China’s CNPC Seen Tapping Exxon-Rosneft Assets: Real M&A

China National Petroleum Corp. already spent more money this year on energy assets than any other global producer. Oil and gas fields controlled by Exxon Mobil Corp. (XOM) and Russia’s OAO Rosneft may be next on the list.

China’s largest oil producer, known as CNPC, has made more than $9 billion of purchases this year -- and has considered another $4 billion, according to people familiar with the matter -- as part of a plan to double overseas output by 2015. Spending will likely accelerate under Zhou Jiping, who was named chairman in April and has more than a decade of experience in international operations, CLSA Asia-Pacific Markets said.

CNPC is ramping up deals to make up for lost ground after Sinopec Group and Cnooc Ltd. (883), two other Chinese state-owned energy companies, outspent the producer by about $50 billion on overseas transactions in the five years through 2012, according to data compiled by Bloomberg. CNPC’s success with mature fields makes an Exxon asset in Iraq a target, Sanford C. Bernstein & Co. said, while a supply agreement with Rosneft may lead to deals with the state-controlled Russian producer, according to UOB-Kay Hian Ltd.

“CNPC’s skill set makes it a good fit for many developed onshore oilfields in central Asia, the Middle East and South America,” Neil Beveridge, a Hong Kong-based oil and gas analyst at Bernstein, said by phone. “CNPC’s state-owned background is more of a bonus rather than a burden when it seeks acquisitions in those regions.”

Photographer: Lucas Schifres/Bloomberg

A China National Petroleum Corp. "nodding donkey" oil pump pumps oil near a Petrochina gas station board displaying gas prices in Daqing, Heilongjiang province, China. Close

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Photographer: Lucas Schifres/Bloomberg

A China National Petroleum Corp. "nodding donkey" oil pump pumps oil near a Petrochina gas station board displaying gas prices in Daqing, Heilongjiang province, China.

Oilfield Experience

At its Daqing field, discovered in the Heilongjiang province of northeastern China in 1959, CNPC has gained “world class” experience at extending the life of oilfields, Beveridge said. The company also drills for oil in Syria, Sudan, Iraq and several central Asian countries.

CNPC plans to increase overseas production to 200 million tons by 2015, about twice what it produced abroad last year. Output from fields outside China may account for 60 percent of production by the end of the decade, former Chairman Jiang Jiemin said in January. The proportion was 37 percent in 2012.

Jiang this year became head of China’s State-owned Assets Supervision and Administration Commission. His replacement, 61-year-old Zhou, previously led CNPC’s overseas division.

“Zhou’s expertise in international business will help CNPC’s international expansion,” Simon Powell, an analyst at CLSA in Hong Kong, said in a phone interview.

Liu Weijiang, CNPC’s Beijing-based spokesman, said the company doesn’t comment on speculation.

Supply Needs

To supply the world’s largest consumer of energy, Chinese companies announced at least $108 billion of overseas purchases in the five years through 2012, about one fifth of the total spent by energy companies worldwide on cross-border acquisitions, data compiled by Bloomberg show.

While CNPC spent more than $16 billion, Sinopec Group -- officially known as China Petrochemical Corp. -- and Cnooc, China’s second- and third-biggest oil and gas producers, spent $41 billion and $26 billion respectively, the data show. The Cnooc total includes purchases by parent China National Offshore Oil Corp.

This year, CNPC has struck at least $9 billion of deals, including a $4.2 billion purchase of a stake in Mozambique’s Rovuma fields, the data show. The 2013 total also includes a stake in Kazakhstan’s biggest oil field worth about $5 billion.

The Chinese producer is considering buying Petroleo Brasileiro SA assets in Colombia and Peru with a value of about $2 billion, people with knowledge of the matter said last month. CNPC also held talks to buy Brazilian oil startup Barra Energia Petroleo e Gas for about $2 billion, people said in May.

Crude Prices

Crude oil prices may help, said Wu Fei, a Hong Kong-based analyst at Bocom International. Brent dropped to an average of about $107 a barrel this year, from $111.7 in 2012.

“CNPC may want to get some deals done quickly while Brent stays relatively stable,” Wu said by phone. “China needs to import the fuel no matter what crude prices may change to.”

CNPC’s experience in Iraq makes the company a candidate to buy Exxon’s 60 percent stake in the West Qurna-1 field in southeastern Iraq, said Laban Yu, a Hong Kong-based analyst at Jefferies Group LLC. CNPC produces about 1.65 million barrels of oil a day from Iraqi projects, the company said last October.

The Exxon asset is near the Rumaila field run by CNPC and BP Plc (BP/), and may produce as much as 600,000 barrels of oil per day by the end of 2013, Exxon has estimated. Iraq’s government has asked Exxon to abandon projects in the semi-autonomous Kurdish region in the north, or exit projects in the south.

Other Bidders?

“CNPC could take over the operation by moving its personnel and equipment from the nearby Rumaila site and start commercial production right away,” Bernstein’s Beveridge said. Exxon’s stake would cost at least $3 billion, he said.

David Eglinton, an Exxon spokesman, declined in an e-mail to comment when asked whether the Irving, Texas-based company has held talks with CNPC over its West Qurna-1 stake or is trying to sell it.

There may be other bidders. PT Pertamina, Indonesia’s state-owned oil company, was in talks with Exxon to buy as much as 20 percent of the West Qurna-1 field, the Indonesian government said in March.

Natural gas projects owned by Moscow-based Rosneft, close to a pipeline connecting Siberia and the Pacific, may yield targets after CNPC and Rosneft signed a $270 billion oil-supply agreement in June, according to Shi Yan, an analyst at UOB-Kay Hian in Shanghai. The 25-year deal will supply about 360 million metric tons of crude to China, Russian President Vladimir Putin said on June 21.

Rare Opportunity

Officials at Rosneft didn’t immediately respond to requests for comment about a potential deal with CNPC.

Any deal with Rosneft would be “in the range of billions of dollars” given the size of the projects, Shi said.

“A majority ownership in the resources would allow CNPC to control some of the best upstream natural gas assets,” Shi said. “The opportunity to buy a quality asset at a reasonable price is rare, after most in easy-to-reach areas have long been controlled by established oil companies in the West.”

To contact the reporters on this story: Aibing Guo in Hong Kong at aguo10@bloomberg.net; Zijing Wu in Hong Kong at zwu17@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Jason Rogers at jrogers73@bloomberg.net; Philip Lagerkranser at lagerkranser@bloomberg.net

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