THE BUSINESS: State oil firm loses out on US bid: “CHINESE state oil firm Cnooc's sudden departure from the bidding war over US oil firm Unocal in favour of ChevronTexaco's $18.4bn (£9.8bn, €14.4bn) offer suggests that, however high they raise the stakes, buying a US company is still, sometimes, a step too far.”: “Chevron now takes third place among the western major oil companies in terms of oil and gas reserves, jumping ahead of Royal Dutch/Shell and Total.” (ShellNews.net) 10 April 05

By Richard Orange

CHINESE state oil firm Cnooc's sudden departure from the bidding war over US oil firm Unocal in favour of ChevronTexaco's $18.4bn (£9.8bn, €14.4bn) offer suggests that, however high they raise the stakes, buying a US company is still, sometimes, a step too far.

The Business understands that Cnooc tabled a cash bid of more than $19bn, comfortably trumping Chevron. But the offer, thought to have been backed by the Chinese government, fell apart at the last minute.

The three main Chinese state-owned oil companies, CNPC, Cnooc and Sinopec, have expanded operations from just 20 countries in mid-2003 to around 36 this year, striking deals in the Middle East, Africa, South America, and the Caspian.

With 75% of global oil resources closed to the oil majors, they fear the Chinese might beat them to access. Sinopec early year last won a key contract to develop gas reserves on the edges of Saudi Arabia's Ghawar field on terms no Western firm would have accepted.

But the Chinese aren't always big spenders, despite Beijing's hunger for crude.

A Hong Kong oil analyst told The Business: "There are people running around saying, "These Chinese will pay anything'. The evidence just doesn't support that. They're at the table and they're desperate to buy production but they're not foolish."

In February, US independents Occidental Petroleum and Amerada Hess stunned the industry with outrageously generous bids for exploration tracts in Libya. The bids from CNPC, Sinopec and CNPC, meanwhile, were restrained.

Tony Reinsch at PFC Energy says: "Where I see the Chinese having an advantage is in what I call political access." He sees China wielding its permanent seat on the UN Security Council as a tool to win deals in threatened Middle East countries such as Iran and Syria, and mobilising armies of low-paid workers to build much needed infrastructure in host countries in exchange for oil and mineral deals. On relatively political-free corporate deals or in open auctions, the Chinese lose this advantage.

Chevron's offer, like Oxy and Amerada's, would have been unthinkable a few months ago, when oil companies preached financial restraint over growth. Chevron makes no bones about the fact that the Unocal acquisition will dilute its returns, but the market has welcomed the move.

Chevron managed to replace only 18% of the oil and gas it produced last year with new production, and its determined efforts to secure a transforming deal in the Middle East or Russia have so far yielded nothing.

Chevron now takes third place among the western major oil companies in terms of oil and gas reserves, jumping ahead of Royal Dutch/Shell and Total. Unocal's strong position in Asian gas also makes Chevron the world leader in the region among western companies. For Cnooc, the greatest hurdle was that Chinese shares still don't hold much truck with western investors as a currency in deals.

Unocal's shares rushed up nearly 50% between the Chinese firm's first approaches in January to $64 by the time it dropped out, taking Unocal's value from $13bn to Chevron's $18.4bn bid. Chevron could pay 75% of the price in its own shares, which had also risen over the period. Unocal had to pay in cash.

And as a way of buying gas assets alone, the Unocal acquisition compares badly with other deals Cnooc has done.

Chevron paid around $10.50 per barrel of oil equivalent (boe) for Unocal's 1.75bn boe reserves, while Cnooc paid just $1.98 per boe to buy into Chevron's North West Shelf gas project in Australia, and only $0.98 per boe to buy into BP's Tanguuh gas project in Indonesia.

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