China’s Global Investment in Oil

China’sGlobal Investmentin Oil

China’sGlobal Investmentin Oil

Oilis a criticalfactorof productionthat determinesthesuccessof thenationalaswellas theglobaleconomy.In thecaseof China, which has amongthefastestgrowingeconomyin themodernworld,oildemand hasbeenincreasingexponentiallyfollowingtheincreasein therateof industrialization. Currently, Chine is consuming42.18 million per yeartonsor10.31 million barrelsof oilper daywith an estimatedincreasein thisrateof consumptionby 3.5 % eachyear(McGraw-HillFinancial, 2014). Domesticproductionof oilcannot sustainthehighdemand,andthishas forcedtheChinese companiesto investheavilyin theforeignmarketin orderto addressthepressingdemandI thelocalmarket.Thispaperwill analyzeChina’s global investmentinoilsectorin Brazil, Iraqi, Angola, Cameroon, andKazakhstan.

Hostcountry:Brazil

TheChinese largestchemicalcompany,Sinochem Group, investedin Brazil by buyinga 40 % stakein Statoil. Sinochem paid$ 3billion forthistransaction,butthere wasnotakeover premiumpaid(Kammel &amp Krasnolutska, 2014). The40 % stakewassubstantial,butlessthan thecontrollingshareholding, which meansthatSinochem didnot acquirethepowerto controltheoperationsof Statoil. However,Sinochem managedto acquirepartof theoilproducedby Statoil, which supplementedits supplyof oilforits domesticoperations.Statoil assets arelocatedin Peregrino, Brazil. Theremaininglifeof Peregrino offshoreoilfieldswasnot disclosed.Therightsof theagreementcould beterminatedin caseSinochem decidesto sellits 40 % stakeorall theoilfieldsownedby Statoil getsexhausted.However,thetwo companiesagreedto exploreotheroilfieldsin Brazil in orderto increasetheir production,which meansthattherightsof theagreementmight takelongbefore theyareterminated.China’sdecisionto investin Brazil wasdrivenby thefactthatStatoil intendedto getintoa jointventure,which could helpitcreatevaluein its domesticoperations.Thehighdemandforoilproductsin theChinese marketwasthemajordriving forceforSinochem’s decisionto buya stakein Statoil.

Figure1: Location of Peregrino oilfields,Brazil

Source:Anadarki (2014)

HostCountry: Iraq

PetroChina&nbspboughta 25 % stakein ExxonMobil. Thistransactionwasworth$ 5 billion, andnotakeover premiumwasrecordedwith respectto thistransaction(Chazan, 2013). With a 25 % stakein ExxonMobil, PetroChina could not controltheoperationsof its newacquisition.However,PetroChina managedto increaseits incomegenerating capacityandoilsupplyin thedomesticmarket.ExxonMobil assets arelocatedin West Qurna 1, Iraq. WestQurna 1 oilfieldshada remaininglifeof about20 yearsat thetimeof purchase.There are factorsthat might resultin theterminationof therightsof theagreement.First,PetroChina may decideto sellits 25 % staketo anotherinvestor. Secondly,theincreasein theincidentsofterroristattackin Iraq’s oilfields,especiallyin West Qurna 1 might forcePetroChina to withdraw(Autonomous Organization, 2015). Theexhaustionof theoilfieldswithin thenext20 yearsmight resultin theterminationof therightsof theagreement.TheChinese companychoseto investin Iraq becauseof thegeographicalcloseness between thetwo countriesandthefactthatIraq hadjustemergedfrom war,which gavetheChinese companyto purchaseoilassets at a fairprice.Thegrowingdemandforoilin China wasthemajordriving factorforPetroChina’s decisionto investExxonMobil in Iraq.

