China Strikes Expensive Oil
<<Sinopec is paying about $16 per barrel of proven and probable reserves>>
Last Update: 6/24/2009 2:22:30 PM
By Liam Denning
A DOW JONES COLUMN
A maxim of the high-risk energy business is "you don't drill for oil in
Switzerland." But you can buy oil companies based there.
Addax Petroleum, which has an office in Geneva but reserves spread between
Nigeria, Gabon and Iraq, is selling itself to China Petrochemical Corp., or
Sinopec, for $8.8 billion, including net debt.
Sinopec is paying about $16 per barrel of proven and probable reserves. The
average for African and Middle Eastern deals in 2008 - a year that saw
triple-digit crude prices - was under $5 per barrel, according to consultants IHS
Herold and Harrison Lovegrove & Co.
Throw in Addax's possible reserves and contingent natural gas reserves and the
multiple drops to just over $7 per barrel of oil equivalent. Your average buyer
would never factor in such rosy assumptions. But then Sinopec, 66% owned by the
Chinese government, is not your average buyer. Besides slaking Beijing's thirst
for oil, Sinopec must be hoping to gain cachet by landing a large foreign
transaction while other recent landmark attempts, such as Aluminum Corp. of
China's deal with miner Rio Tinto, have failed.
One potential wrinkle is Baghdad, which still has no official agreement with
Kurdish authorities on managing the region's oil. The Iraqi government might take
offense at Sinopec's move and block access to bigger projects elsewhere in the
country.
Then again, would cash-strapped Baghdad really confront a major oil consumer
ready to pay top dollar for reserves? Even if it did, Addax's Kurdish assets
represent just a fifth of its proven and probable reserves. For the sake of
expediency, Sinopec could potentially split them off to appease Baghdad and still
gain Africa's riches.
(Liam Denning joined The Wall Street Journal from the Financial Times, where he
wrote for the Lex column. Previously, he was an investment banker at Goldman
Sachs. He can be reached at 212-416-3618 or by email at liam.denning@wsj.com)
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(END) Dow Jones Newswires
June 24, 2009 14:22 ET (18:22 GMT)
AI
