Tag Archives: CNOOC

US Blacklists More Chinese Companies As Trump Takes His Parting Shots

‘IT AIN’T OVER ’till the fat lady sings’, as they say in the United States. With a few days still to go until US President Donald Trump leaves office, there is still time for more measures to be taken against China.

Among his latest parting shots, the US Department of Defence on January 14 added nine more names to its list of companies with alleged links to the People’s Liberation Army. The additions include phone maker Xiaomi and the state-owned aerospace manufacturer, Commercial Aircraft Company of China (COMAC).

One consequence for the blacklisted companies is that US investors will be banned from buying their securities and will have to divest holdings by November. The companies also face delisting by US stock exchanges. Beijing is encouraging its companies to do that voluntarily and use Hong Kong for their primary listing.

Separately, the US Commerce Department added the state-owned oil giant China National Offshore Oil Corp. (CNOOC) to the Entity List, which means that US companies will need special licences to do business with it. Xiaomi may follow suit.

This Bystander suspects there will be more strikes at Chinese companies before Trump is out the door.

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A Map Of The Political Relationships Of China’s State Oil Companies

We noted the growing global reach of China’s big three national oil companies earlier this week. It is tempting to see them as a monolithic arm of state policy, and their overseas acquisitions of oil and gas assets as a centrally directed execution of strategic national policy. Yet both those views miss the complexity of their domestic political relationships. We thought this diagram from the International Energy Agency captured them well.

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China’s Oil Production Outside China To Rival Kuwait and Mexico’s

While it is no secret that China’s state-owned oil giants, CNPC, Sinopec and CNOOC, have been on a buying spree of overseas assets over the past three or four years, not much consideration has been given outside the industry to what that means in production terms. Now the International Energy Agency (IES) has done just that. And it is eye opening.

The IEA estimates that by 2015 China will be producing 3 million barrels of oil a day outside its borders, twice what it produces today. Quite what that means is well illustrated by some comparisons. Three million barrels per day is roughly what the United Arab Emirates, Mexico and Kuwait each now produce. They are currently the world’s eighth, ninth and tenth largest producers. It would be comfortably more than Brazil, Nigeria and Venezuela’s output. They are the eleventh, twelfth and thirteenth largest producers. It would also be three quarters of the way to what China already produces; China is the world’s fifth biggest oil producing nation.

This ranking hasn’t come cheap. The M&A consultancy Dealogic (via the Financial Times) says that China’s state oil companies have spent $92 billion since the start of 2009 on oil and gas assets in countries from Angola to the U.S.  There is little to suggest that number won’t pass the $100 billion mark sometime later this year as they continue to buy oil and gas in the ground, be it under water or shale, and the expertise to get it out.

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Nexen a world away from Unocal for CNOOC

CNOOC’s $18 billion bid for Canadian oil and gas producer Nexen is the third China-related deal in recent months to have cleared the Committee on Foreign Investment in the U.S. (CFIUS), the regulatory agency that reviews mergers and acquisitions that could have implications for U.S. national security. BGI-Shenzhen’s bid for Complete Genomics and Wanxiang Group’s for battery maker A123 Systems also got a green light from CFIUS.

Its approval to buy Nexen was the final regulatory hurdle CNOOC needed to clear to close what will be the largest Chinese foreign investment to date. It must seem a far cry from its 2005 effort to buy California’s Unocal. That deal, with fewer security implications for the U.S. than the Nexen deal (the Canadian company has oil rigs in the Gulf of Mexico near U.S. military installations), was shot down by fevered political opposition in Washington, stoked by rival bidder Chevron, without ever even getting as far as a CFIUS review. Lessons learned.

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CNOOC’s Bid For Nexen And The Canada Dilemma

The question before the house is this, is Canada’s relationship with China qualitatively different to its relationship with Malaysia. On the answer to that may well hang the answer to the question, is the Canadian government’s blocking of the $5.2 billion bid by Malaysia’s state oil company Petronas for Canadian gas producer Progress Energy, prologue for the same thing happening to CNOOC’s $15.2 billion bid for Canadian oil producer Nexen.

The Canadian government is walking a tightrope. It is suggesting both that Canada remains open, even welcoming, to foreign investment, and that each particular investment has to be what the country’s finance minister Jim Flaherty describes as ‘correct’. That will be particular true for Canada’s natural resources, which is pretty much the only Canadian assets foreign investors are interested in right now. That such deals are invariably big-ticket numbers only shoves them more firmly into the center of the spotlight of public scrutiny.

The Canadian government has minimized the degree to which the CNOOC bid is politicized by declining to hold a public inquiry. Instead it has given itself until mid-November to assess the bid. It has also promised to outline guidelines for state-owned companies bidding for Canadian firms.

This is all keeping investors guessing about prognosis for CNOOC’s bid. Before the Petronas decision, it was thought that CNOOC would get the nod. Now there are second thoughts. Ottawa has previous when it comes to keeping foreign companies at arms length from Canada’s natural resources. In 2010, it unexpectedly rejected a $39 billion bid by Australia’s BHP Billiton for Potash Corp, the world’s largest fertilizer maker.

