China’s state owned oil companies, which were extremely active between 2002 and 2013, acquiring foreign oil fields, have gone really quiet over the past three years, with oil prices crashing and oil fields available at much lower prices than before. The reason for this is a mix of internal politics and weakening financials, the latter driven by the acquisition binge of the past decade.
Their paralysis means that one major potential global buyer of oil fields is out of the race, which should mean lower asset prices for other buyers, such as India, and Indian companies ought to make the most of this window of opportunity, of a market with few buyers at a time when assets are cheap.
This impasse that Chinese firms are going through also shows the downside of a system where the dominant political party is closely intertwined with all sectors of the economy: most senior officials of state owned companies are also members of the Chinese Communist Party.
From 2002-2010, China’s state owned oil companies–led by Sinopec, CNOOC and PetroChina–spent $83.2 billion, acquiring oil and gas fields across the world. The next three years (2011-2013), Chinese firms were in overdrive, spending an additional $72.5 billion on oil fields[1]. The year 2013 saw three of the biggest deals ever by Chinese firms (Refer Table 1).
| Table 1: Top Chinese oil acquisitions of 2013 | |||
| Acquiring Company | Acquisition Target | Stake Purchased | Value ($ bn) |
| CNOOC | Nexen (Canada) | 100% | 15.1 |
| CNPC | Kashagan (Kazakhstan) | 8.33% | 5 |
| CNPC | Area 4 (Mozambique) | 20% | 4.2 |
| Source: International Energy Agency | |||
Chinese companies accounted for 35% of all petroleum deals greater than $1 billion during the year[2].
Post 2013 however, acquisitions by Chinese companies fell off a cliff. During 2014, deal volume from China in the petroleum sector fell over 75%[3], while during 2015, Chinese firms accounted for less than 1% of all acquisitions upstream[4].
What changed?
The reason for this slowdown has been largely political. In December 2014, Zhou Yongkang, the former head of China’s security services and a member of the 17th Politburo Standing Committee, was expelled from the Communist party and arrested. In June 2015, he was sentenced to life in prison for corruption, and an estimated $14 billion worth of assets were seized from him and his family[5]. A number of Zhou’s supporters/protégés have also been stripped of their positions and sentenced to long prison terms. His downfall is linked to the Chinese President Xi Jinping’s drive to purge rivals from positions of influence.
Unfortunately for China’s oil giants, Zhou’s base of influence includes the petroleum industry. He is a geophysical engineer and worked in China’s petroleum sector for 32 years and went on to head the China National Petroleum Corporation, the state owned oil giant. Many of his supporters who have been investigated and sentenced are also senior officials in the petroleum sector. The deals that they concluded, including overseas acquisitions, are now being scrutinised for corruption[6]. Some of the biggest acquisitions, such as Nexen and Kashagan[7], have also run into trouble.
The Chinese oil industry therefore seems to be in the doldrums as far as external investments are concerned.
Meanwhile, the fall in oil prices has not helped. Chinese companies bought most of their assets when the oil price was high, and are now losing money on these fields. Profitability has dipped (Refer Table 2). The reduced cash flows and their existing capital expenditure commitments limit their ability to buy new assets.
| Table 2: Jan-June performance of China’s state oil companies | ||
| H1 2016 | H1 2015 | |
| CNOOC[8] | -1.16 | 2.2 |
| PetroChina[9] | 0.079 | 3.80 |
| Sinopec[10] | 2.88 | 3.66 |
| Figures in $ billion | ||
These Chinese firms have been the major rivals for India’s state owned ONGC in its quest to acquire oil fields outside India. In multiple cases, ONGC was outbid by Chinese firms with their bigger balance sheets and willingness to pay much higher prices. A prime example of this was the bid for the giant Kashagan oil field in 2013, which CNPC stole from frontrunner ONGC’s nose[11].
There is thus an opportunity here for India’s oil majors to acquire oil fields overseas, with fewer worries about being barrelled out by the competition. This has turned out a blessing, as Indian companies are not saddled with expensive assets generating poor returns. Now that prices are lower, the same money can fetch them much more. India needs to act before the tide turns, either on oil prices or on Chinese policy.
There are two ways Indian firms can act.
Firstly, they must buy assets in politically stable, friendly and oil rich countries: Russia, Iran, the US and Canada fit the bill. Indian public sector firms have already acquired oil fields in Russia, they must now move on to the other three. Gateway House has, in the past, identified the US and Canada as two stable, oil rich countries with transparent public markets suitable for Indian investment[12]. The low price of oil has pushed a hundred shale oil producers in the US to bankruptcy – Indian companies can invest in some of these firms where a financial infusion can make a difference. Iran has invited Indian firms to invest in developing a gas field, which it was unable to do because of Western sanctions on it[13]. With sanctions out of the way, this project has to be pushed through.
