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08-07-05, 21:24
New York Times

July 9, 2005

China Oil Giants Crave Respectability and Power

By KEITH BRADSHER and JAD MOUAWAD

HONG KONG, July 8 - Two years ago, the China National Offshore Oil Corporation and another Chinese state-controlled oil company seemed on the verge of capturing a large patch of foreign oil reserves with a handshake deal to pay $1.23 billion for part of a giant field in Kazakhstan.

But the prospect was snatched away two months later when the Western companies operating the oil field asserted their legal right to buy the stake instead. For the Chinese oil executives, it was a rude defeat that emphasized their marginal status on the global energy map.

Indeed, for all their efforts over the last dozen years, Chinese companies have remarkably little to show for it - just a string of largely second-rate, remote, dubious or uncertain energy investments for which they have mostly overpaid.

Cnooc's leaders are determined not to be upstaged again. And with their $18.5 billion bid for the American oil company Unocal last month, Cnooc is wagering significantly more in one stroke than Chinese energy concerns have spent so far around the world.

Turning from the steppes of Kazakhstan to the freeways of Southern California, Cnooc is endeavoring to help transform China from a marginal player in the energy markets to a powerful force in a better position to tap the world's natural resources. And in doing so, some experts say, it is ready to pay a higher price for energy assets - a China premium, as some call it - to raise the chances of closing a deal.

Cnooc's surprise offer comes at a time of concern in Washington about Chinese influence over the American economy and amid heightened fears about the nation's energy security. It has prompted suspicion and hostility from many members of Congress.

But viewed from China, Cnooc's thrust at Unocal only underlines the extent to which China's top three oil companies - PetroChina; China Petroleum and Chemical, also known as Sinopec; and Cnooc - are earnestly seeking to expand their reach.

Their eclectic collection spans 44 countries, including pariah states like Sudan and Myanmar - a grab bag of holdings that would strain the management of even the biggest multinationals.

"They're not picking up the best stuff - they're picking up stuff in the middle and, in some cases, the dregs," said Philip Andrews-Speed, the director of the Center for Energy, Petroleum and Mineral Law and Policy at the University of Dundee in Scotland.

Total commitments by the three companies have reached only $15 billion over the last decade to build equity stakes in oil and gas fields outside China, according to the James A. Baker Institute for Public Policy at Rice University.

The Chinese oil giants are belatedly following a well-trodden path - one that France, Italy and Britain have taken - to build national players that can secure access to the globe's energy resources. But the Chinese companies have had the misfortune of trying to build overseas empires at a time of steeply rising prices and renewed nationalism among the governments of oil-producing nations. Their combined overseas reserves remain a tenth of the reserves of a single big Western multinational like BP.

Cnooc, with 93 percent of its reserves in China, is the exact opposite in globalization from BP, with 93 percent of its proven reserves outside of Britain. PetroChina, the giant of China's oil industry, will still have 95 percent of its reserves in China even after the consolidation of a wide range of overseas holdings being transferred by its parent, the China National Petroleum Corporation, or C.N.P.C.

Sinopec, mainly a refiner, has barely begun to acquire overseas assets. But C.N.P.C. and Sinopec have been active in acquiring exploration rights from Mauritania and Angola to Azerbaijan and Kazakhstan so overseas reserves could rise sharply in the coming years if the companies strike oil.

The PIRA Energy Group, a New York-based oil consultancy, estimates that China's top three companies now control 300,000 to 400,000 barrels of oil production a day outside of China, or 10 percent of their domestic production. Unocal would add a daily oil production of 170,000 barrels a day and the equivalent of 260,000 barrels a day of natural gas.

By comparison, crude production outside the United States for the three largest American oil companies amounts to 70 percent of their total output.

Still, Chinese oil workers are becoming a growing presence in the Middle East, Africa and South America, and their executives can now be spotted roving through remote outposts in Libya or negotiating long-term agreements in Iran or Saudi Arabia.

C.N.P.C. has been crucial in developing the oil resources of Sudan, a country that Western oil companies have been forced to leave because of pressure over its poor human-rights record; in Algeria, Sinopec has won exploration and drilling rights to look for new sources of oil; in Venezuela, C.N.P.C. won operating agreements in bidding rounds that included oil giants like BP or Shell.

China's future energy appetite is expected to be enormous. The country, a net exporter of crude oil only a dozen years ago, recently surpassed Japan as the world's second-largest oil consumer. Its domestic production amounts to 3.5 million barrels a day, slightly over half the country's daily needs of 6.7 million barrels.

Last year, oil demand in China grew by 16 percent. In 20 years, China is expected to consume nearly 13 million barrels a day, or 10 percent of what experts hope will be the world's total at the time - with imports exceeding nine million barrels. And if production fails to expand fast enough, China could put even more pressure on global oil supplies.

Since the mid-1990's, the Chinese authorities have mandated that their oil companies expand abroad.

Many China experts say that the country is so eager for overseas reserves that it will inevitably be willing to pay top dollar. Also, Chinese companies have been more willing to assume that oil prices will stay high. Most Western companies base their planning for oil projects on the idea that they should be profitable when oil is roughly $25 a barrel.

"The Chinese take a long-term perspective to securing strategic resources rather than a short-term investment perspective," said Christopher H. Stephens, a senior partner at Coudert Brothers specializing in mergers and acquisitions in China who is not involved in the fight for control of Unocal. "They don't face those pressures to show investment returns on a quarterly basis."

Other experts are more blunt. "The Chinese are blindly going ahead with what commercial sense would not advise, blindly buying up investments in rogue states," said Brahma Chellaney, a strategic studies professor at the Center for Policy Research in New Delhi.

Fu Chengyu, Cnooc's chief executive, denied that Cnooc had been engaged in a scattershot effort to buy into any oil fields that came on the market. But he also defined the company's strategy in broad terms that did not exclude such an approach.

Cnooc, the smallest of the three Chinese oil companies, is not the only one with global ambitions. Wang Guoliang, the chief financial officer of PetroChina, the publicly traded subsidiary of C.N.P.C., signaled his company's ambitions at a news conference on June 10. He said it "will eventually grow from a mainly domestic oil and gas company to an international corporation with significant international oil and gas assets."

PetroKazakhstan, a Canadian company with substantial oil fields in Kazakhstan, one of China's western neighbors, announced last week that it had received "approaches from a number of different parties regarding a potential corporate transaction involving either an acquisition or a merger with the company." Investment bankers said that PetroChina had been especially interested in PetroKazakhstan.

Whether Cnooc's bid for Unocal includes a geopolitical premium of some sort is particularly hard to pin down because the company owns a mixture of oil and gas assets covered by a range of contracts requiring deliveries at various prices for years to come. Based on Cnooc's experience in Kazakhstan and Angola, Unocal may present some additional benefits to Cnooc, energy experts said.

By buying a company outright, rather than stakes in existing oil fields, Cnooc avoids the risk of another government or company exercising the sort of pre-emption right on stakes that Cnooc and Sinopec lost out to in Kazakhstan two years ago.

With their willingness to make optimistic assumptions about oil prices and their ability to borrow heavily from the government, Chinese companies are likely to keep on making acquisitions regardless of what happens with Unocal.

"We evaluate things now on $24 oil," complained William Gammell, the chief executive of Cairn Energy of Scotland, "but you can't make transactions on that any more."

Keith Bradsher reported from Hong Kongfor this article and Jad Mouawad from New York.