The mystery of China’s disappearing mega oil-bid | FT Alphaville

The mystery of China’s disappearing mega oil-bid

There’s obviously a lot of damage-control going on in China, and possibly in Argentina and Spain, following a report on Tuesday – and a denial – of talks over what could rank as the energy deal of the year, and one of China’s biggest overseas investments.

The mystery – apart from whether the talks are on or off – is why Chinese companies would want to pay $17bn for less than premium upstream and downstream oil resources?

Dow Jones Newswires, in a story run by the Wall Street Journal, reported on Monday that China National Petroleum Corp and Cnooc proposed jointly paying at least $17bn for all of Repsol YPF SA’s 84 per cent stake in Argentine oil company YPF.

Such a  deal would rank as the biggest overseas investment by China, it noted, but faces possible hurdles in Argentina, where YPF is the country’s leader in both upstream and downstream oil operations. Spain, meanwhile, could object to China’s purchase of some key assets of Repsol, its largest oil company. But, added the report, CNPC believes it can resolve potential political and consumer objections to a deal.

The article cited a document, seen by the reporter, detailing discussions over the offer between the Chinese side and Repsol executives in a two-and-a-half-hour evening meeting on July 30 in Europe.

But, the article said, a Repsol press official on Monday denied the meeting had taken place and said the company had no further comment. Another Repsol press official, earlier in the day, acknowledged the company “has received expressions of interest on YPF, but no firm bid,” it added.

Bloomberg followed short after with a firm denial from Repsol:

Repsol YPF SA, Spain’s largest oil producer, denied receiving an offer for its Argentine YPF unit following a report that Chinese companies had proposed buying its stake.

Repsol hasn’t received a bid, Kristian Rix, a spokesman for the Madrid-based company, said today [Monday] by telephone. Dow Jones earlier reported that China National Petroleum Corp and Cnooc Ltd had proposed paying at least $17 billion for Repsol’s stake in YPF.

Xiao Zongwei, a spokesman for Cnooc Ltd, declined to comment. Liu Weijiang, a spokesman for China National Petroleum Corp, didn’t answer calls made to his office or mobile phone.

Repsol Chief Operating Officer Miguel Martinez on July 30 said that Repsol doesn’t have a “fixed price” for YPF as the company negotiates divesting part of its holding in that unit…

FT Alphaville meanwhile, understands from well-placed oil industry sources that discussions have indeed been held between the Chinese companies and Repsol. The unanswered question is, how far up the line the deal talks have gone.
Regardless of what transpires on this so-far elusive deal, the Dow Jones report is 100 per cent correct on several points:

The potential deal, which could be the biggest overseas investment by China, highlights the country’s growing thirst for energy resources globally and its willingness to offer big money for access. It also underlines the ambition of CNPC to build its presence in South America and elsewhere.

A deal would be another example of how Chinese companies are now working together to buy foreign energy assets after years of working alone.

In the end, asks Keith Johnson, writing on the Wall Street Journal’s environment blog, just how desperate are Chinese energy companies if they are apparently prepared to pay $17bn for Repsol’s Argentine oil and gas operations, which are “old and tired”, and which Repsol “has been trying to get rid of for years”?

China is spending billions to gain access to energy resources around the world, from gas in the Middle East, gas and oil deals with Russia, offshore oil deals with Brazil, and more. But the possible YPF deal is “odd”, notes Johnson, because Repsol has seen production of both oil and gas fall every year recently from Argentina’s fields, even as production costs have risen.

As YPF itself noted in a securities filing:

Argentina’s oil and gas fields are mature and our reserves and production are declining as reserves are depleted. In the last two years our proved reserves declined by approximately 20%, and we replaced 51% of our production with new proved reserves during 2007; average daily production in 2007 declined by approximately 4.1% from 2006. We are engaged in efforts to mitigate these declines by adding reserves through technological enhancements aimed at improving our recovery factors as well as through deepwater offshore exploration and development of tight gas. These efforts are subject to material risks and may prove unsuccessful due to risks inherent to the oil and gas industry.

In Johnson’s view, it’s possible that technology could give give new life to Argentina’s oil fields – “although that would make extraction more expensive”. And that’s before even mentioning the Argentine government’s heavy involvement in the energy business, including “through fixed domestic prices for fuel and a spate of regulatory hurdles which have bedeviled the Spanish company for years”.

China’s made no secret of its thirst for global energy sources, Johnson concludes, but is Argentina really the answer?

If it’s not, for whatever reason, as Henry Blodget notes at BusinessInsider, “you can bet China will just go buy something else”.

Related links:
A bad week for China’s facts and figures – FT Alphaville