CNOOC, PetroChina go their own ways in reserves hunt

PUBLISHED : Friday, 10 June, 2005, 12:00am
UPDATED : Friday, 10 June, 2005, 12:00am

Securing foreign sources of oil and gas is essential strategy for mainland petroleum companies, but developments this week have shown how two of the country's leading oil firms, PetroChina and CNOOC, are going about it in radically different fashions.

Today, PetroChina is expected to announce it is to take control of foreign oil and gas assets worth US$3 billion from its parent, China National Petroleum Corp.

In contrast, on Tuesday, CNOOC said it was considering a counter-offer to top Chevron Corp's US$16.4 billion takeover bid for California-based oil company Unocal Corp.

Of the two, PetroChina is clearly adopting the more cautious approach. The asset injection by CNPC is expected to comprise about 50 per cent of the parent company's foreign oil and gas fields, with CNPC's controversial assets in civil war-stricken Sudan left out of the deal so as not to spook investors. Of the assets that are expected to be transferred, most are in China's western neighbour Kazakhstan, which has yielded lucrative returns to oil investors in recent years.

Although modest in comparison with PetroChina's onshore fields, the new assets will provide the company with an important foreign bridgehead.

Carved out of CNPC and listed in 2000, PetroChina has developed proven domestic oil and gas reserves equivalent to 11.5 billion barrels of oil, and produces about 2.5 million barrels a day.

However, despite a stellar stock market performance, which has seen PetroChina shares rise 28 per cent this year, easily outstripping the price of oil, which has risen only 11 per cent, the company has struggled to pump more oil from its mature onshore fields.

The new assets, which are expected to be injected into a joint venture with CNPC, will raise PetroChina's production by 5 per cent, comforting investors and providing a platform for future foreign expansion.

With PetroChina shares trading at a price-earnings ratio of 9.65 before yesterday's suspension, a level that compares favourably with other big oil companies, investors are likely to cheer the deal.

CNOOC, meanwhile, is contemplating a far more aggressive strategy. A successful bid for Unocal would get the company production capacity equivalent to 429 million barrels of oil a day, much of it in Asian countries including Thailand and Indonesia.

Any bid would face big obstacles, however. Not only would CNOOC have to trump the offer Chevron has on the table, it would also have to pay the US company a US$500 million penalty for breaking its deal. Then, CNOOC would most likely have to find a buyer for Unocal's North American pipeline and terminal assets, which would make a poor fit with the mainland firm's other businesses.

So far, analysts have given a chilly response to news that CNOOC is considering bidding. Brokers, including Merrill Lynch and UBS, have downgraded their recommendation on the stock, which has long been an investors' darling, with many observers believing the putative bid for Unocal owes more to political pressure from China's resource-hungry leaders than to hard-edged commercial rationale.

Even so, given the deepening scarcity of proven petroleum reserves and China's mounting appetite for energy, the strategy CNOOC is considering of a bold bid for Unocal at a hefty premium could prove more effective in the long term than PetroChina's softly-softly approach.