China prepares to buy foreign oil companies

By Richard Spencer
The Telegraph, London
Sunday, February 22, 2009

http://www.telegraph.co.uk/finance/newsbysector/energy/4781037/China-pre...

China is preparing to open a new phase in its race for the world's resources by using its huge currency reserves to buy foreign oil and gas companies.

This proposal may risk a backlash from countries that fear that China is using the world's economic crisis to tilt the balance of trade and diplomacy in its favour.

A conference of officials from the National Energy Administration has agreed to consider establishing a special fund for China's state-owned companies to buy oil and gas firms overseas. The beneficiaries would be the Beijing's three giant energy companies -- Petrochina, Sinopec, and CNOOC.

"Firms will be able to benefit from low-interest loans and, in some cases, direct capital injections," according to China Petroleum Daily.

This state money would be used to fund takeovers or mergers with resource companies abroad. Which foreign firms, if any, have been identified for takeover has not been disclosed. But the dramatic fall in oil prices since last summer, and the strains caused by recession, have driven down the share prices of many energy companies, making them more affordable targets for predatory competitors.

Jiang Jemin, the chairman of Petrochina, recently remarked that the "low share prices of some global resource companies provide us with fresh opportunities."

The possibility of a Chinese state subsidy for overseas acquisitions may ring alarm bells in Western economies. Four years ago, CNOOC tried to buy an American oil company, Unocal, and succeeded in outbidding its main US rival. But the Chinese firm eventually withdrew its offer amid opposition from American congressmen. They opposed the idea of a private US firm falling into the lap of a state-owned company, bankrolled by the Chinese Communist Party.

This time, China may calculate that Western governments are in a weaker position to object. They are, after all, spending billions on taking over their own companies, notably the banking sector.

Chinese leaders have now concluded a new raft of long-term oil supply deals. In the last week alone, Beijing has signed agreements worth more than L28 billion with countries as diverse as Russia, Venezuela and Brazil. Vice-President Xi Jinping last week toured major oil producers in Latin America.

He signed one agreement worth L7 billion with Petrobras in Brazil, and another to invest L5.6 billion in expanding Venezuela's oil production.

The latter deal aims to increase Venezuela's oil sales to China from 350,000 barrels a day to 1 million barrels by 2015. With his customary flourish, President Hugo Chavez went further, claiming: "All the oil China needs for the next 200 years -- it's here. It's in Venezuela."

A separate deal with Russia will exchange L17 billion of Chinese loans to two major Russian companies -- Rosneft, its biggest oil firm, and the pipeline operator Transneft -- in return for for 15 million tons of oil ever year for the next two decades.

Hillary Clinton finished her visit to Asia, her first tour as US secretary of state, in Beijing yesterday. Her travels took in the world's two largest holders of American debt, Japan and China.

She called on Beijing to continue to buy American Treasury bills to fund President Barack Obama's stimulus package. "By continuing to support American Treasury instruments the Chinese are recognising our interconnection. We are truly going to rise or fall together," she said.

Mrs Clinton may be concerned by China's latest energy ties with Venezuela, a stridently anti-American country, and Russia, one of Washington's strategic competitors. But Dong Xiucheng, from the China University of Petroleum, said that Beijing's motives were solely commercial and there was no intention to strain relations with America.

"From the Chinese government's point of view, perhaps a third country's relations with the USA are taken into consideration, but they will not be a big issue," she said.

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