Energy-Hog China Seen Sitting Out Big Global Oil & Gas Deals
Comment of the Day

April 22 2015

Commentary by David Fuller

Energy-Hog China Seen Sitting Out Big Global Oil & Gas Deals

Here is the opening of this informative article from Bloomberg:

There are many reasons why China’s biggest oil companies should be dusting off their files on acquisition targets: cheap oil, the beginnings of global consolidation, and the nation’s rising crude consumption among them.

If it's not at the top of the priority list, it’s because state-owned giants such as PetroChina Co. and Sinopec have their hands full. Weathering government corruption probes and its plans to remake the public sector are bigger considerations for the year ahead.

Amid speculation that Royal Dutch Shell Plc’s purchase of BG Group Plc will spur a round of mega deals, China could find itself on the margins, swapping assets or buying smaller companies rather than bidding for the majors. That could prove a lost opportunity for the world’s most energy-hungry nation, as its reserves decline and import needs are forecast to rise to two-thirds of consumption by the end of the decade.

PetroChina’s president, Wang Dongjin, said in March that the company is looking at many businesses overseas, although its ambition could be limited to asset swaps to reduce transaction costs.

That thinking hasn’t changed after the Shell-BG announcement earlier this month. Buying large global rivals would be politically difficult and suck up too many resources, according to a company official who asked not to be named as the information isn’t public. Instead, China’s biggest oil and gas producer is seeking individual assets that can give immediate returns, the person said.

David Fuller's view

In addition to the corruption probes mentioned above, I think China’s big, state-owned oil companies are wary because with Brent Crude at $62 today, we now know that they paid over the odds for oil resources during the three previous years. 

‘Once bitten twice shy’, they are likely to be cautious this time, waiting to see how many international oil companies get into trouble, causing them to trade at depressed prices.  Additionally, China has the world’s biggest known reserves of shale oil, as I have mentioned in previous years.  China also has a water shortage problem, which questions their ability to conduct widespread fracking projects at this time.  Nevertheless, this is a big, currently untapped resource.  Additionally, China’s pollution problems may cause it to focus on solar led renewables, in addition to its expanding nuclear power stations.   

 Meanwhile, financial commentators in the West talk at length about China’s many problems, while the country’s stock markets are booming with the help of an accommodative monetary policy (see yesterday’s item on China).   

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