China's Big Oil Primed for Global Deal Race on Crude Slump

  • China's energy companies poised to return to M&A after hiatus
  • PetroChina, Sinopec say they're seeking overseas assets

It was only a matter of time.

China’s oil majors are primed to join the latest round of global energy deals triggered by the collapse in energy prices. PetroChina Co., the nation’s biggest explorer and producer, said this week it’s eyeing targets and in discussions about assets swaps in North America. Its rival, China Petroleum & Chemical Corp., Asia’s largest refiner, signaled it’s looking at overseas acquisitions.

The country’s so-called Big Three oil and gas companies, which also includes China National Offshore Oil Corp., spent nearly $119 billion from 2009 through 2013, accounting for 13 percent of global transactions in the industry, data compiled by Bloomberg show. That slowed to a trickle last year, and they haven’t spent a dime in 2015, watching from the sidelines as oil slides and the deals add up.

“There’s the international race to pick up cheap assets, so the Chinese don’t want to be left out,” said Gordon Kwan, a Hong Kong-based analyst at Nomura Holdings Inc. “They have a reasonably strong bunch despite the oil price collapse, as well as cheap access to government loans. They are certainly going to take advantage to buy more strategic oil assets, as well as whole companies.”

Oil’s slump to a six-year low has prompted a wave of acquisitions. Three of the last five quarters have exceeded $160 billion in deal volume, surpassing even the late 1990s, a period when many of the world’s largest energy corporations were formed, according to data compiled by Bloomberg. Brent crude, the benchmark for half the world’s oil, has tumbled by about 50 percent in the last year. Prices were up 0.4 percent at $47.75 a barrel at 7:58 a.m. in London.

“Low crude prices are a good opportunity for acquisitions,” Wang Dongjin, PetroChina’s president, said Thursday. “Timing is really important now. We have been tracking some assets for a while and are waiting for the time to come.”

Sinopec, as China Petroleum is known, is seeking “high-quality” assets overseas, Chairman Wang Yupu said the same day in a separate briefing.

The changes among the top managers of China’s energy giants and President Xi Jinping’s anti-corruption drive have slowed deals.

PetroChina and its parent, China National Petroleum Corp., as well as Sinopec and Cnooc, have seen more than a dozen executives targeted by investigators, paralyzing decision making.

“China’s graft probes have spooked the state-owned giants, inadvertently discouraging them from conducting overseas acquisitions,” Kwan said.

Motivated by the prospect of decades of demand growth and limited resources at home, China’s energy giants also hunt for assets as a national duty.

Long-Term Need

China consumed about 10.7 million barrels of oil a day in 2014. That’s expected to climb to 13.1 million barrels a day by 2020 and 20 million barrels a day by 2040, according to the U.S. Energy Information Administration. Most of that will have to come from overseas as domestic crude production may only reach 5.7 million barrels a day by 2040.

“Longer term, we believe they are net buyers of assets just given the rising imports,” said Neil Beveridge, an analyst at Sanford C. Bernstein & Co. in Hong Kong.

Sinopec, the country’s second-biggest explorer, has only about nine years of reserves left if it keeps producing at the current rate, according to data compiled by Bloomberg. Cnooc Ltd., the nation’s largest offshore oil and gas producer, has about 10 years of reserves, despite buying Canadian producer Nexen in 2012. Global peers such as Exxon Mobil Corp. and BP Plc have more than 15 years.

“The only way out is to buy more assets from overseas markets,” said Lin Boqiang, director at the Energy Economics Research Center at Xiamen University in Southeast China’s Fujian province, and also an independent director on the board of PetroChina. “They can either send fuels back home or sell them and have considerable influence in setting global crude prices.”

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