Asia's oil thirst to drive up asset prices
Reuters
Singapore, January 18, 2005
India and China's state oil companies are on the brink of snaring their biggest overseas purchases, likely boosting the cost of already pricey assets and raising concerns over future returns.
Big deals in oil-rich Iran, Russia and Canada are imminent as the world's two most populous nations scramble to satisfy surging oil demand and pick up assets that are either politically or commercially untenable for Western companies.
"They've got a big hole in terms of energy requirements. This must place some pressure on the value of assets," said manager for Asia at upstream divestment consultancy IndigoPool, Rob Singh.
Asian oil firms already have sunk billions of dollars in projects around the world, including in countries that are off-limits to oil majors such as Sudan, and picked up scraps hived off by cost-cutting Western oil companies.
The next phase will bring them in competition with Western oil majors, setting the stage for real asset inflation, analysts said. The worldwide search for oil reserves also puts sellers in the driver's seat, potentially driving up values even more.
"Because of the involvement of Asian oil companies, the demand has gone up. So you expect prices to go higher," said former senior energy sector banker and now a US-based energy consultant, David Anderson.
A SLEW OF DEALS
Canada's prime minister will visit Beijing later this week amid talk of several deals involving the country's oil sands, the latest in a parade of visits by heads of oil-rich nations to the world's fastest-growing consumer.
India's Oil and Natural Gas Corporation (ONGC) is in talks with Russia for part of the one million-barrel-per-day YUKOS Yuganskneftegaz unit, which Moscow officials say may also be offered to China National Petroleum Corp.
ONGC and China's number two oil group, Sinopec Group, are taking the lion's share of development deals for Iran's three billion-barrel Yadavaran oilfield, off limits to US firms.
And number three Chinese producer CNOOC Ltd. is mulling a major acquisition, possibly the Asia assets of US oil company Unocal Corp or the entire $12.2 billion company.
SHAREHOLDER WRATH
Western oil firms face shareholder scrutiny of acquisitions, often limiting them to projects that offer stable returns or takeovers that are in line with oil price expectations.
Asia's state oil companies aren't usually hindered by shareholder demands for predictable pay-backs, putting them in a position to pay a premium for assets. But times are changing.
CNOOC shares in Hong Kong slid more than four per cent in the days following news of its acquisition plans on January 6.
"The risk is that Beijing may appear willing to accept lower returns than the international companies," Cazenove analyst Magnus Gunn wrote in a research note. "Much depends though on what is now an appropriate long-term oil price and how China chooses to enhance its energy supply security.
Spain's Repsol YPF learned a key lesson in 1999 when it paid $15 billion for Argentina's YPF just as the Argentine economy headed for a crisis. The enlarged company's market value at one point dropped to less than the purchase price.
Its value has now doubled to $30 billion, but shares are off 16 per cent from end 1999, versus France's Total's 22 per cent gain and Italy's Eni's 70 per cent jump.
IT'S A SELLER'S MARKET
Oil prices jumped by a third last year and are near $50 a barrel, a far cry from the sub-$20 levels that prevailed during the last bout of mega-mergers and acquisitions in the late 1990s.
Deal volume has fallen from $135 billion in 2001 to about $32 billion in the first half of 2004, Citigroup said. Part of the reason is that companies are holding on to reserves because of sizzling oil prices.
Canadian producer EnCana said in October that bids for its Ecuador oil fields, with an estimated price tag of about $1.5 billion, were too low. ONGC and Chinese firms are in the running for those properties.
And CNOOC and Sinopec failed to buy a stake in Kazakhstan's Kashagan in 2003 as existing partners blocked BG Group's $1.23 billion sale of its stake.
Japan's Inpex last year sealed a $2 billion deal to develop the high-risk Azadegan oilfield in Iran, but other pending deals face hurdles. Iranian negotiations are notoriously long and China and Russia's political relations are rocky.
"There is a natural conflict of interest between Russia and China and that will always come to bear on any potential oil and gas investment by China in Russia," said Anderson.
© HT Media Ltd. 2004.