CHINESE GROUPS COURT WESTERN OIL COMPANIES

Chinese oil companies in recent years have discovered the hard way that newcomers need more than money and ambition to establish a major presence in the international oil business.
The Chinese ruffle political feathers when they bid for established companies – notably CNOOC's ill-fated effort to buy Unocal of the US – or when they invest in countries that other companies avoid such as Sudan.
Cash-rich Chinese companies are on a buying spree again, hoping to take advantage of low asset prices. But this time, they are adopting more politically-savvy strategies. They are either making partnerships with multinationals eager to access the strictly-regulated Chinese market, or using strong financial backing from the state to smooth the way in target countries.
In the latest example of the evolving courtship between western and Chinese oil groups, Shell said last week it had been talking with PetroChina and Sinopec, China's two largest oil companies, about bidding together to develop oil fields in Iraq.
The Chinese oil groups and other natural resources companies are fully aware of the current opportunity to acquire good businesses at low prices. Nearly all the $23.2bn in overseas acquisitions announced by Chinese companies this year have been in mining or energy.
Sinopec, in particular, has said it wants to do large deals in Africa and South America in the coming months, and it hopes to give its listed vehicle greater flexibility to make overseas purchases. With Beijing increasingly worried about energy security, there is no shortage of official financial help for would-be acquirers.
Chinese companies are likely to make straight bids for small and mid-sized companies, especially those with an attractive technology, or to invest in oil and gas projects in friendly countries. PetroChina said on Friday it would pay up to $1.4bn for a stake in an oil group in neighbouring Kazakhstan.
In a world with limited new exploration opportunities, Chinese executives are also aware of the political obstacles they face.
Fu Chengyu, head of CNOOC, said this month that many western countries did not want to let oil and gas assets fall into the hands of Chinese companies. “Most governments aren't really promoting free trade. The politicians, especially in some developed countries, say one thing but do another,” Mr Fu said.
As a result, Chinese companies are also seeking to enter new territories with experienced partners. PetroChina is talking with Total about an exploration venture in Venezuela.
“By partnering with the oil majors, the Chinese companies will have a better chance to get deals overseas,” says Gordon Kwan, head of energy research at Mirae Asset Financial in Hong Kong.
“China might not stand a chance of winning the projects if they went on their own to Iraq because the Iraqi government would be worried what western powers would think.”
In the same vein, China has recently made two high-profile loans-for-oil deals. It lent $25bn to two Russian oil groups in return for 300,000 barrels a day of oil. In Brazil, Sinopec and PetroChina will be able to buy up to 160,000 barrels a day from Petrobras, the Brazilian oil group, which in return received a $10bn loan from China Development Bank.
Given that the oil will be sold at market prices, the immediate benefits might seem modest. But in the Russian case, China hopes the loan will convince Moscow to approve a spur from its East Siberia-Pacific Ocean oil pipeline down to northern China.
In Brazil, China aspires to participate in the potentially huge new offshore oil reserves Petrobras has discovered, which would also boost its expertise in deep-sea exploration.
“Chinese firms and the Chinese government are well aware of the economic nationalism unleashed by the attempts of Chinese companies to acquire firms,” says Erica Downs at the Brookings Institution in Washington. “Consequently, they may consider ‘loans for oil' as more palatable to the host countries.”