With the oil price dropping as much as it has over the past nine months, one would expect China’s state-run oil giants to go on a shopping spree abroad. China’s so-called big three oil companies — China National Petroleum Corp. (CNPC), China Petroleum & Chemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC) — have been big buyers of international oil assets in previous years, driven by China’s swelling hunger for energy. Now they’ve suddenly put away their wallets, falling in line with an industry that has produced few noteworthy mergers and acquisitions since prices started plummeting in 2014, aside from BG Group PLC’s $70-billion merger with Royal Dutch Shell PLC in April.
Why is Chinese big oil staying silent? To find out, China Real Time interviewed Chen Weidong, the chief energy researcher of the Energy Economics Institute at CNOOC, who writes on the oil industry for The Wall Street Journal’s Chinese website. Here are excerpts, edited for brevity and clarity:
How big a role has Chinese big oil traditionally played in international M&A?
In the last industry cycle between 2009 and 2013, China’s big three were the largest buyers of international oil assets. Data from Petroleum Intelligence Weekly showed that the total net value — the value of assets purchased minus those sold — of overseas deals made by China’s big three was $104.1 billion, much higher than the $9 billion net made by the three largest U.S. oil companies or the minus $50 billion net by their four largest European peers.
The new cycle is still unfolding. But in 2014, Chinese big oil firms made only three deals totaling $2.8 billion — merely 1/8th of the total amount made in the previous year.
Why are they lying low?
I think there are four reasons. First, the big three need time to integrate the assets they just bought. Especially with the price of oil dropping so quickly, they need to tackle the low return (generated by new investments). Second, they don’t have that much cash anymore. Although they are backed by state-owned banks, their pockets are not unlimited and the debt-to-asset ratio is something management has started to worry about.
And there is the “new normal” of China’s economic development, which requires more attention be paid to pollution, a better energy mix, improvement in the quality of oil products and higher efficiency. A secure energy supply is no longer their top priority. Moreover, there have been lessons from their active overseas M&As. Some projects came at a high cost, some with underestimated risk, and some system loopholes led to abnormal losses. Coupled with the anti-corruption campaign, the slowing-down of M&A activities is a good time for them to reflect and learn.
How about Chinese companies other than the big three?
Private Chinese companies are in fact very active. There are a number of reasons. Some accumulated wealth and management experience in other industries and are turning to the oil sector for higher returns. Some bought overseas energy companies in hopes that when China opens up the energy industry to foreign players, they can enter the monopolistic market in China as foreign firms. A few listed companies also want to use their new link to the oil industry to boost their stock prices.
How much of an impact do these Chinese private players have on the overseas market?
It’s getting bigger. Data shows that more than $50 billion in Chinese investment found its way into the U.S. shale oil boom, and less than 20% of that came from the big three. About $40 billion came from private Chinese capital or state-owned companies that were not in the oil industry before.
What makes this round of the oil industry cycle different from the others?
The golden age of oil is over, and this century will be marked by a structural energy shift. The shale oil revolution in the U.S. broke the old “exploration, development, production” long life cycle and ushered in a new model resembling factory manufacturing, which easily sizes up or scales down in a short period of time. The new production model for unconventional sources has made it possible for thousands of medium- and small-sized oil companies to survive and thrive, and their financial backers are being nicely rewarded.
The new wave of M&As in the oil and gas industry will look very different from previous ones in both investment targets and deal structures. State-owned oil companies and big multinationals are still heavyweights, but companies from other industries will be even more active. The newcomers might not be able to sign “super deals” for now, but they are likely to be the real game changers.