IHS Global Insight Perspective | |
Significance | There is speculation that CNOOC is attempting to acquire an interest in up to 23 oil blocks in Nigeria, although nothing has been agreed and talks are ongoing. |
Implications | The deal would see China increase its energy security by acquiring a number of assets that are either under development or currently producing. However, the acquisitions would cause western majors to lose key assets. |
Outlook | The Nigerian federal government clearly wants to make a deal with the Chinese who have the funds to make a major investment in the country, but Nigeria cannot afford to alienate the western majors, which lead the way with technology and training and already feel they are losing out in the proposed reforms due to be implemented in the near term. |
CNOOC Targets 23 Oil Blocks
CNOOC is reportedly looking to acquire a stake in up to 23 oil blocks in Nigeria in a deal which could be worth around US$30 billion, according to the Financial Times. The acreage is currently held by the western majors, which dominate Nigeria's oil sector such as Shell, ExxonMobil, and Chevron and any attempt by the Nigerian federal government to hand key assets to China would cause further deterioration in relations between the Nigerian government and the international oil companies, which have faced considerable operational problems over the past three and half years due to militant attacks on oil company facilities in the Niger Delta region. CNOOC appears to be in talks to acquire stakes worth about 6 billion barrels of oil reserves in Nigeria, according to the Financial Times, citing a letter from the office of Nigeria's President Umaru Yar'Adua to CNOOC's representative, Sunrise. While the value of the potential deal has not been disclosed, speculative estimates put the offer at between US$30 and US$50 billion, which would make it CNOOC's largest overseas acquisition. However, Nigerian officials have stated that no decisions have been made on the block and negotiations are ongoing with CNOOC and other oil companies in the region. This proposed deal has a number of hurdles to clear as competition for Nigeria's oil resources increases. Nigeria's federal government is in the process of implementing wide-ranging reforms in the country's energy sector. The reforms have been underway for almost two years, however little has been achieved in this time. The process of change is being led by oil industry veteran and technocrat Rilwanu Lukman, who is currently Nigeria's petroleum minister and has chaired the Oil and Gas Implementation Committee (OGIC). Lukman has been working without fanfare with leaders from various parties such as the National Assembly, the unions, and oil companies to push ahead with the policy package. The oil majors operating in Nigeria largely welcome these measures, but have grave concerns over the financial terms included in the new legislation of the Petroleum Industry Bill, which significantly increases tax and royalty payments for IOCs operating in Nigeria; it has long been known that the production sharing contracts (PSCs) signed back in 1993 would be renegotiated in order to give the government improved terms. The new legislation will also include provisions for all future PSCs to include renegotiation clauses. Currently licensed but unexplored acreage must be relinquished under the new legislation to allow other oil companies a foothold in Nigeria’s offshore sector as the government seeks to increase its reserves to 40 billion barrels of crude. The multiple taxes, high royalties, and loss of incentives under the Petroleum Industry Bill as currently proposed will have a significant negative impact for the western majors operating in Nigeria, but Chinese NOCs may be able to absorb the less attractive terms due to them being backed by the state, as long as it improves the country's energy security over the long term.
China's NOCs have been keen to acquire high-potential fields overseas to take advantage of the fall in asset valuations and the plummet in global oil demand and crude oil prices since the start of the global economic crisis. Chinese oil companies have already spent US$13 billion on overseas assets since December 2008 to expand their portfolios and to shore up long-term supplies of crude oil to the domestic market, given that China's crude oil import dependence is due to rise to between 60% and 65% by 2020. A key focus of China's overseas acquisition strategy has been Africa, due to the government's concern to reduce its oil import dependence on the Middle East region, which remains politically volatile. CNPC/Petrochina and Sinopec have already scored a number of high-profile agreements including numerous oil-for-loans deals with countries like Russia, Kazakhstan, and Venezuela and the purchase of Swiss-based Addax Petroleum, with assets in Africa and Iraqi Kurdistan (see China: 12 August 2009: Sinopec Receives Approval for Addax Petroleum Acquisition). However, CNOOC has retained a relatively low profile and earlier this year said it had no plans to expand its overseas asset portfolio during the financial crisis. However, CNOOC appeared to reconsider its strategy in August when Chairman Fu Chengyu said the company would focus on taking stakes in overseas ventures. Indeed, with around 83% of its reserves located in areas like the Bohai Bay and the South China Sea, CNOOC has strong incentives to move into new overseas markets to spread risk and grow its asset base. The company also benefitted greatly from soaring crude prices last year, while it has continued to make margins on crude sales in 2009 given relatively low operational costs and therefore has a solid financial base to support an overseas acquisition strategy. Offshore Nigeria is an attractive area for CNOOC. The company is already familiar with the operating environment through its US$2.69-billion stake purchased in 2006 in deep-sea oil block OML-130 while the area has large oil reserves that CNOOC can either sell on the open markets to generate revenue or import to support its growing oil refining base in China. Exploration and production (E&P) activities in deepwater blocks could also improve CNOOC's deepwater drilling capabilities, supporting its longer term strategy of exploring high-potential deepwater areas in the South China Sea.
