Verenex Deal Collapse Has China Parallel
CHINA ENERGY WATCH (Dow Jones Newswires), Sept. 9, 2009
Chinese energy officials upset at China National Petroleum Corp.'s failed $460 million buyout offer for Libya-focused Verenex Energy Inc. (VNX.T) should remember the maxim "what goes around, comes around."
State-run CNPC dropped its offer for Verenex on Tuesday after the Libyan government refused to approve the deal on the grounds that it wanted to acquire the company instead.
But many foreign executives will likely feel that China has little cause for complaint after three deals involving assets offshore China collapsed over the past 18 months in similar circumstances.
Among them was Anadarko Petroleum Corp.'s (APC) farm-in agreement with BHP Billiton Ltd. (BHP) for an unexplored deep-water block in the South China Sea. It was scrapped after China National Offshore Oil Corp. withheld approval and -- in an unprecedented move offshore China -- backed into the block before a well was drilled.
Houston-based Newfield Exploration Co. (NFX) said last year it also shelved plans to sell its stake in two producing oil fields in northern China's Bohai Bay despite receiving several offers from would-be buyers.
An industry executive said the sale process was halted after PetroChina Co. (PTR) insisted it not only had the right to match the US $100 million winning bid, but also buy the assets at a discount. PetroChina is the Hong Kong and Shanghai listed unit of CNPC.
The failure of these deals is important, as it shows how difficult it can be for foreign firms to build a position in China's rapidly growing energy sector or get a market value for their assets if they wish to sell up.
Buyers need to establish a working relationship with the Chinese so don't want to strike a deal that doesn't have their blessing. Any plans to develop new oil and natural gas reserves must be approved by the Chinese partner before they are put before state regulators.
"We have given up on trying to grow a base in China because we think that every time something is available, the Chinese are going to step in with a kind of weak argument about preemption rights and frustrate it," said one foreign executive, declining to be named.
Foreign executives say they interpret the terms of their production sharing contracts differently from Chinese partners. They argue that selling or acquiring stock in a local exploration and production unit in China that owns the assets doesn't represent a change of control or trigger preemption rights.
However, an official at Cnooc Ltd. (CEO) says foreign partners have no right to sell without its approval and this position is shared by other state-run Chinese firms.
China's willingness to bring down deals may reflect more the strides that its state companies have made in technology than any sudden burst of resource nationalism.
Anadarko's deep-water block 43/11 in the South China Sea is next to block 29/26, where Canada's Husky Energy Inc. (HSE.T) found an estimated 4 trillion to 6 trillion cubic feet of recoverable natural gas reserves in 2006.
Cnooc sees the South China Sea as a major growth area for the company and is increasingly confident it will soon have the technology to drill in deep water by itself. Last year, Cnooc's China Oilfield Services Ltd. (2883.HK) unit bought Norway's Awilco Offshore ASA for $2.5 billion, gaining access to semisubmersible rigs capable of drilling at depths of 750 meters.
But meddling with deals within its own territory risks giving China an image problem at the same time as it is trying to expand overseas.
Opponents of a planned US $19.5 billion tie-up between Aluminum Corp. of China Ltd., or Chinalco, and Anglo-Australian mining giant Rio Tinto PLC. (RTP) earlier this year pointedly referred to a lack of reciprocity in China, with foreign firms hard-pressed to clinch big M&A deals.
China appears to be learning the lesson that interfering with deals doesn't look good.
Terry Fern, chairman of Australia's Petsec Energy Ltd. (PSA.AU), said in May that Cnooc has sent a letter signaling it no longer opposes the possible sale of his company's 25% stake in Block 22/12 offshore southern China.
Copyright (c) 2009 Dow Jones & Company, Inc.
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