China National Offshore Oil Corporation (CNOOC) is the third-largest national oil company in China, after CNPC (parent of PetroChina), and China Petrochemical Corporation (parent of Sinopec). It focuses on exploration and development of crude oil and natural gas offshore of China. CNOOC Group is owned by the government, and its subsidiary, CNOOC Ltd is listed in Hong Kong. Another subsidiary, China Oilfield Services, is listed in Hong Kong and New York. In July 2012, CNOOC announced an agreement to acquire Nexen, a Canadian oil and gas company, for approximately US$15.1 billion.
China oil giants change focus after spending spree
After a spending spree in the past five years, mainland firms are focusing on increasing returns
State-backed mainland oil and gas titans have spent more than US$100 billion in the past five years buying overseas assets in the name of national energy security and acquiring expertise. But a slowdown is expected this year after some disappointing deals, prompting a call for a shift in focus from quantity to quality.
"Overseas acquisitions are definitely slowing down," BNP Paribas head of Asia energy research Por Yong Liang said. "It is a function of two things - foreign assets, on the whole, have not produced attractive returns - and company specific reasons, such as CNOOC digesting Nexen and stretched balance sheets of PetroChina and Sinopec."
In the first four months of this year, just US$2 billion worth of deals were recorded.
According to Thomson Reuters, total annual spending by mainland oil majors on overseas assets ranged from US$15.6 billion to US$23.4 billion in the past five years. The exception was in 2012, when the US$15 billion purchase of Canada's Nexen boosted the total to US$33 billion.
Dominant offshore oil and gas producer CNOOC paid a 61 per cent premium to take full control of Nexen, and this was largely to blame for its disappointing profit last year as it took on a disproportionally large amount of increases in exploration and depreciation costs on its books.
CNOOC expected a lengthy period of rationalisation and cost-cutting to change Nexen's culture and make it "more profit-oriented". Still, it said the acquisition would bring "strategic value" to the company, which hopes to gain from Nexen's expertise in developing Canada's shale gas and oil sands - both unconventional energy resources - as well as deep-sea drilling in the Gulf of Mexico, which would help develop domestic resources.
Fourteen months ago, asked if CNOOC would pursue more overseas deals after Nexen, chairman Wang Yilin said it would "stick to a requirement [by Beijing] to keep internationalising [its] operations".
Last month, Bloomberg quoted unnamed sources as saying the company would sell its 50 per cent stake in Argentina's Bridas, if a buyer would pay more than the US$3.1 billion it paid in 2010, so it could release funds for other projects. CNOOC declined to comment.
Citing data from consultancy Wood Mackenzie, Standard Chartered analysts Duke Suttikulpanich and Wang Ying said in a research report CNOOC's South American operation - primarily Bridas - posted a net loss of 1.97 billion yuan (HK$2.45 billion) last year. Its Canadian operations - primarily Nexen - had a net loss of 722 million yuan.
China Petrochemical Corp (Sinopec) appeared to suffer from a bout of "indigestion" after amassing US$50 billion of overseas assets since 2008.
It was seeking a buyer for half of its two biggest shale gas projects in Canada that it acquired for C$2.2 billion (HK$15.7 billion) in 2011, Reuters quoted Feng Zhiqiang, the head of the firm's North American operations, as saying in October last year.
The move would allow the company to share project risks at a time when North American natural gas prices have been depressed by a glut in supplies after technological breakthroughs resulted in a production boom.
China Petrochemical was the most aggressive on the acquisition trail among the three oil majors between 2009 and 2011, buying more overseas assets than the other two combined in each of the three years. According to a banker who advises the three, China National Petroleum Corp snapped up US$15 billion of overseas assets last year.
"Optimising and rationalising assets by the three have been going on all along, it is just that it was not done as systematically and in as large a scale in the past," he said. "Unlike non-state overseas firms, they are not doing it because they are short of money but to enhance their portfolios' quality, and they still need to make overseas acquisitions to grow."
Jiang Jiemin, a former chairman of PetroChina, the listed unit of CNPC, said in 2010 the firm's target was to raise overseas output to 200 million tonnes by 2020 from 14.3 million tonnes in 2009. Last year's output was 18.5 million tonnes.
A PetroChina spokesman said the firm's strategy to internationalise operations had not changed, and there was no plan to slow overseas expansion. But a CNPC official last year privately said acquisition of unconventional oil and gas assets would be reined back given lower prices.
According to Standard Chartered, the mainland's oil and gas firms spent US$105 billion on acquisitions in the past five years, outstripping the US$91.3 billion used by major international oil companies in the same period.
While the main motive was energy security, Suttikulpanich and Wang said less than 10 per cent of their overseas output had been shipped back to China since many nations had oil export restrictions.
"We were told that in the next five-year plan, the national oil companies plan to focus less on accumulating assets and more on generating returns," the analysts wrote after meeting industry officials and researchers. "This suggests an asset divestment trend, especially among non-performing overseas assets, within the next three to five years, as companies seek to free up cash for domestic projects."