Cnooc’s Fu Turns to Oil Ventures Abroad After Unocal (Update1)

March 16 (Bloomberg) -- Cnooc Ltd.’s failure to buy Unocal Corp. for $18.5 billion in 2005 taught Chairman Fu Chengyu a lesson: use overseas ventures rather than takeovers to gain the global oil resources China needs.

The Chinese company’s March 14 agreement to buy 50 percent of Argentina’s Bridas Corp. for $3.1 billion, its biggest purchase, caps $6.6 billion of acquisitions on three continents in the past four years. Cnooc hasn’t sought a majority stake in any overseas deal since opposition by U.S. lawmakers derailed its bid for Unocal.

“Cnooc realized that joint ventures or taking stakes is the best way to secure resources,” said Wang Aochao, head of China energy research at UOB-Kay Hian Ltd. in Hong Kong. “Fu is the driving force behind the company’s policies and it’s fairly clear he would have been behind this change.”

More deals may follow Bridas. Fu said Cnooc is looking at other opportunities globally and making good progress. Chinese companies spent a record $32 billion last year to buy oil fields, coal and metal mines in Africa, Asia and Australia, raising concerns they are beginning to dominate the world’s resources.

“There is a wariness about Chinese investments overseas, particularly in western countries,” said Eoghan Leahy, an analyst at London-based investment adviser Fat Prophets U.K. Ltd. “China is relatively new to the global marketplace.”

Cnooc’s expansion will “benefit local governments, local economies, local companies and also our partners,” Fu, 58, said in an interview in Beijing, hours before the Bridas deal was announced Sunday. He declined to comment on specific projects.

Aggressive Targets

The company will need more acquisitions to achieve its goal of boosting oil and gas production 28 percent this year to as much as 290 million barrels of oil equivalent, analysts said.

“Cnooc’s targets are very aggressive,” Wang of UOB- KayHian said. “The company is aware of the limitations of domestic reserves and knows it will have to secure a global production base. The percentage of output produced outside China is increasing and that will continue as demand increases.”

Overseas production will account for a sixth of Cnooc’s output this year, with the bulk coming from domestic fields, President Yang Hua said yesterday.

“Cooperation with Bridas would be an important step in our plan to go global,” Yang told reporters on a conference call. “The deal will add long-term value for shareholders.”

Cnooc has gained 78 percent in Hong Kong trading in a year, outpacing the 63 percent rise in the main Hang Seng Index. The stock rose 0.2 percent to HK$12.84 at 11:10 a.m. local time.

Latin America

The stake in Argentina’s second-biggest oil producer marks Cnooc’s entry in Latin America and tops the $2.7 billion it paid in 2006 for a share in a Nigerian oilfield. In the last four years the company also bought stakes in Angola and Indonesia. Beijing-based Cnooc and parent China National Offshore Oil Corp. are bidding for assets in Ghana, Nigeria and Uganda.

The offer values Bridas’s proven reserves around $10 a barrel, about half of what BP Plc paid Devon Energy Corp. last week for assets in Brazil, the Gulf of Mexico and Azerbaijan, according to Sanford C. Bernstein & Co. analyst Neil Beveridge.

Cnooc estimates the Bridas investment will add 318 million barrels of reserves, an increase of about 12 percent, and also boost its average daily production by 46,000 barrels. Devon’s assets may add 40,000 barrels a day for BP starting next year, based on current production, with “huge potential” for exploration, BP spokesman David Nicholas said March 11.

‘Relatively Good Deal’

“Cnooc’s got a relatively good deal here, but you have to look at the profit margin they’ll make on each barrel of oil,” Beveridge said. “The assets Cnooc is buying are relatively mature, which will lower the price. But I estimate the fields could be in production for about 18 years, which isn’t bad.”

Bridas, controlled by Argentine businessman Carlos Bulgheroni, owns a 40 percent stake in Pan American Energy LLC, the country’s largest crude oil exporter, and BP Plc, Europe’s largest oil company, owns the rest. Bridas also has oil and gas assets in Chile and Bolivia, according to Cnooc.

About 94 percent of Pan American’s total crude production comes from Argentina’s San Jorge basin, straddling the remote Patagonian provinces of Chubut and Santa Cruz. The basin is home to Cerro Dragon, Argentina’s most productive field. Pan American produces about 17 percent of the nation’s crude and about 15 percent of its gas, according to the company’s Web site.

China relied on imports for more than half its crude oil needs last year, with monthly shipments reaching a record 20.9 million metric tons in December. Oil demand in the world’s second-largest energy consumer may rise 6.2 percent in 2010, the International Energy Agency said March 12.

Cnooc had total proven reserves of about 2.52 billion barrels of oil equivalent at the end of 2008, and average daily production was 530,728 barrels of oil equivalent, according to the company’s Web site. The U.S. is the biggest energy consumer.

To contact the reporters on this story: John Duce in Hong Kong at jduce1@bloomberg.net.