China Cashes In On Overseas Shopping Spree

The second largest energy consumer, China is quickly becoming one of the most significant energy players in the world.

Increasingly in need of fossil fuels to power its burgeoning economy, China has sought to acquire oil and gas access rights beyond its borders, snapping up additional reserves that span both hemispheres.

Already this year both offshore oil and gas producer China National Offshore Oil Corp. (CNOOC) and refining heavyweight China Petrochemical Corp. (Sinopec) have purchased international assets that will bulk up its already hefty cache of petroleum resources. Respectively, the two companies have acquired stakes in overseas portfolios that include blocks in West Africa and the Middle East.

In addition to these eastern interests, China's state-owned oil firms have been reportedly eyeing investments in hydrocarbon prospects that lie in Brazilian waters, as well as in the Gulf of Mexico -- two western sweet spots brimming with potential pay.

Barreling in More Crude Oil

Having grown by slightly more than 6.1 million barrels per day from 1.825 million bopd to 7.940 million bopd over the period of 1978-2008, China's oil consumption is projected to continue its upward trend.

Oil, China's second-largest energy source behind coal, accounts for 20% of the country's total energy consumption with some 7.8 million bopd having been consumed in 2008, according to the EIA's estimates.

At a press conference held in January 2009, Hu Cunzhi, chief planner of the Ministry of Land and Resources, noted that China hopes to raise its production of crude oil to 220 million tons by 2015.

To support its stockpiles, Xinhau News Agency reported that China commenced construction in 2003 on four strategic reserve bases in the coastal cities of Zhenhai, Zhoushan, Huangdao and Dalian, the first two of which were put into use in 2008. All four bases are designed to hold oil reserves equal to 10 days of national crude import.

China's Open Wallet

In escalating efforts to secure additional reserves, CNOOC and Sinopec have collectively shelled out an estimated US $8.5 billion in two major overseas acquisitions.

Representing the largest foreign acquisition by a Chinese company and underscoring the country's desire to tap resources in overseas exploration frontiers, Sinopec's upstream oil and gas arm, Sinopec International Petroleum Exploration and Production Corp., agreed to purchase Addax Petroleum Corp. for around $7.2 billion in June 2009.

Approved by the People's Republic of China in August, Sinopec's bid comprises all of the outstanding shares of Addax, a Swiss-based energy company with offices in Calgary, for C$52.80 per common share in cash. In return, Sinopec will have access to Addax's oil fields in the Kurdistan region of Iraq, as well as to lucrative offshore projects in West Africa's Nigeria and Cameroon.

In addition to securing Kurdistan assets, China's three state-owned companies, CNOOC, Sinopec and CNPC, are mulling over participating in the Iraq Oil Ministry's second oil and gas auction later this year, following the first round held in June. Featured in the auction are 10 oil fields and one gas field rich in untapped reserves.

Acquiring together, CNOOC and Sinopec purchased Marathon Oil's stake in an offshore block in West Africa for an estimated $1.3 billion in July 2009.

Under the transaction's terms, the two Chinese companies will receive an undivided 20% participating interest in the Production Sharing Contract and Joint Operating Agreement in Block 32 offshore Angola.

With this acquisition, CNOOC and Sinopec will have access to twelve previously announced offshore discoveries comprising the Gindungo, Canela, Cola, Gengibre, Mostarda, Salsa, Caril, Manjericao, Louro, Cominhos, Colorau and Alho prospects.

Overseas E&P Activities Under Way

Already aggressively pursuing its global exploration and development activities in both West Africa and South America, China is drilling offshore Nigeria and is in negotiations with Brazilian oil giant Petrobras for interests in its offshore concessions.

In July, Sinopec began drilling in the Nigeria-Sao Tome and Principe Joint Development Zone using Transocean's semisubmersible drilling rig Sedco 702. Shell farmed-out the rig to Sinopec to drill on Block 2 of the Nigeria-STP JDZ from July 15 until early September.

Further, Sinopec has been involved in talks this year with Petrobras to pave the way for China's entry into Brazil's offshore oil exploration. The blocks that Sinopec is vying for, however, are not located in the subsalt region, where Brazil is keen to secure its own promising finds, but will include blocks off the country's equatorial coast between the Amapa and Ceara states, according to Dow Jones Newswires.

Sinopec's pow-wows with Petrobras follows China Development Bank's generous $10 billion, 10-year financing deal with the Brazilian oil major signed in May.

On the Prowl

According to the Energy Information Administration, China has emerged from a net oil exporter in the 1990s to become the world's third-largest net importer of oil in 2006.

Additionally, the far eastern country has fired up its natural gas usage in recent years, with natural gas imports on the rise due to more pipelines snaking through major provinces and interest beginning to spike in liquefied natural gas.

In fact, CNOOC announced in July that it will ramp up development of LNG terminals to allow for the import of 50 million tons a year of LNG by 2020.

To continue supplying its rapidly growing economy, China will have to hunt for hydrocarbons in international territories in addition to harnessing its own resources, particularly from offshore fields which will, as projected by the EIA, fuel most of China's net oil production growth.

Company: Petrobras more info
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Company: Shell more info
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 - Silvertip Subsea Contract Goes to McDermott (Aug 07)
Company: Marathon Oil Company more info
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Company: Transocean Ltd. more info
 - Transocean Lands $830MM Rig Contract with Chevron (Dec 28)
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 - Offshore Brazil Contract Extension Goes to Transocean (Sep 28)
Company: Sinopec more info
 - China's Surging Gasoline Exports Hurting Regional Refiners (Jan 15)
 - China's Sinopec Plans To Build Canadian Oil Refinery (Sep 14)
 - Sinopec Says Some Refineries Would Be Hit By A Halt In Iran Crude Buying (Aug 27)
Company: Addax more info
 - Chinese-Owned Oil Firm Addax Shuts Offices After Swiss Bribery Case (Aug 07)
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 - Addax Extends Yinson's FPSO Charter Contract for $129M (Oct 20)
Company: CNOOC more info
 - China's Surging Gasoline Exports Hurting Regional Refiners (Jan 15)
 - Shell and CNOOC Eye Closer Petchems Collaboration (Oct 24)
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Company: CNPC more info
 - CNPC Plans Internal Consolidation To Fast-Track Gas Storage Upgrade (Jun 01)
 - Total at Risk of Losing Gas Field Stake to CNPC If It Quits Iran (May 07)
 - China's CNPC Sells First Gasoline To Americas As Fuel Stocks Hit Record (Apr 03)
Company: Energy Information Administration (EIA) more info
 - EIA Says US Domestic Oil Production Rising Despite Lower Prices (Dec 11)
 - EIA: US Crude Stockpiles Fall More Than Expected To Below 400 Million Bbls (Sep 12)
 - EIA: US Likely Became Biggest Oil Producer Earlier This Year (Sep 12)