TCA Apr 2014

CNOOC: Expansion into Unconventional Expertise

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Parallel to China’s growth in oil consumption, CNOOC has risen from a relatively unknown player in the oil and gas industry to one of the largest energy firms in the world. This article focuses on two of CNOOC’s overseas investments that exemplify both China’s attempt to diversify its energy sources and the benefits this development will bring to CNOOC and its international partners. By Tim Quijano



The China National Offshore Oil Corporation (CNOOC) Group is the third-largest Chinese state-owned oil and gas (O&G) enterprise after PetroChina and Sinopec. It mainly focuses on exploration and production (the “upstream” value chain) of oil and gas onshore and offshore resources as opposed to PetroChina and Sinopec, who have a more integrated value chain.

CNOOC was the first of China’s three O&G majors to be created by the State Council, China’s main governing body, in 1982. It was granted the exclusive ability to leverage joint ventures with foreign companies to rapidly expand China’s offshore assets in the Bohai Bay, the Yellow Sea and the South China Sea, among other sites.

As China’s oil consumption has grown by more than three times in the past two decades, China’s O&G companies have been acquiring overseas assets to provide China with greater energy security. This development has catapulted CNOOC Group, through its main listed subsidiary CNOOC Ltd., into the top twenty global O&G firms in terms of production.

China does not only want to purchase O&G assets, it also wants to explore, extract and refine them. However, the majority of reserves being discovered today are composed of unconventional resources, which require advanced technology. Though China’s O&G companies are expanding their expertise and experience in this field, their capabilities remain lower than their international counterparts. Outbound acquisitions are enabling Chinese national oil companies (NOCs) to close that gap while, conversely, offering their partners the opportunity to tap China’s recoverable shale gas reserves, which are estimated to be the world’s largest.


CNOOC global deals

Since the 1990s, CNOOC has maintained a diversified approach to its overseas acquisitions – gaining majority shareholder status in some projects while serving a more passive, minority role in others. The firm continues to diversify its supply of upstream resources to reduce potential risks and vulnerabilities to its supply chain. In the first half of 2013, it earned roughly 25% of its profits overseas.

The Beijing Axis has tracked 23 major overseas investments made by CNOOC in 17 countries over the past 12 years. The deals range in size from a USD 1 million purchase of an Indonesian Widori Oil Field to the USD 15.1 billion purchase of Canadian Nexen Energy, the largest Chinese outbound investment in history.

As a Chinese state-owned enterprise (SOE), CNOOC initially faced challenges in the international market. Thus, CNOOC Ltd., the main subsidiary, was listed on the Hong Kong and New York Stock Exchanges in 2001. The newly created firm was required to adhere to the regulations for public companies and answer to private investors, providing most foreign investors, regulators and governments an acceptable level of transparency and accountability. Therefore, CNOOC Group has subsequently undertaken the majority of its overseas acquisitions through CNOOC Ltd.

As a result of CNOOC’s focus on upstream activities, the company has targeted partnerships through which it can attain exposure to international expertise related to exploring and extracting unconventional and geographically-complex energy sources such as deep-water, oil sands, and shale gas.

Though China is not yet a world leader in liquefied natural gas (LNG), CNOOC, having facilitated over 70% of China’s LNG imports in 2012, has led the country’s expanding access to overseas gas extraction and transportation through direct investment and imports. Correspondingly, CNOOC’s engineering, procurement and construction (EPC) arm, China Offshore Oil Engineering Co. (COOEC), leads China in the construction of the capital-intensive LNG port facilities.

Through the lens of two CNOOC overseas acquisitions, this article examines the trend of Chinese NOCs in their overseas acquisitions.


Recent CNOOC deals in Africa and Canada

China has fostered strong political relationships with Canada and many nations on the African continent for decades. These ties have facilitated the expansion of Chinese companies into those markets. Both hold important global sources of energy. For example, Canada has the world’s third-largest oil reserves and the world’s seventh- largest recoverable shale gas reserves. Fittingly, China represents 28% (USD ~28 billion) of the foreign investment into Canada’s O&G sector from 2007 to 2013, compared to the US’s 19% (USD ~19 billion). Similar in importance to CNOOC, the African continent was the source of roughly 10% of CNOOC’s O&G production in 2013, with Nigeria, Angola, Uganda, Sudan and South Sudan being production hotspots.

CNOOC, however, has felt more resistance to its approaches in other countries, especially the US. CNOOC’s failed attempt to purchase Unocal for USD 18.5 billion in 2005 (compared to Chevron’s later- accepted offer of USD 17.1 billion) is a prime example of the US government blocking Chinese investment due to political considerations.


OML 130

China’s first investment in the Nigerian O&G industry took place in 2006 through CNOOC’s acquisition of a 45% equity stake in Oil Mining Licence 130 (OML 130) from South Atlantic Petroleum for USD 2.3 billion. With depths ranging from 1,100 m to 1,800 m, OML 130 spans a 2,590 sq. km plot of the Gulf of Guinea in the Niger River Delta. It is composed of four O&G fields (in order of viability) – Akpo, Egina, Egina South and Preowei – and a range of other exploration prospects. Akpo reached a production plateau of 175,000 b/d and 9 million cm of natural gas per day by early 2011. Egina is expected to come on-stream in 2017.

