PetroChina Is Set to Go It Alone

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), May 26, 2009

PetroChina Co.'s proposed US$1 billion purchase of a minority stake in Singapore Petroleum Co. shows that China's largest listed oil company is ready to go it alone when expanding overseas.

PetroChina, based in Beijing and listed in Hong Kong and Shanghai, has previously relied on support from state-owned parent China National Petroleum Corp. when making deals abroad, with all business handled via a joint venture known as CNPC Exploration & Development Co.

PetroChina has owned 50% of CNPC E&D since June 2005 when it paid CNPC 20.74 billion yuan (US$3.04 billion). A senior PetroChina official said at the time that all overseas assets would be developed by the joint venture.

However, PetroChina has become increasingly keen to take full control of overseas assets, which would lower the potential for conflicts of interest between itself and its parent even as it reduces its ability to rely on state funds.

PetroChina's purchase of Keppel Corp.'s 45.51% stake in Singapore Petroleum, which will likely trigger an offer for the whole company, comes as China's resources firms are meeting resistance to their overseas expansion because of their close ties to the state. In that climate, a deal by listed PetroChina alone increases the transparency of the transaction and may limit accusations of a nationalist push to grab resources.

While the joint overseas venture with the parent will likely continue to be of use to PetroChina, it said Sunday that the Singapore Petroleum deal will become "a new platform for the implementation of our international strategy," signaling that strictly commercial transactions may be made by the listed company in the future.

Noting the relatively small size of the Singapore deal, KGI Asia's Ben Kwong said it is a sign that PetroChina is "testing the water" with its global expansion program.

PetroChina isn't alone among China's listed companies in wanting more freedom to make overseas deals. China Petroleum & Chemical Corp., known as Sinopec, wants to invest directly in overseas upstream projects, instead of deferring to state-owned parent China Petrochemical Corp. for such deals.

Sinopec, China's second-largest oil producer by capacity and Asia's biggest refiner, said March 30 it plans to seek shareholder approval to modify legal arrangements so that it can carry out overseas mergers and acquisitions.

Heavy involvement by state companies in deal making has helped China to expand rapidly its energy footprint abroad, including a deal earlier this month with Brazil's state-run energy giant Petroleo Brasileiro SA to guarantee oil supplies in exchange for financing help. Chinese policy banks have also entered into recent oil-for-loan deals with national oil companies in Russia and Kazakhstan.

But analysts say the listed oil companies' top management are concerned that direct involvement by their parents in M&A may become a liability.

Since a US$18.5 billion offer for California-based Unocal Corp. by Cnooc Ltd. failed in 2005 after criticism by the U.S. Congress, China's acquisitions have focused on politically sensitive regions, like Sudan and Myanmar, that were largely ignored by Western oil companies.

But such opportunities for growth are more rare now and if PetroChina, Sinopec and Cnooc want to add meaningful amounts of oil and gas reserves, they may have to bid for companies listed on Western exchanges. In a sign of the hurdles they may face, PetroChina has been subjected to an activist campaign in the U.S. because CNPC E&D has major stakes in oil and gas blocks in Sudan. Activists have encouraged U.S. investors to sell out of PetroChina.

Singapore Petroleum, one of the Singapore's three major refining companies, has exploration interests in Australia, China, Indonesia and Vietnam.

(Robert Li in Hong Kong contributed to this article.)  

Copyright (c) 2009 Dow Jones & Company, Inc.


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