China’s Global Investment in Gas

China’sGlobal Investmentin Gas

China’sGlobal Investmentin Gas

Therapidpopulationgrowthcoupledwith theemergenceof China as a significantindustrialpowerhas createda complexchallengeforthenaturalresourcemarkets,includingthemarketforthenaturalgas.Lookingat thedemandside,thecurrentChinese appetiteforlargeamountsof thenaturalgashas putpressureon theinternationalsupply.Accordingto Moran(2013)China has beeninvestingin theoverseasnaturalresourceswith theobjectiveof gainingpreferentialaccessto thelimitedoutput.Currently, China is meeting71 % of its domesticdemandfornaturalgasfrom thelocalproduction,while29 % of thedemandis addressedby imports (U.S. Department of Energy, 2014). Thelocaldemandis expectedto increaseby 8 % by theyear2016 and10 % by theyear2020 (Haas &amp Guo, 2014), which necessitatesthemassiveinvestmentin theoverseasgasassets. Thispaperwill addressChina’s investmentin gasassets in Brazil, Mozambique, Russian Federation, andCanada.

Hostcountry:Mozambique

ChinaNational Petroleum Corporation investedin Mozambique’s gassectorby buyinga 20 % stakein Eni SpAAfrican. CNPC paid$ 4.2 billion forthistransaction,butthere wasnopremiumrecordedwith respectto thistransaction(Haas &amp Guo, 2014). Thestakeof 20 % could not allowtheCNPC to controltheoperationsof Eni SpAAfrican since itwasbelow thecontrollingshareholding of at least50 %. However,thistransactiongaveCNPC an opportunityto expandits supplyof naturalgasforthe domesticmarketandincreaseits revenuegeneratingcapacity.Thismeansthatpartof theagreementwasthatEni SpAAfrican would sella sectionof its annualproductionto CNPC. Eni SpAAfrican’sassets are locatedin Area 4, Mozambique (Haas &amp Guo, 2014). Theremaininglifeof Area 4 gasreservewasnot recorded,butitwasestimatedthatthedepositcan servethewholeworldfortwoconsecutiveyears.Therightsof theagreementforthistransactioncan beterminatedin caseCNPC decidesto sellits shareto anotherinvestor. Chinachoseto investin Mozambique followingthediscoverythat Mozambique has someof thelargestdepositsof naturalgas(about 250 trillion tons),which makesthehostcountrya reliablesupplier of naturalgasto theChinese market(Haas &amp Guo, 2014).Thehighdemandfornaturalandenvironmentally friendlygasin theChinese marketwasthemajordriving factorforthisinvestment.

Hostcountry:Brazil

TheChinese energyfirm, Sinochem Groupinvestedin Brazil’s gassectorby purchasinga 10 % stakeof gasPerenco’s deepsea gasexplorationblocks.Sinochem paid$ 3.07 billion forthistransaction,butthere wasnotake-over premiumrecorded(Fellman, Guo &amp Loo, 2012). With a 10 % stake,Sinochem could not controltheoperationsof Perenco SA. However,Sinochem could getthesupplyof naturalgasto supplementits domesticproduction,thushelpingitaddressdomesticdemandforenvironmentally friendlygas.In addition,thistransactiongaveSinochem an opportunityto expandits revenuegeneratingcapacityto increaseits gassalesin thelocalmarket.Perenco’s assets arelocatedin theEspirito Santo basin,Brazil. Theremaininglifeof Espirito Santo basingasreservewasnot disclosedwhenthistransactionwasbeingmade.Therightsof theagreementcan beterminatedin caseSinochem sellsits staketo anotherinvestor. Chinachoseto investin Brazil becausetheentirecoastof South America (includingEspirito Santo basin)has largedepositsof naturalgas,someof which havenot beenexploited.Therefore,Brazil will be a reliablesupplier of naturalgasto China. Thehighdemandfornaturalgasin theChinese marketwasthemajordriving factorsforthisinvestment.

