Sinopec Oil-Production Venture Struggles

China Petrochemical Corp.'s partner in its only oil production venture in Australia appointed administrators Monday, a move that underscores how some of China's earliest investments in the resource-rich country have struggled to meet expectations.

AED Oil Ltd. raised US$561 million in 2008 when it sold 60% of its underperforming Puffin oil field in the Timor Sea to China Petrochemical Corp., also known as Sinopec. The deal, finalized just as oil prices were approaching a high above $147 a barrel, was driven by Sinopec's desire to reduce its reliance on China's refining sector for revenue.

However, around a year after the deal was sealed, the Puffin joint venture suspended operations after alleging that the Norway-based owner of the oil production and storage platform at the field had breached safety standards. Sea Production Ltd. denied the claims and said it would seek at least US$60 million compensation for lost revenue.

An international arbitration panel found in favor of Sea Production and the Puffin joint venture was ordered to make a "substantial payment," AED said Aug. 4.

Melbourne-based AED said Monday the decision to appoint KPMG as administrators was connected to the panel decision going against it. A Sinopec spokesman couldn't immediately be reached for comment.

Production rates at Puffin failed to meet expectations in the months after the field was commissioned in October 2007. One snapshot of performance, given in January 2008, put output at between 6,000 barrels per day and over 10,000 barrels per day, a disparity that AED blamed at the time on issues relating to the production well rather than the field overall.

Subsequent drilling turned up mixed results. AED said in a quarterly production report last month that a redevelopment project "may eventually be possible," given that oil prices are recovering from end-2008 lows and the industry has pioneered new techniques for the development of marginal fields.

China, the world's second-largest oil importer by volume after the U.S., is investing heavily in Australian resources to secure materials for its fast-growing economy. By owning assets rather than buying commodities on the open market, China hopes to build a hedge against fluctuations in prices.

The AED deal was agreed at a time when China was struggling to compete against Western rivals for global resources assets, including oil, because high commodity prices had left them awash with cash and banks were willing to lend for new projects. The credit crunch that followed the collapse in commodity prices in the second half of 2008 changed the dynamic, with China gaining a stronger hand in deal negotiations because many Western companies put new investments on hold to conserve cash.

Other deals struck by Chinese companies prior to the financial crisis have also hit hurdles.

Sinosteel Midwest Corp. put its 2 billion Australian dollar (US$2.09 billion at current rates) Weld Range iron-ore mine on hold in June owing to uncertainty over the multibillion Oakajee port-and-rail development in Western Australia state. The company, a unit of state-owned Sinosteel Corp., acquired the project through a takeover of Midwest Corp. in 2008.

Citic Pacific Ltd.'s Sino Iron project, purchased in 2006, has been hit with delays and cost overruns totalling US$900 million. Anshan Iron & Steel Group's iron ore joint venture with Gindalbie Metals Ltd. has suffered similar issues.

To be sure, some Australian assets bought by Chinese companies are performing as expected, including mines picked up by Yanzhou Coal Mining Co. through its A$3.54 billion acquisition of Felix Resources Ltd. in 2009. Chinese companies are also staking out positions in giant liquefied natural gas terminals planned for Queensland state, which will be fed by onshore coal seam gas fields.

(wsj.com, edited by Topco)