Business-savvy Chinese energy firms surge ahead

The first week of the year began on a gloomy, wintry note with Chinese equities down from the word go. Efforts to pump up optimism for monetary easing did nothing to break the psychological clampdown among investors. A sense of trepidation was added to the markets with tensions rising between the West and Iran after the US and European Union expressed their intent to impose sanctions against oil exports from the Middle Eastern state.

Despite this, energy companies were the only ones which showed some gains on the Shanghai Exchange, bringing the focus back on these behemoths.

State-owned energy firms are under renewed glare due to two recent developments. Fu Chengyu, chairman of Sinopec, Asia's largest refiner, was named one of the 12 most influential CEOs to look out for in 2012.

Second, the International Energy Agency, in its recent report, noted that contrary to public perception, China's major oil companies are not blindly state-driven, but uncannily market-oriented. These trends only indicate that 2012 will be another year to watch out for as China marks out more oil territory.

Commercial basis

The IEA report emphasised how big oil companies such as China National Petroleum Corp, Sinopec and China National Offshore Oil Corp or Cnooc don't always act as extensions of the state. They pursue strategies independently and on a commercial basis and are not strictly government run. In what may well raise Beijing's hackles, IEA made a crucial observation that in their operations abroad, Chinese energy companies operate commercially both in acquisitions and in shipments of oil and gas. They do not automatically ship equity oil to China, but also sell locally, based on prevailing market prices and profit angle, causing much concern in Venezuela. Chinese majors have operations in 31 nations with rights to the output produced in 20 of them, especially Kazakhstan, Sudan, Venezuela and Angola.

So far, these state-owned companies have accrued the best of advantages. With government backing, they have blazoned into countries like Iran and Sudan, places where Western companies are discouraged to venture. Now with the latest Iran salvo, a sharp diversification strategy seems on the cards.

Against embargo

China, which is the biggest buyer of Iran's oil, has as of now publicly rejected Western sanctions aimed at Tehran's energy industry. It is highly unlikely to support an oil embargo, considering that 11 per cent of its oil imports in 2011 came from Iran.

The beleaguered country is the third biggest crude source after Saudi Arabia and Angola, and China will have a tough time replacing this supply. But of late, the three majors, Sinopec, CNPC and Cnooc have slowed their pace of investment in Iran.

The ever-alert policy- makers will no doubt study more options. A net oil importer since 1993, China now depends almost entirely on imported oil to satisfy the growth in demand, and international acquisitions remain at the heart of its energy policy. IEA figures indicate that Chinese oil and gas-related international acquisitions in the past two years totalled $47.59 billion (Dh174.77 billion).

Even though Chinese oil companies have experienced setbacks in the global market, the country is still determined to expand internationally. During the first nine months of 2011, energy, chemicals and materials accounted for more than 50 per cent of China's outbound M&As (mergers and acquisitions). Industrialised countries such as the United States and Australia were the major destinations for M&A deals in terms of transaction volumes.

Diversify and acquire

This year too, the biggest oil companies are set to redouble their efforts to expand internationally, the sense of urgency coming from the swiftly changing geopolitics of Iran. Fu Chengyu, the man behind China's relentless acquisition drives in the energy sector, has already extended Sinopec's outbound portfolio.

In November, Sinopec decided to pay $3.5 billion for a 30 per cent stake in the Brazilian unit of Portuguese oil company Galp Energia, in a bid to consolidate in the southern hemisphere.

In December, it completed the final step to buy Canadian oil and gas explorer Daylight Energy. This acquisition will give Sinopec access to Daylight Energy's 69 oil and natural gas assets in Canada. In 2011, Cnooc also acquired Canadian oil sands developer Opti.

In the new year, Sinopec made its first foray into shale gas assets in the United States, with readiness to invest $2.2 billion in exchange for one-third of five new venture blocks owned by Devon Energy.

This way, China also inches ahead in attempting to obtain cutting-edge shale gas exploration technology — now a high priority area.