Korean Firms Test Water Offshore China

SYDNEY (Dow Jones Newswires), Jun. 4, 2009

As oil deals go, US $8 million isn't likely to set many pulses racing. But could Majuko Group's purchase of a 5% stake in an oil block near Hong Kong pave the way for more deals offshore China by Korean firms?

Industry officials point to the track record of Korean companies in building consortia when bidding for oil and gas assets abroad. By working together, companies can keep a low profile and appear less predatory than if they acted alone.

China and South Korea are both net importers of crude oil, and concerns about energy security have driven their governments to encourage companies to expand overseas and secure a reliable supply of equity oil.

However, China's offshore oil industry has been off the radar of Korean companies until recently, despite the close proximity of the two countries and the lower cost involved in transporting crude oil.

That changed in April when Majuko, which is closely held, agreed to a deal to buy a 5% stake in Block 22/12 from First Australian Resources Ltd. (FAR.AU). The block is due to pump its first oil in late 2011 or early 2012, assuming the government backs a development plan.

"Our timing of purchasing was when the assets were, in general, depressed. We think this is a good entry time and size to go into China," said Y.S. Nam, managing director of Majuko.

Executives who met with Nam say the entry of Majuko into block 22/12 is likely to be a stepping stone for more deals.

"This was an opportunity for them (Majuko) to put their toe in the water, to get a feel for doing business in the oil and gas sector in China," said Michael Evans, executive chairman of First Australia Resources Ltd.

Majuko has oil and natural gas interests in North Africa, the Middle East and Russia as part of a wider portfolio of investments that include hotels, a golf course, and commodity trading.

The company, which has offices in Seoul and Singapore, helped to develop the huge Elephant oil field in Libya. The field produced an average of 140,000 barrels per day of crude oil in 2007.

"In many cases, exploration and production companies in Korea (act) as a consortium. It is always possible to form a consortium to invest in China," Nam said.

Paving The Way for KNOC?

In northern Iraq, Majuko is part of an eight-company consortium exploring the Bazian block, which has estimated reserves of 1.18 billion barrels of oil. Other partners in the block are Korean companies SK Energy Co. (096770.SE), GS Holdings Corp. (078930.SE), Daesung Industrial Co. (005620.SE) and state-owned Korea National Oil Corp.

KNOC is also a shareholder in the Elephant field and its close working ties with Majuko is generating speculation it could follow it into China's offshore oil sector.

"Having a private company come in would be easier for the Chinese than KNOC," said a Beijing-based oil industry executive, declining to be named. "Any acquisition by KNOC would look like a government-to-government deal."

Terry Fern, chairman of Australia's Petsec Energy Ltd. (PSA.AU), said a meeting with Nam several months ago to discuss the possible sale of part of his company's 25% stake in Block 22/12 to Majuko was also attended by KNOC.

KNOC has ambitious expansion plans, targeting production of 300,000 barrels per day by 2012 from 50,000 barrels per day at the end of 2007. In the same time frame, its assets are to more than triple in value to KRW30 trillion.

It has a foothold in China through a joint venture with Samsung C&T Corp. (000830.SE) and a local Chinese firm, for an oil field in the northwestern region of Ningxia Hui that is producing around 400 barrels per day, but nothing offshore.

Nam said Majuko has a close and active relationship with KNOC, but added: "We do not have any specific plan to invest in China jointly with KNOC at this moment."

When contacted by Dow Jones Newswires, a spokesman for KNOC said he wasn't aware of Majuko's deal in China and declined to comment further.

In the past two years, Asian energy companies have been more successful than Western rivals in securing assets offshore China via acquisitions, rather than through production sharing contracts with China National Offshore Oil Corp.

In September 2007, Singapore Petroleum Co. (S99.SG) agreed on a US $223 million acquisition of offshore oil fields and exploration working interests in China's Bohai Bay. The deal with U.S.-based Ultra Petroleum Corp. (UPL) was completed two months later.

"All Asian companies I know are in the marketplace looking for reserves," Petsec's Fern told shareholders at the company's annual meeting in Sydney on May 20.

"That said, they are not trying to be hyenas looking to pick up assets at terrible prices, but quality oil fields at fair value as they become available," he said.

Other shareholders in Block 22/12 are Australia's Roc Oil Ltd. (ROC.AU) and Horizon Oil Ltd. (HZN.AU), with stakes of 40% and 30%, respectively. Roc acts as operator.

Fern said talks between Majuko and Petsec didn't progress, partly because the Korean company only wanted a small stake to test the water with Cnooc.

"I'm either all in or all out," Fern said, adding his company's focus on the U.S. Gulf of Mexico and the need to fund development costs for the Block 22/12 project meant he would consider a sale in future.

"I suspect there will be a market for the China asset and that market will become apparent once the overall development plan is lodged" with Cnooc over the next few weeks, Fern said.

Asked whether Majuko would look to raise its stake in Block 22/12 via acquisition, Nam was noncommittal. "We want to see how the development plan is finalized," he said.

(Shin Jung-Won in Seoul contributed to this story.)

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

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