China's Insatiable Energy Deals Only Growing (PTR, XOM, CVX, RDS-B, SNP, CEO, MRO)

On Monday, the Shanghai Composite went under 2,700 and between Monday and Tuesday is back to lows not seen since May’s end. Technically, it is back in bear market territory now that it has come off 20% from the highs.  But there is one single aspect here which may be the silver lining for China.  As asset prices sink, it is easier for China and its central government to buy more and more of whatever it wants on the cheap.  While the notion that China’s deal making for key assets is not new, the pace at which China is locking in energy supply deals seems to only be increasing. And it is effectively doing it without a single handshake taking place on US soil and without US oil.

After reviewing some of the public deals that China has been making, it is rather obvious that its  appetite to buy and secure more sources of oil and gas is not ending whether China is technically in the 2007 to 2009 recession or not.  If you have what many Westerners believe is a 50-year plan, then overextended Americans, lower commodity prices, and cheaper stocks of key infrastructure and energy players just makes it easier  to buy up oil and gas for all of the energy needed to power the infrastructure for over 1.3 billion people.  China has already spent billions in several bigger public deals and it seems as though the size and the pace is only rising.

PetroChina Co. (NYSE: PTR) is taking a 60% stake in two oil sands projects in western Canada in a $1.7 billion (U.S. equivalent) in a deal with Athabasca Oil Sands Corp.  These two projects, the MacKay River and Dover oil sands projects, are both owned by Athabasca and are located in northeast Alberta.  As far as what the surveys have shown, these are believed to hold about 5 billion barrels of bitumen heavy crude.  As oil sands are far more capital intensive and require a much higher oil price equivalent break-even point, this is just another long-term secured energy pact that China is capitalizing on.

Exxon Mobil Corp. (NYSE: XOM) and PetroChina already signed a sales and purchase agreement in Beijing for the long-term supply of LNG from the proposed Gorgon LNG project in Australia. Exxon Mobil owns a 25% interest in the offshore Gorgon LNG facility, and Chevron Corp. (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS-B) have the remaining stake.  Under the joint-venture agreement, each company will compete to market their gas separately.  China is on the hook for more than $40 billion over a 20-year period if the terms have not changed.

Sinopec acquired oil company Addax Petroleum in a bid of more than $7 billion for its large operations in Western Africa and the Middle East.  This company had listed 738.4 million barrels of oil in total proved, probable, and possible reserves as of the end of 2008.

Integrated oil major Marathon Oil Corporation (NYSE: MRO) announced in July a pact to sell its 20% interest in a block offshore Angola for $1.3 billion…. Chinese oil companies CNOOC Ltd. and Sinopec were the buyers of the deal expected to close late in 2009.  The partners in the deal might block this with a right of first refusal, but by now you get the gist.

Earlier this year, Petroleo Brasileiro SA in Brazil agreed to a $10 billion loan from the China Development Bank and to supply oil to China through China Petroleum & Chemical Corp. (NYSE: SNP).  While this is at market prices, the deal does continue to secure more and more oil for China.  Around the same time, China National Petroleum signed separate deals with Russia and with Venezuela where China would provide $25 billion to Russia and $4 billion to Venezuela in loans for long-term commitments to supply oil.

Kuwait Petroleum Corporation and Sinopec (NYSE: SNP) were well along on plans to build a new 300,000 barrel per day refinery in Guangdong province back at the end of Spring 2009.  The deal also had Royal Dutch Shell Plc (NYSE: RDS-B) and Dow Chemical Company (NYSE: DOW) each as owning 10%.

China Petroleum (NYSE: PTR) also announced a deal back in May to buy 45.5% of Singapore Petroleum for just over $1 billion.

Chinese oil giant CNOOC Ltd. (NYSE: CEO) tried earlier this decade to make an unsolicited acquisition offer to buy Unocal here in the United States.  This was essentially blocked by the Congress wrangling over China owning a large US oil reserves (or by CFIUS) because of national security concerns.  And then Unocal was ultimately acquired by Chevron in a deal which did receive approval from CFIUS and other regulators.

After failing for Unocal and deciding to go elsewhere for its oil besides the U.S., a Canadian oil and gas interests company called PetroKazakhstan with reserves of roughly 550 million barrels of oil and 25 billion cubic feet of natural gas (old estimates from around the time of the deal that are likely different today).  This was acquired by China National Petroleum Corporation in 2005 in a deal which valued PetroKazakhstan over $4 billion.

There is another notion here which may only move to infuriate some readers.  China is more than able to do deals in Iran.  And guess who has been interested in securing Iraq’s vast oil supplies?  That chapter of Iraq’s history is still being written as of today.  It seems T. Boone Pickens’ thought that the U.S. should have an at-market call option on all that oil may come true, at least for China.

These are just some of the big public deals that have been made.  The real tally is of course hard to know when you only have the press release data to go through for real details and the exclusions or conditions that exist.  But this tally here is well over $50 billion in oil heading to the Chinese.  And not a single drop of it has been via a Chinese company acquiring a prized public U.S. oil company.  Now go ahead and lop in all the uncounted or smaller deals that are in the millions or unknown size of transaction dollars that have taken place in emerging market countries.

China has done all of this without launching a single air strike and without the use of military force.  And the U.S.’s biggest public concern in whether China will keep buying up U.S. Treasury notes and bonds….

JON C. OGG
September 1, 2009