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.”
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