Figure2: Location of West Qurna 1

Source:Irfan (2014)

Hostcountry:Angola

Sinopec,theChinese companywith thelargestoilrefining capacity,boughta 75 % stateinnSonangol in 2006. Thestakewasworth$ 2 billion, butthere waspremiumdisclosedwithregardtothistransaction(Macauhub, 2014). The75 % stakeallowedSinopec to takecontrolof theAngolan company’soperations.In addition,Sinopec gainedaccessto theoilproducedby Sonangol andincreaseits incomegenerating capacityfollowingits newventure.Sonangol’s assets arelocatedin Luanda, Angola. Theremaininglifeof theoilfieldswasnot disclosed.However,itwasreportedthattheoilfieldsownedby Sonangol containeda reserveof about3.2 billion barrels(Macauhub, 2014). Therightsof theagreementcan beterminatedin caseSinopec sellsits 75 % staketo anotherinvestor orthe3.2 billion barrelsof oilreservesgetsexhausted.TheChinese companychoseAngola as a hostcountrybecauseitcould getoilassets at a fairpriceandthefactthatAngola is a developing countrywith a limitedexploitsits ownoilfields.Theever-increasing demandforoilproducts,especiallyin theenergysectorin theChinese economywasthemajordriving forceforthisinvestment.

Hostcountry:Cameroon

TheChinese companyknownas Sinopec Group acquiredits firstassets in theoilindustryin 2011 after purchasinga stakeof 80 % in thePecten Cameroon Company. Petrochemical Corporation paid$ 538 millionandthere wasnotakeover premiumrecorded(Reuters, 2014). With an 80 % stakeSinopecGroup could controltheoperationsof Pecten. In addition,Sinopec Group increasedits supplyof oilproductssince itimportedpartof Pecten’s produceinto theChinese market.Sinopec announcedthatitwould getabout 11,900 barrelsof Pecten’s produceper day(Reuters, 2014). Thiswasan addedbenefiton topof theincreasein therevenuegeneratingcapacity.Mostof Pecten’s assets arelocatedin theKribi Campo basin,Cameroon. Theremaininglifeof theoilreservesof theoilfieldsownedby Pecten wasnot disclosed.Therightsof theagreementcould be terminatedfollowingtheexhaustionof thefewoilfieldsownedby Pectenof in caseSinopec sellsits staketo a differentinvestor. Chinachoseto investin Cameroon becauseitcould getcheaperoilassets that would in turnhelpitincreasethesupplyof oilproductsto its domesticmarket.Theexponential growthin domesticdemandforoilproductsin theChinese marketwasthekeydriving forceforChina’s decisionto investin Cameroon.

Hostcountry:Kazakhstan

Chinainvestedin Kazakhstan’s oilsectorin 2013 whenChina National Petroleum Corporation purchased8.33 % ofstakein theKazMunai Gas Company of Kazakhstan. Thedealwasworth$ 5 billion, butthere wasnotakeover premiumrecorded(Gordeyeva, 2013). The8.33 % stakecould not allowCNPC to controltheoperationsof KazMunai Gas. However,KazMunai Gas could sellpartof its annualproductto CNPC in orderto expandtheChinese oilsupply.ThistransactionalsogaveCNPC an opportunityto increaseits revenuegeneratingcapacity.Assets ownedby KazMunai Gas arelocatedin theCaspian Sea,Kazakhstan. Theremaininglifeof theoilfieldswasnot disclosed.However,itwasreportedthattheoilreservewasabout35 billion barrels,which might takeseveraldecades before itgetsexhausted.Therightsof theagreementmaybe terminatedfollowingtheexhaustionof theoilreservesandselloff 8.33 % staketo a differentinvestor. Oilfieldsare themajortargetsof banditsandterrorist groups,especiallyin theArab world(Luft &amp Korin, 2013). Thisimpliesthatthetermsofagreementcould alsobe terminatedin casethethreatsof terrorattackincreasein Caspian Sea mines.Chinachoseto investin Kazakhstan becauseitcould getreliablesupplyof oilto meetits domesticdemandgiventhatKazakhstan is one of thecountrieswith thelargestoilreservesin theworld(Gordeyeva, 2013).An increase in oil demand intheChinese marketwasthemajordriving forcethisinvestment.