Outlook and Implications
The uproar in the United States in response to CNOOC's attempt to acquire Unocal in 2005 made the company cautious about large overseas forays and the letter to Nigeria's president was probably intended to be kept out of the public eye so as not to provoke alarmist allegations that CNOOC was trying to lock up major crude streams at the expense of western majors. However, CNOOC has reiterated that it will adopt a co-operative strategy to boost its overseas crude oil output and is unlikely to adopt a confrontational strategy while it is attempting to expand a fledgling overseas portfolio. CNOOC is therefore likely to want to negotiate stakes in some of the blocks rather than trying to acquire them off major IOCs, which could provoke all kinds of legal complications. Whether the company will be successful in gaining access to 6 billion barrels of oil is also highly unlikely as the Nigerian government will want to diversify investment in offshore acreage, (not hand disproportionate amounts to the Chinese major) in order to increase leverage over all the companies involved.
China's NOCs are targeting reserves in other Sub-Saharan African countries but have lost out in Angola after government officials decided to block the sale by U.S. energy group Marathon Oil Corp. of its holding in offshore Block 32 to Sinopec and CNOOC and instead use its own NOC Sonangol’s right-of-first-refusal to increase its stake in the block, which is expected to produce first oil in 2012. CNOOC has also formally declared its intent to acquire Kosmos Energy's stake in Ghana's Jubilee oilfield, due onstream before the end of next year. CNOOC chairman Fu Chengyu told Reuters; "We are participating in the bid". The Jubilee field is the largest oil discovery to be made in West Africa in the past decade and could hold reserves of up to 2 billion barrels oil. When the government of Ghana officially approved the field's "Phase 1 Development Plan and Unitisation Agreement" in mid-July, Kosmos's stake was registered as 23.49%.
Chinese NOCs have been investing in Nigeria's oil sector for most of the decade but they have a mixed record, which should alert Nigeria's federal government in Abuja to the fact that signing these deals will not miraculously solve all of Nigeria’s problems. China’s President Hu Jintao during a visit to Nigeria in April 2006 secured a multi-billion-dollar deal for CNPC, which gave the firm first refusal on four oil blocks, two in the Niger Delta Basin and two in the Chad Basin. As part of the deal the Chinese would rehabilitate the broken-down Kaduna refinery, which was in need of huge investment, however, it was not long before the Chinese lost interest in the refinery deal and did not keep its end of the agreement. There have been examples of success as well. At the start of 2006 CNOOC concluded its purchase of South Atlantic Petroleum's 45% stake in offshore oil block OML 130 for US$2.3 billion (see Nigeria: 9 January 2005: CNOOC Makes Play for Nigerian Akpo Acreage; ONGC Pulls Out). This block contains the Akpo gas and condensate field, which came onstream in March this year and will reach peak production of 225,000 b/d next year of which nearly 80% will be condensate. The block also contains the Engina field, estimated to have recoverable reserves of 500 million barrels, which is set to be developed with a new floating production, storage, and offloading (FPSO) vessel with first production not expected until the second half of 2013.
The Nigerian federal government has to be careful not to alienate its western oil major partners, which have been operating in the country for many decades and in some cases since Nigeria first began producing oil. It is Nigeria's prerogative to get the best deal it can when contracts are to be renegotiated, but the country could find itself losing out on the transfer of technology and skills, which is one major advantage the western majors bring to the country. Despite holding interest in the reserves of deep offshore waters, China often tends to work with other IOCs in order to exploit these resources. As Nigeria seeks to increase its production capacity to 4 million b/d and increase its reserves to 40 billion barrels, it should be wary of the western majors going to court in order to protect their assets, which could potentially slow down the progress of oil fields currently under development.