Global Insight Perspective | |
Significance | Sinopec won a sweepstakes to acquire the 120,000-b/d Udmurtneft production unit from TNK-BP, besting competitors such as MOL, ONGC, Gazprom and Itera, among other known interested parties. |
Implications | The value of the sale was not disclosed, but Sinopec is believed to have paid upwards of US$3 billion for the privilege of getting China's foot in the door in the Russian oil sector, where the window for foreign investors is rapidly closing. |
Outlook | Growing energy sector co-operation between Russia and China could see China's National Petroleum Corp. (CNPC) gain a minority stake in Rosneft as one of the "cornerstone" investors in the state-run Russian oil company's upcoming initial public offering (IPO). |
China Pays for Access
TNK-BP, Russia's third-largest oil company, said yesterday that it had reached a deal to sell its Udmurtneft production unit to Sinopec for an undisclosed sum. The announcement brought to an end months of manoeuvring between a handful of Russian and foreign oil companies, each seeking to throw their hat in the ring in an effort to secure control of the 120,000-b/d production unit based in Russia's constituent Republic of Udmurtia (see Russia: 18 May 2006:Gazprom Hints at Possible Deal on Kovykta-Udmurtneft Deal with TNK-BP and Russia: 3 May 2006:TNK-BP Consider Udmurtneft Offers: MOL Reportedly Highest Bidder). Udmurtneft holds 551 million barrels of proven reserves and 922 million barrels of proven, possible and probable reserves, according to an appraisal by DeGolyer & MacNaughton.
For an asset whose fields are supposedly in decline, TNK-BP is believed to have fetched a price somewhere between US$3 billion and US$4 billion. TNK-BP's shrewd selling strategy, dangling Udmurtneft on the market to size up offers while refraining from a firm commitment to divest the unit until late in the game, appears to have worked like a charm. Numerous potential suitors joined the fray, bidding up the cost of Udmurtneft from a purported starting price of around US$1 billion. Successive bidders dropped out, and Sinopec eventually clinched the deal, giving China its first major successful acquisition in Russia after numerous previous attempts were foiled.
TNK-BP CEO Robert Dudley said that the agreement to sell to Sinopec was a "positive development" that reflected the growing ties between Russia and China in the energy sector. "It brings another major international investor working with strong Russian alliances into the country's oil and gas sector. It reinforces Russia's pivotal role in global energy markets." Indeed, TNK-BP, which decided to sell the unit as part of its efforts to streamline its portfolio to concentrate on core exploration and production (E&P) operations, benefited from the fact that Russian oil assets are becoming increasingly difficult to come by, as the Kremlin (Russia's presidential administration) exhibits more signs of an intention to limit foreign investment in the country's oil and gas reserves (see Russia: 26 May 2006: Resource Nationalism On the Rise as Russia Mulls Changes to Sakhalin Deals, Subsoil Legislation and Russia: 14 June 2006:Russian Government May Introduce Tighter Restrictions for 'Strategic Deposits' ). Although the terms of the TNK-BP-Sinopec deal have not been disclosed, it is fairly certain that TNK-BP received a very good deal for Udmurtneft.
Outlook and Implications
For its part, Sinopec probably overpaid, but such is the price for access to resources in today's oil market as prices hover near record highs and power lies in the hands of those that control access to oil. The Chinese company certainly paid something of a premium merely to gain access to Russian oil reserves; after China's National Petroleum Corp. (CNPC) was blocked from even participating in the Russian government's privatisation of Slavneft in December 2002, buying a producing asset - albeit one with an apparently limited upside potential - from a part-foreign-owned company operating in Russia has not served as China's entry ticket to the Russian oil sector.
Rumours continue to circulate that Sinopec acquired Udmurtneft in co-operation with Rosneft, although the state-run Russian oil company has denied any involvement. Still, as Russian-Chinese ties have improved since the xenophobic exclusion of CNPC from the Slavneft privatisation in 2002, the prospect of additional Chinese investment in Russian oil is becoming easier to fathom. Oil and gas pipeline deals between the two countries, emanating from a series of summits between Russian President Vladimir Putin and Chinese President Hu Jintao, have laid the basis for more cross-border energy sector co-operation. CNPC may soon be the next Chinese company to ink a deal in Russia, since media reports have suggested that the company will be invited to serve as a "cornerstone" investor in Rosneft's upcoming initial public offering (IPO) planned for next month. CNPC could acquire as much as 5% of Rosneft as a strategic investor. Although this is well short of control, a potential CNPC stake in Rosneft would ensure that the door for Chinese investment in Russia's oil sector remains open.