Conclusion

Chinahas one of therapidlygrowingdemandsforoil,which has forcedthecountryto investmassively in theforeignoilassets with theobjectiveof increaseits oilimports. Thisimpliesthatthemajordriving forcefortheChinese investmentin overseesoilassets is theneedto addresstheoildemandin thelocalmarket.However,developingcountriesandoilproducersin theArab worldhavebeenthemajortargetsfortheChinese companies.ThissubjectsChina’s invests to theriskof terminationof rightsofagreementas a resultof politicalinstabilityorthreatsof terroristattacksin theoilfields.Theriskof exhaustionis anotherfactorthat might contributetowards theterminationof rightsofagreement.AlthoughtheChinese companiesmanagedto increasetheir revenuegeneratingcapacityby investingin theforeignmarkets,theprimaryobjectivewasto expandtheir oilsupplyfordomesticmarket.

Summary

Hostcountry:Brazil

Transactioncostandtransactioncost

SinochemGroup boughta 40 % stakein Statoil at $ 3 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

SinochemGroup didnot acquirethecapacityto controloperationsof Statoil.

Productionrights

SinochemGroup acquiredoilas a productandincreasedits revenuegeneratingcapacity.

Location

Statoil’sassets are located in Peregrino, Brazil.

Remaininglife

Remaininglife was not disclosed.

Rightsof agreement

Rightsof agreementcan be terminatedby exhaustionof oilfields.

Reasonsforchoosingthehostcountry

Statoilneededa jointventurethat could helpitcreatevalue.

Interpretationof driversbehind investment

Thegrowingdemandofoilin theChinese market.

Hostcountry:Iraqi

Transactioncostandtransactioncost

PetroChinaboughta 25 % stakein ExxonMobil at $ 5 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

PetroChinadidnot acquirethecapacityto controloperationsof ExxonMobil.

Productionrights

PetroChinaacquiredoilas a product,in additionto an increasein its revenuegeneratingcapacity.

Location

ExxonMobil’sassets arelocatedin West Qurna 1, Iraq.

Remaininglife

WestQurna 1 oilfieldshada remaininglifeof about20 yearsat thetimeof purchase.

Rightsof agreement

Rightsof agreementcan beterminatedby exhaustionof oilfieldsandthreatsof terroristattacks.

Reasonsforchoosingthehostcountry

China’sgeographicalcloseness to Iraqi andIraqi’s largeoilreserves.

Interpretationof driversbehind investment

Thegrowingdemandofoilin theChinese market.

Hostcountry:Angola

Transactioncostandtransactioncost

Sinopecboughta stakeof 75 % in Sonangol at $ 2 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

With75 % stake,Sinopec acquiredthepowerto controloperationsof Sonangol.Productionrights

Sinopecacquiredoilas a product,in additionto an increasedits revenuegeneratingcapacity.

Location

Sonangol’sassets arelocatedin Luanda, Angola.

Remaininglife

Remainingof assets wasnot disclosed.

Rightsof agreement

Rightsof agreementcan beterminatedby exhaustionof oilfieldsora decisionby Sinopec to sellits 75 % stake.

Reasonsforchoosingthehostcountry

Angola,beinga developing countryofferedtheChinese companywith cheapoilassets.

Interpretationof driversbehind investment

Thegrowingdemandofoilin theChinese market.

Hostcountry:Cameroon

Transactioncostandtransactioncost

SinopecGroup boughta stakeof 80 % in Pecten Cameroon Company at $ 538 million.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

With80 % stake,Sinopec acquiredthepowerto controloperationsof Pecten Cameroon.

Productionrights

Sinopecacquiredoilas a product,in additionto an increasein its revenuegeneratingcapacity.

Location

Sonangol’sassets arelocatedin Kribi Campo basin,Cameroon.

Remaininglife

Remainingof assets wasnot disclosed.

Rightsof agreement

Rightsof agreementcan beterminatedby exhaustionof oilfieldsora decisionby Sinopec to sellits 80 % stake.

