China’s NOCs Remain on the M&A Sidelines

Copyright © 2021 Energy Intelligence Group

As Western oil companies seek to divest oil and gas assets amid their pivot toward low-carbon investments, China's national oil companies (NOCs) have been expected to step up their M&A activity like they did in previous oil cycles. But Chinese NOCs face many more constraints in 2021, so are more likely to go window-shopping abroad than repeat their 2009-13 buying spree. Domestic production and the energy transition are these companies’ main priorities. Within these new parameters, the NOCs’ M&A activity will likely be much more focused, with a preference for developing countries and gas over oil. • Policy is driving Chinese NOCs to focus capital spending on domestic production, which means budgets for international acquisitions have had to be cut. New priorities mean that China’s NOCs are not spending on acquisitions like they did in the past. In previous cycles these companies would scour the world for cheap resources to meet the country’s surging oil and gas demand. The three state-run players -- China National Petroleum Corp. (CNPC), China National Offshore Oil Corp. (CNOOC) and Sinopec -- spent at least $112 billion on overseas acquisitions during the 2009-13 period, according to Energy Intelligence estimates. Conditions seem ripe again for these NOCs to go on another buying spree. China’s economy and hydrocarbon imports are once again surging ahead of the rest of the world. Meanwhile, Western energy companies are looking to divest upstream assets in line with their energy transition plans. But Beijing’s policy of encouraging NOCs to rapidly build overseas portfolios has been replaced with demands that companies try harder to develop oil and gas resources domestically amid rising geopolitical tensions with the West. “Companies have reduced their capex for policy-driven reasons. They are asked to boost domestic production. We can expect some overseas M&A deals but they will not match the volumes of previous years,” Kaho Yu, principal analyst at political risk consultancy Verisk Maplecroft, told Energy Intelligence. The three NOCs have been busier with divesting assets than buying new ones, reflecting their new priorities and the fact that many of their purchases proved unprofitable. Sinopec’s sale this year of its Argentinean shale assets is a case in point. The NOC paid Occidental Petroleum $2.45 billion in 2010 when shale fever was taking hold, but the assets were valued at around $250 million this year (EIF Sep.7'11). A vast anticorruption campaign, in 2013-15, which focused on a series of high-profile overseas deals, has also left Chinese NOCs wary of large-scale acquisitions. • Chinese M&A budgets could be diverted to building low-carbon energy portfolios alongside China-focused gas investments. The three NOCs are also expected to play a role in the energy transition after President Xi Jinping last year set ambitious climate targets for China. The country’s goals include a peaking of carbon emissions before 2030 and becoming carbon-neutral by 2060. So far the NOCs have set rather thin new energy budgets, but they could divert M&A capital toward building green portfolios (EIF Apr.7'21). The energy transition in China also likely means a greater focus on natural gas in Asia, where gas is seen as a transition fuel to bridge the journey from coal to renewables. Investments in LNG plants are likely. “I do wonder if engaging in high-profile overseas M&A at a time when central [state-owned enterprises] are busy formulating responses to the 2030-60 targets might make for bad optics ... and if uncertainty about the role of natural gas in the energy mix post-2030 is prompting the NOCs to be cautious,” Erica Downs, a senior researcher at the Center on Global Energy Policy at Columbia University, told Energy Intelligence. The Chinese NOCs are also seen as too novice in the renewables sector to be valuable partners. Operating new energy assets is not in their expertise, an upstream Chinese source told Energy Intelligence. Meanwhile, another China-based source who works for a Western oil services company pointed out that China’s new energy assets, from wind to solar, hydrogen and geothermal, can be found, and developed, in China itself. • Belt and Road countries will likely prove crucial to Chinese NOCs’ overseas investment plans as tensions build between China and the West. Rising tensions between China and the West have also been closing doors to major Chinese energy investments in Australia, Canada, the US and parts of Europe. But many countries are still open to Chinese investment that is supported by Xi’s signature foreign economic policy: the Belt and Road Initiative (BRI). The United Arab Emirates, Iraq and Russia, three important BRI partners, are the only countries to have attracted Chinese M&A activity over the past four years. The only investment this year by a Chinese NOC involved Sinopec’s deal to develop the Mansuriya gas field in Iraq. Southeast Asia -- where there are a lot of relatively small projects ripe for development, such as gas-fired plants and LNG facilities -- would be a likely destination for investment by China’s NOCs, Verisk’s Yu said. But CNOOC, which has vowed to have gas contributing 50% of its output by 2035, may have no choice but to go overseas (EIF Feb.10'21). One large gas opportunity for CNOOC could be Royal Dutch Shell’s Masela Block that lies offshore Indonesia, Rystad Energy’s Asia analyst Readul Islam told Energy Intelligence. If the company is looking for additional oil resources, southern Iraq and Angola could prove tempting, Islam added. Maryelle Demongeot, Singapore, and Dawn Lee, Beijing Chinese NOCs' Divestments and Acquisitions, 2017-21 Deal Date Seller Buyer Assets Country Divestments Jun 30'21 Sinopec CGC Unconventional oil and gas assets Argentina Nov 25'20 CNOOC Shell 30% WI in offshore Block 4 Mexico Sep 8'20 Buyer Zenith Energy 22.5% interest in the

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