Energy & Resources, Talking Point

If BP’s looking to sell…

Chinese sense opportunities from oil firm’s troubles

If BP’s looking to sell…

“Just name the fields, we’ll buy them...”

What’s in a name? Quite a lot if the company’s BP. President Obama has repeatedly referred to it as British Petroleum. Over in the UK, his choice of words has stirred up the press and business community.

After all, BP changed its name more than a decade ago, dropping the ‘British’ bit in favour of a nondescript couple of letters – which the marketing guys refashioned as ‘Beyond Petroleum’. With ordinary Americans looking to lay blame for the nation’s worst oil leak, the deliberate use of BP’s former name was just stoking anti-British sentiment, the UK press has argued.

If the name – and the politics surrounding it – vexed the British, over in China the linguistic debacle must have been puzzling. That’s because 1.3 billion Chinese know the firm as Yingguo Shiyou, which translates as British Petroleum. In China, at least, BP never quite rebranded.

So should Hu Jintao ever want to join his American counterpart in a little corporate ‘ass-kicking’, he’ll definitely be thinking he is booting ‘British Petroleum’ backsides, rather than BP ones…

Aren’t the Chinese more likely to buy BP, than bash it?

That was the rumour doing the rounds last week, on speculation that state giant PetroChina might consider a BP takeover.

A few years ago, another of the Chinese oil majors, CNOOC, would have seemed the better candidate to mount a bid (as its name suggests, China National Offshore Oil Corporation was originally tasked with pursuing offshore opportunities, while PetroChina concentrated on drilling at home).

But now PetroChina is on the hunt overseas too, including deepwater. With a $60 billion war chest and the political air cover to expand worldwide, it also seemed to have a rare opportunity to capitalise on BP’s weakened condition. A deal would bring access to an additional 18 billion barrels of oil and gas around the world, or an equivalent to a third of China’s oil imports.

Most analysts have discounted the rumour as a non-starter, however, in light of CNOOC’s experience in bidding for Californian oil firm Unocal in 2005. The US Congress soon intervened, pressuring George W Bush for a review on national interest grounds. CNOOC then withdrew its bid, and Unocal was sold to Chevron.

British regulators are generally more relaxed than most about their ‘national’ assets being sold. But it’s still hard to see the Obama administration being comfortable with such a transformational outcome. BP chief executive Tony Hayward certainly isn’t flavour of the month in Washington. But replacing one of the Gulf of Mexico’s leading oil producers with a company ultimately controlled by the Chinese government won’t be the preferred alternative.

The Chinese press has little confidence in a potential takeover working out either. China Business News goes further, terming it an “almost impossible task”.

What about a bid for some of BP’s assets…

That looks a lot more likely, especially in a context in which the Chinese majors are on the lookout for opportunities (see WiC34).

In the past 12 months, PetroChina and CNOOC have led Chinese spending of $25 billion on “equity oil” in the Gulf of Mexico, Canada, Argentina, Nigeria, Syria and Iraq’s Kurdistan region. The Chinese government has also made $50 billion of oil-linked loans to Brazil, Kazakhstan, Venezuela and Russia. And Sinochem just inked a deal to buy 40% of Statoil’s stake in Brazil – paying the Norwegian energy firm $3.07 billion for its Peregrino oilfield holding.

Much will now depend on which of BP’s existing assets come up for auction. One option could be the Liberty Oil field in Alaska. Another is BP’s stake in the Rumaila project in Iraq, in which PetroChina is already a joint venture partner.

Of course, if the US government’s current ban on deepwater drilling is extended, we may also see more of an industry shift towards onshore or shallow water projects, as well as to unconventional resources, like Canada’s oil sands. That might benefit Sinopec (the third of the Chinese oil Big Three) and PetroChina itself, which have invested $6.5 billion between them in two Canadian oil sands companies.

Chinese sovereign wealth investor CIC (see WiC40) has also bought into a joint venture with Penn West to develop oil sands assets in Alberta. (CIC will be licking its wounds, mind you, on the $2 billion of BP stock it purchased in April 2008.)

Is there any Chinese deepwater drilling?

Deepwater oil and gas is still at an early stage of development in China. But CNOOC’s president, Fu Chengyu, told Xinhua in May that the company would soon be heading out from shallow waters. Zhou Shouwei, CNOOC vice president, also predicted to the China Daily this month that deepwater oil production in the South China Sea will surpass that of China’s largest find, Daqing in Heilongjiang province, by 2020.

CNOOC is positioning itself as the leader in the sector. Up to now, its major deepwater discoveries have been made in partnership with Husky Energy, a Canadian firm. But CNOOC launched the first deepwater pipeline-laying ship of its own last month, and its first deepwater rig is supposed to be operational by the end of this year. Fu told the 21CN Business Herald in May of his plans to drill at depths of up to 3,000 metres (by comparison the Deepwater Horizon rig drilled to 10,683 metres, before disappearing into the deep).

Some of these initiatives may now go on hold. Recent HSBC research estimates that operating costs for deepwater drilling could increase by as much as a fifth, due to new safety measures and insurance hikes. But HSBC also says that CNOOC will not be as badly hit by the Gulf of Mexico spill as some of its peers, as its deepwater exposure (Nigerian offshore slots, plus some in China too) is limited.

It’s just as well, agrees China Business News, that the Chinese oil firms are “relatively backward” in deepwater exploration.

But the newspaper joins Outlook Weekly in asking if the chances of an accident in Chinese waters are going to increase as domestic operators became more active in the sector. The country’s oil enterprises trail their international peers in terms of safety management experience, it warns, so they could be at risk too.

But BP’s difficulties still offer an opportunity?

That’s the view of those who see the country’s state-owned enterprises as vulture funds, ready to feast on corporate distress wherever they find it.

Of course, the Chinese don’t regard themselves as commercial scavengers. Last week we reported on a rather different analogy, courtesy of Wei Jiafu, chairman of shipping giant Cosco.

Signing a 35-year lease to expand the main Greek port of Piraeus, he had much nobler creatures in mind. “We have a saying in China, ‘construct the eagle’s nest, and the eagle will come,’” he told the assembled press. “We have constructed such a nest in your country to attract such Chinese eagles. This is our contribution to you.”

It’s a rather stark comparison. On the one hand, Wei’s lofty confidence in China’s restorative powers. But on the other, the domestic media’s anxiety about rig safety and the Chinese deepwater operators.

And even the Global Times – an unashamed promoter of Chinese interests overseas – has been choosing not to tub-thump on the oil acquisition trail. Part of the attraction for signing up with international oil partners in the past, it reports, was to benefit from their experience. BP’s chastening circumstances may have brought some of that into question. But the newspaper still wonders whether the time is right for China’s oil firms to strike out alone.

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