Reasonsforchoosingthehostcountry

Chinainvestedin Cameroon becauseitcould getcheapassets to addressthelocaldemandforoil.

Interpretationof driversbehind investment

Thegrowingdemandofoilin theChinese market.

Hostcountry:Kazakhstan

Transactioncostandtransactioncost

CNPCboughta stakeof 8.33 % in KazMunai Gas Company at $ 5 billion.

Take-overpremium

Notake-over premiumwasrecorded.

Operatorship

The8.33 % stakecould not allowCNPC to controltheoperationsof KazMunai Gas Company.

Productionrights

CNPCacquiredoilas a product,in additionto an increasein its revenuegeneratingcapacity.

Location

KazMunaiGas’s assets arelocatedin Caspian Sea,Kazakhstan.

Remaininglife

Remainingof assets wasnot disclosed.

Rightsof agreement

Rightsof agreementcan be terminatedby exhaustionof oilfields,a decisionby CNPC to sellits 8.33 % stake,oran increasein threatsof terroristattacks.

Reasonsforchoosingthehostcountry

Kazakhstanhas largeoilreserve,which gavechinaa reliablesupply.

Interpretationof driversbehind investment

Thegrowingdemandofoilin theChinese market.

References

Anadarki,P. (2014). Brazil: Anadarko receives $ 419 million additional paymentassociated with 2008 sale of Peregrino oil field. MarketIntelligence.Retrieved February 13, 2015, fromhttp://www.energy-pedia.com/news/gulf-of-mexico/new-148530

AutonomousNon-profit Organization (2015). Iraq exodus? Oil major withdrawalstaff as terror threat rises. AutonomousNon-profit Organization.Retrieved February 13, 2015, fromhttp://rt.com/business/167004-foreign-oil-evacuate-iraq/

Chazan,G. (2013, November 28). PetroChina buys Iraq oilfield stake fromExxon. TheFinancial Times Ltd.Retrieved February 13, 2015, fromhttp://www.ft.com/intl/cms/s/0/19c128a2-5818-11e3-a2ed-00144feabdc0.html#axzz3Rb7T18Tz

Gordeyeva,M. (2013, July 7). China buys into giant Kazakh oilfield for $ 5billion. Reuters.Retrieved February 13, 2015, fromhttp://www.reuters.com/article/2013/09/07/us-oil-kashagan-china-idUSBRE98606620130907

Irfan,H. (2014). The treasure at the heart of Iraq. Hwaairfan.Retrieved February 13, 2015, fromhttps://hwaairfan.wordpress.com/2013/04/11/the-treasure-at-the-heart-of-iraq/

Kammel,B. &amp Krasnolutska, D. (2014). Sinochem to buy 40 % of Statoilpetrogrino field off Brazil coast. Blumberg.Retrieved February 13, 2015, fromhttp://www.bloomberg.com/news/articles/2010-05-21/statoil-agrees-to-sell-40-of-peregrino-site-to-sinochem-for-3-07-billion

Luft,G. &amp Korin, A. (2013). Terror’s next target. IAGS.Retrieved February 13, 2015, from http://www.iags.org/n0111041.htm

Macauhub,P. (2014). Sinopec-Sonangol partnership as model for further Chineseinvestment. Gas&amp Oil Connections.Retrieved February 13, 2015, fromhttp://www.gasandoil.com/news/africa/1ca118931cf891830a4adddb7e03ebc6

McGrawHill Financial (2014, December 24). Platts report: China oil demandrises 3.5 % in November from year ago. McGrawHill Financial.Retrieved February 13, 2015, fromhttp://www.platts.com/pressreleases/2014/122414/no

Reuters(2014). Sinopec Group completes Pecten Cameroon stake purchase.Reuters.Retrieved February 13, 2015, fromhttp://uk.reuters.com/article/2011/11/07/china-oil-cameroon-idUKL4E7M719B20111107

Related Posts

© All Right Reserved