Chinese overseas investment in electricity projects surges in 2016

Overseas energy deals were worth US$25bn in 2016, from US$12.3bn in 2015 and US$3.7bn in 2014, but well short of US$27.4bn in 2013 and US$31.7bn in 2012

PUBLISHED : Sunday, 05 February, 2017, 1:54pm
UPDATED : Sunday, 05 February, 2017, 10:40pm

China emerged as an aggressive investor in overseas electricity projects in 2016, helping to lift outbound mergers and acquisition deal volume in the energy sector to the highest level in three years, even as oil and gas activity remained subdued, according to the latest data.

Analysts said they expect more oil and gas deals to be done this year as oil prices are likely to see moderate gains after recovering to US$51 per barrel in the fourth quarter of 2016, up from US$35 a barrel in the first, helped by an Organisation of Petroleum Exporting Countries’ output cut at the start of 2017.

“2016 remained a relatively quiet year for Chinese companies’ mergers and acquisitions activities, although interest has picked up,” said Hilary Lau, a partner at law firm Herbert Smith Freehills who advises on energy and gas assets in the Asia.

He said there is likely to be an increase in companies buying and selling energy assets throughout 2017.

According to data provider Mergermarket, Chinese outbound energy M&A deals amounted to US$25 billion in 2016, up from US$12.3 billion in 2015 and US$3.7 billion in 2014, but well short of US$27.4 billion in 2013 and US$31.7 billion in 2012.

Last year’s volume was skewed by a jumbo US$12.4 billion takeover in September of Brazilian group CPFL Energia by state-owned power distribution behemoth State Grid Corporation of China.

The deal tally was further bolstered by state-backed electricity companies investing in four projects worth a combined US$6.4 billion.

These include the US$1.9 billion acquisition of an 80 per cent stake in German offshore wind farm operator WindMW and United States-based Duke Energy’s hydro power assets in Brazil worth US$1.2 billion by China Three Gorges Corp.

In addition, Shanghai Electric Power bought a 66 per cent stake in Pakistani power generator and distributor K-Electric for US$2.3 billion, and Guangdong Yudean purchased a 45 per cent stake in an shale oil-fired power project in Jordan for US$975 million.

The major wheeling and dealing by the state power firms last year were reminiscent of the heady days of the oil and gas M&A boom in the lead up to 2013 when China’s oil and gas titans bought over US$100 billion of overseas assets over a five year period.

But Mergermarket’s data showed that China’s outbound oil and gas deals amounted to only US$3.8 billion last year, compared to US$6.6 billion in 2015 and US$2.1 billion in 2014 and over US$23 billion in both 2013 and 2012.

A prolonged anti-corruption drive that began in mid-2013, together with a sharp drop in crude oil prices from mid-2014 were cited as reasons for the decline.

Analysts also cited changes in the political climate as reasons for the slowdown.

“There is a genuine shift from volume to value with less emphasis on top line growth in line with [Beijing’s] priorities,” said Sanford Bernstein senior analyst Neil Beveridge in a report on Thursday.

Difficulties in determining fair asset values, and the rise of protectionism were also contributing factors, he said, adding that cooling is good news for the major state-owned companies since many of their previous acquisitions proved to be “value destructive”.

China’s dependency on foreign oil has risen to almost 70 per cent from 20 per cent in the past decade, as domestic oil output fell amid continuing demand growth.

Beveridge said this means Chinese oil giants will eventually resume their acquisition activities, although they remain wary.

“Peak oil demand is more of a risk than peak oil supply,” Beveridge said.

When they eventually return, liquefied natural gas assets and oil assets in Africa and Latin America are likely to be key targets, he added.

Angus Rodger, a director of Asia-Pacific upstream research at commodities consultancy Wood Mackenzie, said in the decade prior to 2014, Chinese state-backed oil majors were dominant buyers of overseas assets, but since that time smaller companies have played a bigger role.

“We have seen 74 new Chinese upstream companies, of which more than 30 acquired overseas oil and gas assets, executing more than 60 deals worth over US$22 billion over the past decade, most of them done since 2014,” Rodger told the Post.

Rodger noted that deal flow picked up in the second half of 2016 amid rising oil prices. Many sellers were eager to sell assets into the stronger market, whereas some global companies needed to dispose of assets to meet divestment targets.

Wang Yushuang, a Beijing-based oil and gas consultant at Wood Mackenzie, said smaller companies will likely continue to play a bigger role in 2017 and beyond, as Beijing pushes reforms to allow greater participation by private firms in the upstream oil and gas sector.

“Many private enterprises that lack industry expertise have been acquiring assets overseas to gain experience, and in time they may deploy that within projects back home.”

Wang noted that the expected depreciation of the yuan will also attract Chinese investors into upstream projects, whose oil revenues are US dollar denominated.

She added that overseas oil and gas acquisitions will be less affected by Beijing’s efforts to curb fund outflows because of the need to secure overseas acquisitions in strategic resources.

This is especially key in resource-rich developing nations where government-to-government relationships are well aligned, she said.