Buying developed assets is an expensive proposition even in present times. Indian firms too need to explore, and given their limited experience and success, tying up with an exploration company with a strong track record may be a better approach. The most successful explorers are not usually the global oil majors, but smaller, more focused companies such as Anadarko, Tullow Oil and Cairn (UK). Bharat Petroleum has already tried this approach with Anadarko and reaped rich dividends. Indian oil firms need to identify and ally with such partners. In the current scenario, as exploration spends are being cut back, a financial partner willing to shoulder costs will be welcome.
By not going overboard with investments during the boom, Indian oil companies are already in a strong position. By judiciously increasing investments during the downturn, they can create long term value and energy security for the nation.
Amit Bhandari is Fellow, Energy & Environment Studies, Gateway House.
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References
[1] International Energy Agency, Jiang, Julie, and Chen Ding, Update on Overseas Investments by China’s National Oil Companies, <https://www.iea.org/publications/freepublications/publication/PartnerCountrySeriesUpdateonOverseasInvestmentsbyChinasNationalOilCompanies.pdf> (Accessed on 31 August 2016)
[2] Ernst & Young, Global Oil and Gas Transactions Review 2013, 2014, p. 9, <http://www.amcham.ro/UserFiles/articleFiles/EY Global_O&G_M and A transactions FINAL 2014 _03031624.pdf> (Accessed on 31 August 2016)
[3] Ernst & Young, Global Oil and Gas Transactions Review 2014, 2015, p. 12, <http://www.ey.com/Publication/vwLUAssets/EY-global-oil-and-gas-transactions-review-2014/$FILE/EY-global-oil-and-gas-transactions-review-2014.pdf> (Accessed on 31 August 2016)
[4] Ernst & Young, Global Oil and Gas Transactions Review 2015, 2016, p. 08, <http://www.ey.com/Publication/vwLUAssets/EY-global-oil-and-gas-transactions-review-2015/$FILE/EY-global-oil-and-gas-transactions-review-2015.pdf> (Accessed on 31 August 2016)
[5] Wu, Yuwen, ‘Profile: China’s Fallen Security Chief Zhou Yongkang’, BBC, 12 October 2015, <http://www.bbc.com/news/world-asia-china-26349305> (Accessed on 31 August 2016)
[6] Zhu, Charlie, David Lague, and Benjamin Kang Lim, Inside the Purge of China’s Oil Mandarins, 24 July 2014, <http://graphics.thomsonreuters.com/14/07/CHINA-PURGE:CNPC.pdf> (Accessed on 31 August 2016)
[7] Zhdannikov, Dmitry, ‘Megaprojects a Megaheadache for Oil Bosses’, Reuters, 22 January 2014, <http://uk.reuters.com/article/us-davos-oil-megaprojects-idUSBREA0L1EV20140122> (Accessed on 31 August 2016)
[8] CNOOC Limited, Announcements and Notices, Listed Company Information, Announcement of 2016 Interim Results (Unaudited), 24 August 2016, <http://www.hkexnews.hk/listedco/listconews/SEHK/2016/0824/LTN20160824233.pdf> (Accessed on 31 August 2016)
[9] PetroChina Company Limited, , Announcements and Notices, Listed Company Information, Announcement of the Interim Results for the Six Months Ended June 30, 2016, 24 August 2016,<http://www.hkexnews.hk/listedco/listconews/SEHK/2016/0824/LTN20160824235.pdf> (Accessed on 31 August 2016)
[10] China Petroleum & Chemical Corporation, Announcements and Notices, Listed Company Information, Interim Results Announcement for The Six Months Ended, 30 June 2016.’ 28 August 2016, <http://www.hkexnews.hk/listedco/listconews/SEHK/2016/0828/LTN20160828139.pdf> (Accessed 31 August 2016)
[11] Gordeyeva, Mariya. ‘China Buys into Giant Kazakh Oilfield for $5 Billion.’ Reuters, 7 September 2013, <http://www.reuters.com/article/us-oil-kashagan-china-idUSBRE98606620130907> (Accessed 31 August 2016)
[12] Bhandari, Amit, and Kunal Kulkarni, ‘North America: Petro State’, Gateway House, 13 April 2016, <https://www.gatewayhouse.in/petro-state/> (Accessed 31 August 2016)
[13] Verma, Nidhi. ‘India Hopes to Sign Farzad B Gas Field Deal with Iran next Month.’, Reuters, March 22, 2016. <http://in.reuters.com/article/india-iran-gas-deal-idINKCN0WO1YV> Accessed 31 August 2016.