The Chinese Make An Offer For North Sea Oil That Britain Can't Refuse
History is being made in the North Sea, as China makes its first significant investment in its oilfields through two major deals.
30 July, 2012
State-controlled energy giant CNOOC last Monday unveiled a $15.1bn (£9.7bn) bid for Canada’s Nexen, the second biggest oil producer in the North Sea. If successful, the takeover will be China’s largest ever foreign investment.
That same day, Chinese refiner Sinopec said it would pay $1.5bn for a 49pc stake in the UK unit of Canada’s Talisman Energy, also a top 10 oil and gas producer in the North Sea.
Given the sums, no surprise that the cry from oil industry analyst Malcolm Graham-Wood at VSA Capital was: “The Chinese are coming with their wall of money!”
Still, money is not the only consideration in purchases of this kind, which will have to be signed off by the UK Government, among other authorities around the world. Eyebrows inevitably raise at the political niceties of having North Sea energy reserves in the hands of Beijing.
Consultancy Wood Mackenzie calculates that together the two Chinese firms will directly own 13pc of all UK oil production if both deals go through.
But for all the nervousness around China buying up local energy assets – urged on by a Chancellor looking outside the UK for much-needed investment – the reality is that Beijing is looking at a bigger picture.
After all, production from the North Sea oilfields peaked years ago, a change accompanied by a shift from bigger to smaller operators. The thinking is that China has not been seen in the North Sea so far, because it has not viewed the reserve potential as big enough.
There is also another consideration. From Beijing, political risk looks rather different to someone working out of say, London, or Washington.
For China, the high tax rates levied on North Sea oil producers are not offset by the sweetener of operating in a country seen to be, in Western eyes, without much political risk.
So what has changed, to make the Chinese want to take a dip? Nothing much for CNOOC, suggests Alex Grant, managing director of oil & gas investment banking at Jefferies. “I don’t think that [getting into the UK] was the driver for the deal – although the question now is whether they will seek to expand on their position,” he says.
Nexen, he points out, has significant assets across Canada, Nigeria and elsewhere. The Sinopec deal looks different, however. Through that purchase the Chinese are clearly getting into UK waters deliberately.
The driving force is that China is moving from a focus on untapped reserves to assets that are up and running, Grant argues.
“Historically, the Chinese have been chasing big resources. They want molecules in the ground – that don’t lose their value as US Treasuries could,” he says. “I think the near-term focus has now moved to producing assets. They have acquired a lot of long-term resource in places such as Brazil and West Africa, and want production to fill the near-term gap.”
The logic does make sense. After all, if you have bought oil reserves which need to be developed before production starts, the costs of rigs, drilling and manpower gobbles up your cash before you start to see any returns. So why not buy a few fields already producing to make your balance sheets look a bit better in the short term?
The problem is that there is not an abundance of producing assets up for sale. Once an oilfield is in production there is little pressure to sell, as the profits cover running costs.
In that light, the UK’s oilfields, declining and lacking in scale as they may be, look more attractive. Industry watchers do not rule out the possibility of more acquisitions by China in the North Sea as it looks to build up its producing assets, whether through smaller bolt-on purchases or more large-scale buys.
That could signal opportunities for investors in the sector – provided that they back the right horses.
As for the practicalities if the deals go through, major changes are not expected.
Sinopec is buying into the North Sea through a non-operating interest, meaning Talisman will remain in charge. CNOOC, in contrast, will take over the show if it purchases Nexen. Still, the Chinese are well aware of the political sensitivities, so it would be a surprise if, say, CNOOC started cutting back on maintenance spending or do anything that might play into prejudices.
That is not to deny the deals bolster China’s position in many ways.
Just listen to the oil traders grumbling that CNOOC will be a step closer to information affecting crude prices, as Nexen’s Buzzard field plays a key role in setting prices for Brent, the benchmark London oil price.
But do not hold your breath for this to stop the purchases getting the green light from the UK. After all, where else is the money going to come from?
“They are both big credible companies, with good technical expertise and strong balance sheets,” says Grant, who does not expect them to be held up on the UK side.
“In a way they could not have come at a better time. Both deals bring well needed potential new investment to the North Sea.”