On Monday, Chinese state oil company CNOOC agreed to acquire Calgary-based Nexen in a deal worth $15.1 billion, China’s largest corporate purchase to date. The purchase has shaken up the industry, and its implications extend to the GCC.
CNOOC is paying $27.50 a share in cash for Nexen, over four times latest EBITDA, and a premium of 61% over the prevailing share price when the deal was announced.
Nexen holds 2.3 billion barrels in oil reserves and produced 207,000 barrels of oil a day after royalties in the second quarter, adding 22% to CNOOC’s groupwide output.
The company operates in the Gulf of Mexico, Colombia, the North Sea, Yemen and offshore West Africa. Its assets include conventional oil and gas, oil sands and shale gas.
“The acquisition reflects our strong belief in Nexen’s rich and diverse portfolio of assets and world-class management and employees,” said CNOOC Chairman Wang Yilin. “This is an exciting opportunity for us to build on our existing joint venture relationship with Nexen in Canada, and to acquire a leading international platform in the process.”
As part of the proposed acquisition, CNOOC will make Calgary the head office of its North and Central American operations. CNOOC is also considering listing on the Toronto Stock Exchange. The purchase will crown several Canadian energy and resource purchases by China. Canada’s Competition Bureau confirmed it will review the proposed transaction, but it is expected that CNOOC’s commitment to Canada will ensure the deal is waved through.
The Nexen announcement was followed within a few hours by news that Sinopec will acquire a 49% stake in the UK North Sea assets of Talisman, another Canadian oil company. Talisman pumps 89,000 barrels of oil a day from the UK North Sea, and has sought to pull equity out of the declining concession in favour of other target markets. Talisman will continue to operate the assets.
The deal is unlikely to ruffle feathers in the UK, which after a production decline of 19% last year in not in a strong position to decline new investment.
According to data from Bloomberg, Chinese oil companies made $35.6 billion of acquisitions last year, second only to US supermajors. The Nexen and Talisman deals show this trend is unlikely to slacken. Analysts have begun casting around at other mid-tier companies which now look undervalued.
The GCC has been adept at tilting towards Asian markets, and China in particular. Saudi Arabia, Kuwait, the UAE and Iraq now rely heavily on Asian demand, and China relies on GCC supply.
Yet China is also keen to hedge its bets, perhaps more so after the perception of elevated geopolitical risk to Arabian Gulf supplies resulting from Iran’s attempts to use the Strait of Hormuz as part of negotiations with the West over its nuclear program.
BRENT
The Nexen purchase in particular allows them to do just that. The move also puts China at the heart of the section of the oil industry which sets the Dated Brent crude benchmark. According to numbers crunched by the Wall Street Journal, the Nexen and Talisman purchases combined give China an 11% equity stake in UK North Sea production.
Nexen’s Buzzard field, the UK’s largest at around 200,000 bpd, is a core component of the ‘Forties’ blend, the most influential constituent crude grades which comprise Dated Brent.
Reuters columnist Robert Campbell says purchasing Nexen will give the Chinese company “for the first time unprecedented insight and access into this secretive, yet enormously influential market.”
Campbell says the distortions and vulnerabilities in the Brent market are to the upside, something that China as a major oil purchaser has little interest in provoking. Nevertheless, China will now be active on the supply and demand side of Brent-setting, which could help it obtain optimum prices for its oil purchases worldwide.
SHALE
Valuably, Nexen also gives CNOOC proven expertise in shale gas fracturing, a process which is set to take off in China, after a recent national target to produce 6.5 billion cubic meters a year of shale gas by 2015 was set.
China is hoping to up to produce 100 billion cubic meters a year of gas from shale by 2020. Whatever CNOOC picks up from frackers in the US, it can apply at home. The country is estimated to hold 35 trillion cubic feet of recoverable shale gas resources.
OIL SANDS, GOM
The US is unlikely to be enthused by China taking a stake in the Gulf of Mexico, having vetoed CNOOC’s proposed $20 billion bid for exploration and production company Unocal in 2005. Nexen will improve CNOOC’s deepwater drilling expertise, just as the country has seen its first well spud in the South China Sea. Sinopec and Chesapeake are rumoured to be negotiating a deal which will allow the US shale specialist to divest assets to ease recent financial problems.
The purchase also increases pressure for the US to approve the controversial Keystone XL pipeline, an issue which US President Barack Obama has been keen to delay. If oil from Canadian oil sands, a market in which Nexen is a key player, cannot flow south, it will flow east.
MOVING EAST
The takeaway trend is that oil exporters can no longer sell to Asian markets at arm’s length. Asia is seeking deepening integration of its energy supply mix, from source to stove. As the only major market showing strong growth in demand for oil, suppliers will have to accommodate this desire to ensure stable supply to the best customer on the market.
China is particularly potent, with its huge foreign exchange reserves from manufacturing ready to be redeployed in energy investment. The country recently faced down the US over Iran sanctions, winning an exemption despite continuing to take large consignments of Iranian crude. Everyone now bows to Beijing.
More generally, China saw oil imports rise 11% to 5.6 million bpd in 2011, increasing its importance to oil sellers which driving a push to tie in more supply.
In the GCC, there are few opportunities to take stakes in oil through corporate acquisitions, so China and GCC countries have been dealing directly. Abu Dhabi has proved particularly skillful in reading this trend, awarded a huge slice of prospective territory to Korea’s KNOC last year, and making a point of including Chinese and Korean companies in the running for major concessions from the ADCO license to the Bab Sour Gas project.
This open and pragmatic attitude will need to develop to ensure the GCC retains its core supplier role to China, and does not lose out to increasing unconventional oil sources.
