Foreign Correspondence

[Amaunet]

China chases a global oil presence

By Richard McGregor, Enid Tsui and Andrew Yeh
Published: January 10 2005 02:00 / Last updated: January 10 2005 02:00

The mooted takeover bid by China National Offshore Oil Corp, the country's third-largest oil and gas group, for Unocal shows little is off limits for ambitious Chinese companies in their search for secure resources.

But as with other Chinese acquisitions overseas, the possible US$13bn deal raises questions about the prices mainland companies are willing to pay and their ability to manage the transaction and, later, the assets themselves.

State-owned CNOOC, which has a listed arm in Hong Kong and New York, has asked bankers to study a takeover of Unocal, the ninth-largest oil company in the US, to be followed by the immediate sale of its US assets.

Although progress is at a preliminary stage, foreign energy executives, who judge CNOOC to be the best of China's state energy groups, said yesterday the company should not be underestimated.

CNOOC had been looking at Unocal's assets in Asia, in countries such as Thailand, Indonesia andMyanmar for some time, these executives said, and had the balance sheet to handle such a large transaction.

But China's strategic search for overseas resources and its own rising short-term demand is driving up prices for oil and other resources, and providing an incentive for the present owners to hang on to their assets.

"Chinese companies are finding overseas acquisitions difficult because of the high oil prices, so not a lot of assets are for sale . .. as it's more practical to hold on to them," said a Beijing-based energy consultant.

David Hurd, the head of energy research at Deutsche Bank in Hong Kong, said the Unocal acquisition appeared to be a lot more expensive than CNOOC's previous purchases.

By his calculations, the US group has an enterprise value per barrel of the equivalent (EV/BOE) of US$7.71.

CNOOC paid $1.98 in EV/ BOE for its stake in Australia's Northwest Shelf gas project, and$0.98 in EV/BOE for raising its stake in Indonesia's Tangguh LNG project last month.

Lawrence Lau, the oil and gas analyst at the Bank of China (HK), agreed that, based on initial reports, the price tag could be too big for the company.

It would be best, he said, if CNOOC sold the non-Asian assets back-to-back, as it is believed to be planning to do, to ease the financing pressures.

CNOOC's overseas-listed vehicle, along with its parent company, has a growing string of LNG terminals in the mainland and is keen to secure the long-term supply of gas. Most of Unocal's production assets in Asia are gas.

"But the realisation value of gas is low, especially in today's high oil price environment," Mr Lau said.

"And given that there may be other bidders out there, Unocal may prove to be a very expensive purchase by CNOOC."

CNOOC's possible purchase of Unocal also represents a new approach for Chinese oil companies in that it would not just be acquiring single oilfields but an extensive regional network.

This trend will accelerate if oil prices decline because companies abroad will become less valuable and some smaller operations may struggle for profitability, said the Beijing-based analyst.

Each new Chinese deal overseas also ratchets up the global political dimensions of such purchases.

With China reportedly preparing to sign a framework agreement for investment in Canadian resources this month, including the oil sands project in Alberta, Chinese investments have roused debate in Ottawa about the sale of strategic assets.

The purchase of Unocal would be the first by the Chinese of a large, listed US resources company, and might attract the attention of regulators and politicians.




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