. “At some point, we have to put our foot down over China’s refusal to play by the rules of free trade.”

Rep. Edward Markey, a Massachusetts Democrat, has also written to Geithner in opposition, UPI reported.

“Giving valuable American resources away to wealthy multinational corporations is wasteful, but giving valuable American resources away to a foreign government is far worse,” Markey said.

Petersen argued that the premium may be needed to counter such resistance, thuogh this may not be the primary reason.

“The higher price may be to overcome political measures, but I don’t think it’s so much that there’s some sort of grand political plan,” he said.

“I think CNOOC wants first and foremost a toehold in a new sector and a new market where they can gain experience and gain technology and expertise.”

Concerns over opposition

Mikkal Herberg, research director for energy security at the Seattle-based National Bureau of Asian Research, said CNOOC’s worry about political opposition may have added as much as 10 percent to its offer.

“They’re probably paying a bit of a premium in this case to try to make sure that this offer is so attractive to the shareholders and the Canadians that it would be very hard to turn down, and to make any counterbid very difficult,” he said.

But Herberg does not believe the deal is part of a new wave of wild bidding from Chinese national oil companies that will swamp the international market again.

“My feeling is that they’ve become much smarter about paying closer to market rates for these assets, first because of criticism and second because these companies increasingly have to make money,” said Herberg.

“You can’t do it if you’re acquiring assets at huge premiums,” he said.