Figure1: Location of Espirito Santo basingasreserve

Source: Rigzone (2015)

Hostcountry:Russian Federation

ChinaNational Petroleum Corporation investedin Russia’s gassectorby buyinga 20 % stakein OAO Novatek. Thistransactionwascarriedout in 2013, whereCNPC paid$ 940, butthere wasnotake-overpremiumpaidforthistransaction(Shiryaevskaya &amp Kravchenko, 2013). The20 % stakecould not giveCNPC thepowerto controltheoperationsof Novatek. ThistransactiongaveNCPC an opportunityto increaseits supplyof gasbecausetheagreementstatedthatNovatek would giveitat least3 million tonsof naturalgaseveryyear(Shiryaevskaya &amp Kravchenko, 2013). Apartfrom accessingliquefied gasas a product,CNPC increasedits revenuegeneratingcapacityby investingin Novatek. Novatek’s assets arelocatedin Yurkharovskoye field,Russia. Theremaininglifeof theassets Novatek’s assets wasnot disclosed.Therightsofthe agreementwill be terminatedfollowingtheexpiry of thecontractthat statedthatNovatek will supplyliquefied gasto CNPC for15 years(Shiryaevskaya &amp Kravchenko, 2013). Thisimpliesthattheagreementhadalreadysetthedateforterminationof rights.Chinachoseto investin Russia becauseof geographicalcloseness, which madetransportationof gaseasy. Russia could alsoactas a reliablesupplier of gasgiventhatithas largedepositsof naturalgas.Theincreasein gasdemandin theChinese marketwasthemajordriving forceforthistransaction.

Hostcountry:Canada

PetroChinainvestedin Canadian Shale gasassets in 2012 by purchasinga 20 % stakein theRoyal Dutch Shell PLC. PetroChina paid$ 1 billion, butthere wasnopremiumrecordedforthistransaction(Lee, 2012). The20 % stakecould not allowPetroChina to controltheoperationsof theRoyal Dutch Shell PLC. However,thistransactionenabledPetroChina to expandits supplyof shalegaswith theobjectiveof addressingthepressingdomesticdemand.Thiswasan additionalbenefitto an increasein therevenuegeneratingcapacityforPetroChina. Theshalegasassets ownedby Royal Dutch Shell PLC arelocatedin Groundbirch, Canada. Theremaininglifeof theRoyal Dutch Shell PLC assets wasnot disclosed.Therightsof theagreementcould beterminatedin casePetroChina decidesto sellits staketo anotherinvestor orthegasreservesgetexhausted.Chinachoseto investin Canada becausethere wasa needto increasethesupplyof shalegasto thedomesticmarket.In addition,PetroChina intendedto increaseits experienceprocessof exploringanddevelopingunconventionalgasresourcesby cooperatingwith theRoyal Dutch Shell PLC (Lee, 2012). Theincreasein demandforthenaturalgasin theChinese marketwasthemajordriving forceforthisinvestment.

Conclusion

Theexponential increasesin demandfornaturalandenvironmentally friendlygasin theChinese markethaveforcedthecountryto investmassively in overseasassets. AlthoughChina has localreservesof thenaturalgas,their annualproductionis insufficientto meetthedemand.Apartfrom investingwith theobjectiveof expandingthesupplyof thenaturalgasin China has alsomanagedto increaseits experienceof themodernminingtechnologies by cooperatingwith firms thathavebeenoperatingintheindustryforlong.Thishas helpedChina in buildingthenecessarycapacityto exploreanddevelopnaturalgasresourcesin orderto addresstheeverincreasedemandwithout relying solelyon suppliersfrom non-Chinese companies.

Summary

Hostcountry:Mozambique

Transactioncostandpercentageinterest

CNPCboughta 20 % stakein Eni SpAAfrican at $ 4.2 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

A20 % stakecould not allowCNPC controloperationsof Eni SpAAfrican.

Productionrights

CNPCgotpreferentialaccessto naturalgasandexpandedits revenuegeneratingcapacity.

Locationof assets

EniSpAAfrican’sassets arelocatedin Area 4 Mozambique.

Remaininglife

Remaininglifeof assets wasnot disclosed

Terminationof rights

Rightsof agreementcould beterminatediftheCNPC decidesto sellits staketo a differentinvestor.

Reasonsforchoosingthehostcountry

Availabilityof largeandunexploited gasreserves

Drivingforce

Theincreasein thelocaldemandfornaturalandenvironmentally friendlygas

Hostcountry:Brazil

Transactioncostandpercentageinterest

Sinochemboughta 10 % stakein Perenco SA at $ 3.07 billion.Take-over premium

Notake-over premiumwasrecorded.