On top of that, these are uneasy days for Chinese companies in North America. The U.S. House of Representatives’ Intelligence Committee issued a report earlier this month saying that telecoms groups Huawei and ZTE were a security risk and that American companies shouldn’t do business with them. Canada has expressed similar concerns.

Opponents of the CNOOC bid for Nexen are playing on such security fears.  They have latched onto a description by CNOOC’s chairman Wang Yilin of the company’s deep-water drilling rigs in the South China Sea as “mobile national territory and a strategic weapon”.  The disputed waters of the South China Sea are a long way from the shale sands of Canada, both geographically and politically, but such words travel badly.

The unease cuts both ways. Last Thursday, Superior Aviation Beijing’s planned $1.8 billion purchase of U.S. aircraft maker Hawker Beechcraft fell apart unexpectedly. Hawker’s chief executive rued China-bashing by U.S. presidential candidates for contributing  to the collapse of the talks.

Like Washington, Ottawa faces a dilemma in framing its relations with China, which are of an order different to that of its relations with Malaysia (so our answer to our own first question is, yes). China is an important source of foreign capital as well as a growing customer for Canada’s exports. Ottawa doesn’t have much choice but to engage with its customer. It can do so with a lower intensity of geo-political competition than Washington does. But is still has to engage on the best terms it can get. We expect the CNOOC bid to go ahead, but with conditions imposed.

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Nexen Likely An Easier Deal Than Other Chinese FDI

Governments around the world are taking a more critical eye to Chinese direct investment, but CNOOC’s proposed $15.1 billion merger with Canada’s Nexen is likely to get the nod from regulators, regardless of it being the largest Chinese foreign direct investment to date. First, it is an agreed all-cash deal. Second, China’s largest offshore oil and gas exploration company has made a better job than other Chinese firms of wooing Canadian regulators. It says it will base its North American operation in Calgary, including oil sands research, and create jobs there. It has learned the lessons of its failed 2005 bid for California’s Unocal which ran into a wall of xenophobia. Third, CNOOC has a existing joint venture with Nexen in the Gulf of Mexico, so U.S. regulators are less likely to raise concerns about a full takeover.

Nexen, though it has substantial operations in Alberta’s oil sands at Long Lake, and operations in the North Sea, the Gulf of Mexico and in West Africa, needs capital to exploit its assets. Its share price has been weighed down by that, the slump in natural gas prices and a number of production setbacks in Canada and the North Sea, providing an opportune time for the state-owned Chinese energy group to bid. Given the current glut of gas and heavy crude, North American oil and gas assets are relatively cheap, making it likely that other cash-rich investors will follow in CNOOC’s wake. Nor will they necessarily have to pay the rich premium of 61% to Nexen’s market value immediately before the deal was announced that CNOOC is paying.

They will, however, increasingly have to explain how they will be good local corporate citizens, complying with labour laws and creating jobs. Some Chinese state-owned firms, used at home to having Beijing at their back to overcome any such local difficulties and unused to having to deal with lower-level stakeholders such as community groups and labour unions, may find this a painful learning curve. That is proving the case with natural resources acquisitions in Australia. Some may find it just too arduous to make pursing further foreign direct investment worthwhile at any price.

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CNOOC Looking For Partners To Drill For Oil In The South China Sea

China’s recently abandoned tactic of asserting its territorial claims to the South China Sea through fishing rather than minerals extraction is well and truly dead. State-owned China National Offshore Oil Corp. (CNOOC) started drilling in the disputed waters in May. Now it is inviting bids from foreign oil companies for the joint exploration and development of nine blocks off the coast of Vietnam that would appear to lie south of the Paracel Islands and cover 160,000 square kilometers where Beijing’s claim to the South China Sea and the 200 mile zone claimed by Hanoi under the UN Law of the Sea overlap. Clash might be a more appropriate word. The diplomatic protests from Vietnam have already started. State-owned PetroVietnam also says CNOOC’s tender blocks overlap its own. This map from CNOOC shows the locations.

Footnote: CNOOC has invited such tenders in the South China Sea before but only in waters incontrovertibly Chinese.

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That Sinking Feeling

Crew members of deep-water drilling rig CNOOC 981 gather to watch a drill bit go down to explore in the South China Sea, south China, May 9, 2012. (Xinhua/Jin Liangkuai)

It is not so much that China’s largest offshore oil company, CNOOC, has started drilling for oil and gas with the country’s first home-developed deep-sea rig, it is more where it is doing so–in the South China Sea. This is Beijing dropping a big marker, so to speak, for its claim to sovereignty over waters to which many nations lay claim.

The rig, CNOOC 981 (above), is able to drill to 3,000 meters; previously, China could only drill up to 500 meters. It is operating some 300 kilometers southeast of Hong Kong between the Paracel Islands, claimed by China and Vietnam, and the Macclesfield Bank, claimed by China and Taiwan. Not too far away lies the Scarborough Shoal, scene of a month-long stand-off between China and the Philippines.

