China's Increasing Stake In North America’s Energy Industry now at $17 Billion
China is slowing gaining a foothold into the US and Canada oil and natural gas industry, said a report by the Wall Street Journal on Tuesday, as Chinese companies continue to scoop up minority stakes and joint ventures with North American oil companies.
According to data provider Dealogic, Chinese companies have invested more than $17 billion into oil and gas deals in the US and Canada since 2010, with state-owned companies such as Cnooc (China National Offshore Oil Corporation) and Sinopec (China Petrochemical Corporation) leading the charge by taking up non-operating stakes in US companies.
In January this year, Sinopec agreed to pay $2.5 billion to Devon Energy Corp of Oklahoma City for a one-third stake in about 1.3 million acres of drilling property in Ohio, Michigan and elsewhere. Chinese investment in North American oil and gas assets have also already reached $4.2 billion so far this year, after spending just $6 billion in the whole of 2011 and $6.8 billion the previous year.
"Cnooc executives have been openly saying: 'Since 2005, they haven't had a strategy to invest in the U.S., but they think now is the time to do it'," said Chesapeake Energy Corporation CEO Aubrey McClendon, whose company received a $1.08 billion payment from Cnooc for a one-third stake in Chesapeake's oil-rich Eagle Ford Shale formation in south Texas.
But the recent Chinese acquisition strategy has been vastly different from its previous attempts to buy US oil companies, said McClendon, who felt that the Chinese were looking for "a non-threatening way to get back into America."
"They didn't come over here and try to buy Chesapeake," noted McClendon. "They came over here to buy a minority, non-operating interest in an asset and not take the oil and gas home."
Indeed as previous attempts by Chinese companies to buy over US oil assets have proven to be particularly problematic, the Chinese are now seeking just minority stakes in companies, with Chinese personnel said to be kept at arm's length from the more advanced US technology.
In 2005, the first major attempt by the Chinese to acquire a US oil company failed dramatically as public protest led to US lawmakers passing a resolution that prevented Cnooc from purchasing Unocal - a California-based oil company. Cnooc blamed "unprecedented political opposition" back then for the lack of success, while Unocal was subsequently bought over by Chevron for $17.3 billion.
In a 2006 interview with the Wall Street Journal, Cnooc's then chairman, Fu Chengyu, admitted that the company had "learned we need to be more prudent in terms of public relations and political lobbying when dealing with such a big deal. We now understand American politics better."
The failure to purchase Unocal also led to two years of zero investment by the Chinese in the North American energy industry, before PetroChina, bought 60 percent stakes in two oil-sands projects from a Canadian operator for about $1.9 billion in 2009.
"The most likely outcome is that they would want us to participate with them in China," said David Hager, who heads Devon Energy's exploration and production business.
Zhong Hua, the chief financial officer of Cnooc, added that the Chinese acquisitions had no ulterior motive, besides learning from the US companies on how to drill more effectively in China.
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"With the US experience, the company is fully capable of developing and deploying its own technologies within a short period of time in the coming years," he said.
Fu Chengyu, who has since moved to Sinopec, also expects Chinese investment to continue growing overseas.
"The slowdown of the global economy brings us new opportunity to go overseas, expand overseas M&A and introduce advanced technology and talent," said Fu during a New Year's address to Sinopec employees in January.
Originally published at the Economy Watch on 07 March 2012