Resource Investor.com: China Looks to Record Deal to Secure Energy Reserves

China Looks to Record Deal to Secure Energy Reserves
By Xu Zhiqiang
10 Jan 2005 at 03:55 PM EST

SHENZHEN (ResourceInvestor.com) -- China National Offshore Oil Corporation [CNOOC] is said to be considering a $13 billion bid for U.S.-based oil group Unocal. The putative purchase of one of America’s most recognized energy brands underscores China’s growing M&A clout as the country seeks to secure reliable supplies of key resources.

China has displaced Japan as the world’s second largest oil consumer [BRNT] [GSOIL]and has been a net importer for a little over a decade due to strong economic growth. CNOOC is China’s third largest energy parastatal.

According to the Financial Times, CNOOC wants the Asian assets of Unocal and would sell off the US assets. Industry analysts have warned that it is not going to be a simple transaction, not least because of potential liabilities arising from environmental claims.

Unocal has an $11 billion market value and $2.68 billion net debt at 2004 year-end. CNOOC’s market value is about $21.5 billion and had $1.6 billion cash at the end of 2003. Through the $1 billion convertible bond issue last month, CNOOC has $3 billion at hand. As Goldman Sachs points out, that leaves it dependent on an equity issue to pay for the rump of the supposed purchase.

Were the deal concluded, it would be China’s most significant foreign deal to date, easily eclipsing last month’s $1.75 billion purchase of IBM’s computer business.

Unocal has a significant presence in Asia. Of its year-end 2003 total oil and gas reserves of 1.76 billion barrels (38% in oil and 62% in gas), about 50% is in Asia, mainly in Thailand and Indonesia.

Little wonder then that CNOOC is interested since Unocal’s would potentially boost the Chinese company’s reserves by 83% (oil up 47%, gas up 157%) and production volume by 126% (oil up 53% and gas up 591%). Unocal boasts the ninth-largest reserve base among American producers.

Goldman Sachs says it would make more sense for CNOOC to acquire the Asian assets specifically rather than making a potentially hostile bid to acquire the whole company.

Cao Yunshi, vice-president of CNOOC, said in Hong Kong that negotiations with Unocal have not begun yet, and that it would be risky to do a deal in haste since oil and gas prices remain historically high.

Meanwhile, CNOOC has been quite active abroad with a $348 million natural gas deal in Australia and ongoing negotiations for Canadian oil-sands assets.
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Prudent Investor says: If the deal to buy UNOCAL pushes through this in effect will represent China’s backdoor entry to acquire energy assets in Asia and in the Philippines.

In the Philippines, the local flagship of Unocal, Unocal Philippines formerly Philippine Geothermal Inc. (PGI) has geothermal projects in Tiwi, Albay and Makiling Banahaw (Mak-Ban) covering the areas of Laguna and Batangas.

Aside, in 2004, the American company under the Unocal Sulu Limited invested $41 million (Manila Bulletin, June 14, 2004) in oil exploration at the Sandakan Sulu Sea under Service Contract 41 covering the Zebra 1 and Rhino 1 wells with a consortium of several other foreign and local groups. As I said previously, “Watch it, here they come!!!”