While Chinese fishing fleets have been plying the disputed waters, and sparking diplomatic spats, for years, Beijing has been slow to start exploration for the energy and mineral riches that lie beneath the South China Sea, in part to stop the fisheries tiffs, and the bombastic claims of sovereignty that invariably accompany them, from getting out of hand. That drilling has now started for the 23 billion-30 billion tonnes of oil and 16 trillion cubic meters of natural gas believed to lie beneath the South China Sea–equivalent to one half of China’s existing onshore oil and gas reserves–suggests that the hawks are playing a stronger hand as well as talking one.

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Shifting Sands Of China’s Relationship With U.S.

Reuters’ report that China’s three big state-owned energy companies, CNPC, Sinopec and CNOOC, have had their arms twisted by the U.S. to suspend new investments in Iran causes this Bystander to raise an eyebrow. CNPC has reportedly delayed work on a 4.7 billion dollar deal; Sinopec has postponed a 2.0 billion dollar oil development, and CNOOC has halted a gas venture according to the news agency after U.S. officials threatened sanctions against the SOEs’ U.S. investments. This they apparently did by bypassing official diplomatic channels and going directly to the companies.

Now, Washington has not had much success in getting Beijing to go along with its efforts to thwart Iran’s nuclear programme. Beijing opposes proposed UN sanctions, which would jeopardize the oil supplies it buys from Tehran, it’s third biggest supplier. Plus there is the general reluctance on Beijing’s part of being seen to be doing anything at Washington’s behest, and a general tendency to stick with old friends, especially those hostile to the U.S., (a policy that is causing some second thoughts, or at least some readjustment, in the light of events in places like Pakistan, Libya and Syria, all of which also have implications for the leadership’s legitimacy at home).

Even if there may be some shifting of the geo-political sands occurring, there is no way that any or all of CNPC, Sinopec and CNOOC would take it upon themselves to undermine official policy without at least tacit approval from Beijing. Which then makes the question, why would Beijing do this now. Is it just letting some of those swirling geo-political sands settle until prospects become clearer, or is using supposedly business decisions as a smokescreen, if we may mix and match our metaphors, for some back-channel cooperation with Washington that it sees to be in its short- or long-term advantage but which it can’t bring into the open? Or is it, as Reuters implies, just part of Beijing’s desire, seen since late last year, to ease tensions with the U.S.as it heads into it’s own leadership transition?

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Where China Put Its Big Bucks In 2010: Down South America Way

South America dominates the list of the biggest overseas acquisitions by Chinese companies this year. The two biggest to date: Sinopec’s $7 billion purchase of 40% of the Brazil assets of the Spanish energy group, Repsol; and the $5.6 billion CNOOC is spending in two phases for 50% of Bridas Corp., the investment vehicle of the Argentine vertically integrated energy group, Bridas. Bridas Corp.’s primary asset is Pan-American Energy (PAE). The partners are buying out BP’s 60% stake in PAE as BP raises cash to put in a piggy bank for any obligations arising out of the Deepwater Horizon accident, turning what looked in March like an iffy investment by CNOOC into something much more promising by the end of November.

Sinopec has since also picked up the U.S. oil company Occidental’s production and development assets in Argentina for $2.5 billion, the fourth biggest overseas investment by a Chinese company this year. The third biggest was Sinochem’s $3.1 billion purchase of a 40% stake in Statoil’s Peregrino subsalt field off the Brazilian coast. Add in a couple of smaller deals in Venezuela and Chinese firms have secured this year stakes in six projects that will eventually be producing upwards of 570,000 barrels of oil a day.

China’s state oil companies have long had a toe-hold in the region, but this year represents a big step forward, including diversifying China’s energy dependence on Venezuela. These deals have not only secured future oil supplies, they are also piecing together a vertical supply chain that includes refining, trading and storage — and further downstream power generation and distribution. State Grid, the world’s largest power utility and another state-owned behemoth, spent nearly $1 billion to acquire seven power distributors in Brazil as part of a deal it has won to be operate the power distribution system in densely populated southeastern Brazil.

Taken together those seven acquisitions would make a list of the ten largest overseas acquisitions by Chinese companies in 2010. As well as securing energy supplies for China’s own fast growing economy, Chinese companies will be well positioned to profit from the domestic growth of the emerging economies of South America.

In comparison the other big overseas acquisitions of the year seem small beer. PetroChina spent $1.6 billion to acquire Arrow, an Australian coal seam and power distribution company, in a joint bid with Royal Dutch Shell valued at $3.2 billion overall. Chinalco spent $1.3 billion to buy 45% of Rio Tinto’s Simandou iron ore business in Guinea through its Chalco subsidiary. China Huaneng Group, the country’s largest electricity producer, paid $1.2 billion for GMR Infrastructure’s 50% stake in InterGen, a U.S.-based utility that runs power plants in Britain, the Netherlands, Mexico, Australia and the Philippines.

The biggest industrial foreign acquisition was Geely’s $1.8 billion acquisition of Volvo from Ford Motor, the largest piece of business done by a company not state owned. The next largest industrial acquisition was the purchase of Nexteer, a parts-maker bought from GM by Pacific Century Motors, a joint venture between Tempo Group and the investment arm of the Beijing municipal government, a deal valued at less than $500 million.

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