Operatorship

Witha 10 % stake,Sinochem could not controloperationsof Perenco SA.

Productionrights

Sinochemgotpreferentialaccessto naturalgasandexpandedits revenuegeneratingcapacity.

Locationof assets

PerencoSA’s assets are located in the Espirito Santo basin, Brazil.

Remaininglife

Remaininglifeof assets wasnot disclosed

Terminationof rights

Rightsof agreementcould beterminatedifSinochem decidesto sellits staketo a differentinvestor.

Reasonsforchoosingthehostcountry

Largedepositsof naturalgasintheEspirito Santo basin.

Drivingforce

Theincreasein thelocaldemandfornaturalandenvironmentally friendlygas

Hostcountry:Russian Federation

Transactioncostandpercentageinterest

CNPCboughta 20 % stakein OAO Novatek at $ 940 million.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

A20 % stakecould not allowCNPC takecontrolof Novatek’s operations.

Productionrights

CNPCgotpreferentialaccessto naturalgasandexpandedits revenuegeneratingcapacity.

Locationof assets

Novatek’sassets arelocatedin Yurkharovskoye field,Russia.

Remaininglife

Remaininglifeof assets wasnot disclosed

Terminationof rights

Rightsof agreementcould be terminatedfollowingtheexpiry of the15 yearscontract.

Reasonsforchoosingthehostcountry

Geographicalcloseness, which makestransportationof naturalgaseasier

Drivingforce

Theincreasein thelocaldemandfornaturalandenvironmentally friendlygas

Hostcountry:Canada

Transactioncostandpercentageinterest

PetroChinaboughta 20 % stakein Royal Dutch Shell PLC at $ 1 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

A20 % stakecould not allowPetroChina to controltheoperationsof Shell.

Productionrights

PetroChinagotpreferentialaccessto naturalgasandexpandedits revenuegeneratingcapacity.

Locationof assets

Shell’sassets arelocatedin Groundbirch, Canada.

Remaininglife

Remaininglifeof assets wasnot disclosed

Terminationof rights

Rightsof agreementcould beterminatedin casethegasreservesgetexhausted.

Reasonsforchoosingthehostcountry

PetroChinaintendedto increaseits experienceprocessof exploringanddevelopingunconventionalgasresources.

Drivingforce

Theincreasein thelocaldemandfornaturalandenvironmentally friendlygas

References

Fellman,J., Guo, A. &amp Loo, D. (2012). Sinochem to buy stake in Brazildeep water blocks from Perenco. Bloomberg.Retrieved February 21, 2015, fromhttp://www.bloomberg.com/news/articles/2012-01-06/sinochem-to-buy-stakes-in-brazil-deep-water-blocks-from-perenco

Haas,B. &amp Guo, A. (2014). CNPC to buy stake in Eni Mozambique assetsfor $ 4.2 billion. Bloomberg.Retrieved February 21, 2015, fromhttp://www.bloomberg.com/news/articles/2013-03-14/cnpc-to-buy-stake-in-eni-s-mozambique-assets-for-4-2-billion

Lee,Y. (2012, February 2). PetroChina buys 20 % stake in Shell’sGoundbirth shale assets. Rigzone.Retrieved February 21, 2015, fromhttp://www.rigzone.com/news/article.asp?a_id=114805

Moran,T. (2013). China’sstrategy to secure natural resources.Washington, DC: Peterson Institute.

Rigzone (2015). Espirito Santo Basin, Brazil. Rigzone. RetrievedFebruary 21, 2015, fromhttp://www.rigzone.com/news/image_detail.asp?img_id=1405

Shiryaevskaya,A. &amp Kravchenko, S. (2013, October 22).Novatek signs 15-year dealwith NCPC on LNG supplies from Yamal. Bloomberg.Retrieved February 21, 2015, fromhttp://www.bloomberg.com/news/articles/2013-10-22/novatek-signs-15-year-deal-with-cnpc-on-lng-supplies-from-yamal

U.S.Department of Energy (2014). China analysis: Independent statisticsand analysis. U.S.Department of Energy.Retrieved February 21, 2015, fromhttp://www.eia.gov/countries/cab.cfm?fips=ch

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