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Fast-growing nation needs oil to fuel its factories

PORT MORESBY, Papua New Guinea (PNG Post-Courier, July 1, 2009) – China’s government-backed oil companies are jostling with each other to make landmark overseas acquisitions, seizing on the economic crisis — and accompanying low asset prices — to grow.

Asia’s largest refiner, Sinopec, agreed to acquire Canadian company Addax Petroleum for US$7.2 billion in a deal announced last week, just days after PetroChina bought a 45.51 per cent stake in Singapore Petroleum.

"China is a country that goes to extremes to secure its future," said Jean-Pierre Favennec, the Paris-based director of the French Institute of Oil.

Historically, other nations have adopted similar logic to build up their oil companies but China, a rapidly growing economy that needs fuel and bulging coffers to pursue its ambitions, is doing so with particular vigour.

Sinopec’s Addax deal would mark the most expensive foreign acquisition by a Chinese oil company, surpassing the US$4.18 billion deal by China National Petroleum Corp, or CNPC, to acquire Canadian company PetroKazakhstan in 2005.

But it falls short of the $US13 billion ($A16.1 billion) Chinalco paid out last year to become the largest shareholder in Anglo-Australian miner Rio Tinto Plc.

Chinalco tried unsuccessfully to top its own milestone this year, offering to invest an additional US$19.5 billion in Rio Tinto.

However that potential tie-up was thwarted by a shareholder rebellion.

With the Addax deal, Sinopec, which imports 70 per cent of its oil, will secure supplies from Africa and Iraq’s Kurdish region.

"(Sinopec) is vulnerable to crude oil price fluctuations on international markets," IHS Global Insight analyst Thomas Grieder said.

"This is why it is looking abroad to boost upstream operations... and insulate itself against any possible shock."

Since the Chinese government controls refined product prices, Sinopec has been unable to pass on costs from soaring crude prices in the past year.

Its refining operations suffered a loss of 114 billion yuan ($US16 billion, $A19.81 billion) in 2008, according to media reports.

"Oil prices have fallen to half of what they were last year and it’s become easier to buy, even if the price (for Addax) seems fairly high," said Favennec.

Sinopec’s offer represents a premium of 47 per cent on the closing share price on June 5, just before preliminary discussions were announced.

"This is typical of Chinese companies. They routinely bid over 30 per cent above the market price," Grieder said.

"It is mainly political. That’s why they can bid so high."

Beijing’s support for the energy sector was made clear this year in a series of loans extended in exchange for oil supplies to an assortment of countries, including Russia and Brazil.

At the end of April, China invested close to $US46 billion ($A56.97 billion) in foreign natural resources, including hydrocarbons, state media reported.

For the sake of energy security, China has taken steps to diversify its supply sources.

"Most Asian countries import their oil, logically, from the Middle East. It’s the closest," Favennec said.

"Except China has a diversification system and it also imports a lot from Sudan, Angola, Nigeria - where Addax has a lot of production," Favennec said.

With Addax, China gains a foothold in Iraq’s Kurdistan region with the key Taq Taq oil field.

But the deal comes with political risk: the Iraqi government has threatened to blacklist it along with others that it has not approved.

"It could happen but it is not really known for certain ... Iraq is still an evolving market. The government also is evolving," said Victor Shum, an analyst at energy consultancy Purvin and Gertz.

Baghdad has repeatedly said it is opposed to the autonomous Kurdish region signing its own contracts, a position which Kurdish officials have thumbed their nose at by inking dozens of agreements with foreign firms.

Iraq’s oil minister is likely to be frustrated to see a Chinese national oil company sweep in and give international credibility to an oil law unilaterally passed by Iraqi Kurdistan, Global Insight’s Samuel Ciszuk said.

Iraq is this week due to announce which foreign firms have won contracts to develop its oil and gas fields nationalised decades ago by Saddam Hussein’s regime.

Papua New Guinea Post-Courier:

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