China’s Energy Industry Pushes into Developed Markets

PetroChina agreed last month to buy a 50 percent stake in a Canadian gas venture for $5.4 billion. If the deal goes through, it will be the largest overseas acquisition on record for the Chinese oil company.

The transaction will also signify a shift in the merger and acquisition strategy of the Chinese energy industry. For decades, major players like PetroChina, Sinopec and Cnooc focused on building out their operations in politically volatile regions like Sudan, Venezuela and Iran. Now, they are competing with the multinational giants on their own turf, striking partnerships and joint ventures in the United States, Canada and Latin America.

Chinais becoming an important driver of energy mergers. In 2009 and 2010, Chinese oil companies struck nearly $50 billion of deals outside their borders, roughly 5 percent of the industry total.

The effort comes as companies in more developed markets are pulling back or divesting assets. Last year, majors like Statoil, ConocoPhillips and BP were net sellers.

Deal-making is part of the country’s broader energy goals. With a population of 1.3 billion and a fast-growing economy, China is the world’s largest energy consumer and the biggest polluter.

 But its energy demands are quickly outstripping its supplies, leaving the economy vulnerable to disruptions like the current Middle East turmoil. China, once Asia’s most important oil exporter, started importing in 1993. With domestic production stagnating, the country generated 3.99 million barrels a day — less than half the annual consumption. The International Energy Agency estimates China will have to rely on imports for 79 percent of its oil needs by 2030.

“They have a lot of money, a lack of energy security, and their import dependency is not getting any better,” said Paul Ting, an expert on China energy policy who runs an industry consultancy firm. “They’ve just got to get energy any way they can.”

The country’s oil majors recognized the supply problem decades ago. After Deng Xiaoping opened up the Chinese economy, PetroChina, Sinopec and Cnooc slowly moved to expand overseas. With large multinationals or state-run companies already in control of the better oil fields, Chinese players had to focus on the more volatile and politically vulnerable regions.

“They were late-comers to the game, and a lot of the good assets were taken,” said Julie Jiang, an analyst at the International Energy Agency. “They went to difficult areas.”

In 1996, PetroChina’s parent entered Sudan, which has a history of civil war and human rights abuses that has kept many multinationals away. Despite worldwide protests, PetroChina built a significant operation in the territory, which now accounts for 3 percent of China’s oil imports. The big three now operate in 31 countries, including Angola, Venezuela and, until recently, Libya.

Before the financial crisis, “their reputation greatly exceeded what they were doing,” said Erica S. Downs, a Brookings Institution scholar who has written on Chinese oil companies’ changing strategies. “If you look at 2009 and 2010, they’re going for bigger-ticket items. They want to compete with the Exxon Mobils and the Shells of the world.”

PetroChina, Sinopec and Cnooc declined to comment.

Buyers are treading more cautiously than in the past. In 2005, Cnooc made an $18.5 billion hostile bid for Unocal in the United States. The prominent deal was quickly quashed by political opposition — a humbling experience that prompted the Chinese to reassess their aggressive stance overseas.

Now, the country’s energy leaders are moving into the Americas in friendlier ways by taking smaller stakes or creating joint ventures. Wood Mackenzie, an energy consulting firm, said that even the banner year the major players had in 2010 was characterized by nothing more than a “steady stream of midsized deals.” For example, Sinopec joined up with Total of France to buy a 9 percent stake in Syncrude, a unit of ConocoPhillips in Houston, for $4.65 billion.

Chinese oil companies “are on a steep learning curve, but they’ve come up it quite some way,” said a banker familiar with the industry deal-making who requested anonymity because he was not authorized to speak to the media. “They’re all conversant with Western culture and Western deal-doing.”

They’re also learning to play politics. When Cnooc announced it was buying one-third of Chesapeake Energy’s south Texas shale assets for $1.1 billion last October, it established the first successful onshore move by a Chinese oil company in the United States.

According to people with knowledge of the deal, Cnooc got the transaction “precleared” by the Committee for Foreign Investment in the United States, a panel that monitors national security issues related to mergers and acquisitions. Cnooc management would not have gone ahead without that tacit approval, the people said.

“It’s not like there’s a prohibition on Chinese companies buying energy assets in the United States,” said Bob Schlossberg, a partner at the law firm Freshfields Bruckhaus Deringer in Washington. “But politics, let’s face it, does play a part.”