CNOOC’s interest in the oil block is related to two facets of the project. First, OML 130 was CNOOC’s first venture into deepwater drilling, a key focus in China’s overseas investment agenda. Deals like this have allowed CNOOC to acquire key technology to explore and develop O&G deposits in the South China Sea. New technology also meant that COOEC, CNOOC’s EPC subsidiary, learned from and gained exposure to Samsung Heavy Industries, the leading deep- water engineering, procurement and construction (EPC) contractor for the Akpo oil field. Secondly, as CNOOC’s first project in the Niger Delta, a minority stake in OML 130 provided a unique opportunity to diversify the firm’s geographical risk and establish a foothold in Africa that could be leveraged for future projects.

CNOOC successfully secured the bidding process for OML 130 partially due to its access to a USD 1.6 billion loan from China Exim Bank to develop Akpo. CNOOC also committed to rehabilitate a local refinery, construct a railway line and build a hydroelectric power station; however, these three projects fell through due to a regime change soon after the deal went through.

As seen in the “Angola Model”, Chinese companies frequently contribute to improving the local infrastructure as part of an investment. Additionally, the inexpensive financing CNOOC received for this investment is an example of the unique benefit Chinese SOEs bring in their overseas expansions.


Opti Canada

Opti Canada, an Alberta-based oil sands developer with a 35% stake in the Long Lake Oil Sands Project in the Athabasca region, was seeking a strategic partner after a series of equipment failures and lower-than-expected production figures. The firm filed for bankruptcy protection in early July 2011 after suffering from a shortage of capital for several quarters.

Shortly after their application was submitted, CNOOC Ltd. acquired Opti Canada for USD 2.1 billion. CNOOC was well matched for this project mainly because of its deep pockets and access to the Chinese market. However, from CNOOC’s perspective, this deal was only the stepping stone to its 2013 acquisition of Nexen, who owned the other 65% of the Long Lake Oil Sands Project, and other strategic assets around the globe.

CNOOC management leveraged this project to expand its oil sands expertise and gain access to Nexen to inform them on their acquisition intention. Nexen, as of February 2013, became CNOOC’s wholly-owned subsidiary in a deal worth USD 15.1 billion. Increasing CNOOC Ltd.’s total oil reserves by over 12%, the Nexen acquisition dramatically expanded CNOOC’s expertise in deep-water drilling, shale gas, as well as conventional O&G. Furthermore, Nexen held strategic assets in the North Sea, offshore West Africa and in the Gulf of Mexico. Nexen, whose management team has remained largely the same following the deal, now manages around USD 8 billion of CNOOC’s assets in Central and North America. This strategy of purchasing a minority stake in a firm before making a majority or whole acquisition is not uncommon.

Such strategies do, however, have their risks. So far, the Long Lake Oil Sands Project has only been able to reach half its production goals. Some analysts suggest that CNOOC’s inability to overcome rising costs and technical difficulties, and ramp up the project, has contributed to a decline in CNOOC Ltd.’s share price over the last few years. CNOOC continues to be optimistic and has further injected capital into the project. This year will be critical in determining whether the acquisition of an effectively bankrupt project for access to a larger target was a prudent strategy.


Key takeaways

CNOOC’s investments in OML 130 and Opti Canada demonstrate common themes followed by Chinese companies and provide insights on how international O&G stakeholders, from suppliers and EPCs to project partners, can benefit from them.

Lack of expertise in unconventional energy resources. CNOOC’s expansion into unconventional O&G resources demonstrates the firm’s and China’s forward-looking business and energy security strategy. However, Chinese O&G companies’ lack of experience in the necessary technologies has constrained its growth. Expect CNOOC to continue seeking partnerships with firms that have access to advanced technologies that it can implement in China’s shale gas and deep-water reserves, as well as in markets that will provide CNOOC with a more diversified energy and geographic portfolio.

Access to cost-saving measures. Chinese companies, especially those with close ties to government, have the ability to borrow at significantly lower rates than what is otherwise available to their international competitors. Furthermore, Chinese EPCs can also leverage, albeit to a decreasing degree, cost-saving avenues, such as Chinese raw materials and labour, to offer more competitive service and product offerings than international competitors. In this manner, the involvement of CNOOC and other Chinese firms can increase their and their partners’ return on investment.

Opportunities for international stakeholders. CNOOC seeks advanced international firms’ expertise and technology in exploring and extracting unconventional O&G resources. CNOOC can offer its partners access to China’s underdeveloped domestic market that may become the world’s largest. In the same way that Nexen has taken responsibility of managing over several USD billion worth of CNOOC’s Central American assets, many stakeholders hold valuable experience operating in key markets without the same level of scrutiny or political interference faced by Chinese NOCs.



Chinese companies will continue to acquire overseas O&G assets as the country’s demand for a diversified range of energy resources and technologies continues to increase and domestic expertise remains limited. CNOOC and the other Chinese NOCs represent an evolving opportunity landscape to international O&G stakeholders, from foreign EPCMs, to oil service providers. These case studies present examples of a key Chinese company’s strategies and how international stakeholders could benefit from such a trend.


Tim Quijano Associate
Editor: The China Analyst
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