Chinese oil giant China Petrochemical Corp. (SNP), otherwise known as Sinopec, will buy a 20% stake in Total S.A.'s (TOT) Nigerian offshore oil field for $2.5 billion. This expands Sinopec's overseas asset portfolio significantly. Like its other two leading Chinese oil and gas firms, Sinopec has been attempting to secure its country's energy future globally while Total needs the cash to finance its explorations. The current sale is a part of Total's plan to dispose of $15-$20 billion in assets over the next two years. While for Sinopec, this deal is expected to increase its capacity by 130,000 bpd and will share this oil block with Exxon (XOM) and Chevron (CVX).
The recent hike in oil prices, where Brent Crude averaged $113.60/barrel in the first half of 2012, have made explorations more lucrative for Total. Moreover, the lack functional political structure in Nigeria and the massive flooding the country has been experiencing have created severe problems for firms operating in there.
Sinopec is expanding rapidly all around the world, particularly in Brazil. Its current African deal comes just four months after it acquired a 49% stake in Talisman Energy's U.K. North Sea operations for $1.5 billion while just a month ago, it agreed to purchase Canada based Daylight Energy for $2.1 billion. In addition, earlier this year, Sinopec also purchased a 30% stake in Portugal-based Galp Energia's Petrogal Brasil for its Brazilian oil and gas operations for $5.2 billion. Before that, in a massive deal, Sinopec had acquired Repsol YPF's Brazilian unit for $7.1 billion. The company's media shy Chairman Fu Chengyu has stated that they would prefer a partnership with a foreign firm over a full takeover, but obviously is not above doing so when the situation presents itself.
The Chinese oil and gas firms are more eager to expand in Latin America or Africa than in North America or Europe mainly because of lower entry barriers such as minimum government scrutiny over the deals. The growing trade war and animosity between the U.S. and China nearly precludes Sinopec and its Chinese peers from gaining access to much of the North American continent.
In the meantime, CNOOC's (CEO) $15.1 billion Nexen (NXY) bid is still under review by both Canandian and U.S. officials (read politicians). Internal sources have identified that issues related to employment guarantee and capital expenditures are the main reasons behind the delay, but the story is never as simple as what is released to the public. There are serious security and nationalistic issues at work behind the scenes of this bid. The review's timeline has now been extended to December 10th but Nexen's shareholders, on the back of positive statements from the Prime Minister Stephen Harper and other politicians, are hoping for the approval. The Chinese media has revealed that CNOOC has agreed to the Canadian government's demand of their country having at least 50% representation on the new company's board. Meanwhile in anticipation of the deal, Nexen's stock went up by 6.95% in the week ending 16th November, the biggest weekly jump since July. The trader in me distrusts any moves like this prior to the actual approval.
Sinopec is primarily a refiner, in fact it is Asia's largest, and this is the reason behind the poor performance of its stock. The Chinese government has a complicated price fixing scheme on things like diesel fuel to curtail inflation which Sinopec has been struggling with all year since Brent crossed $100 per barrel. However, the government has recently relaxed the price caps and is implementing a more spot-price sensitive price policy which will help its refinery operations in the future.
This drive to secure greater flow of oil back to mainland China is now playing against a backdrop of a severely weakened Petrodollar, because on September 6th, China officially announced that its system is now ready to support the buying, selling and trading of oil in Yuan. The multi-trillion dollar flow through the oil markets is one of the main pillars to the value of the U.S. Dollar. For those wondering why the Federal Reserve has seemed reluctant to actually engage in QEIII it is because of this marginal oil-dollar flow leakage that is no longer capable of soaking up the dollars printed by the Treasury and, by proxy, the Fed.
This move both helps to deepen the Yuan as a trade currency and further regionalizes trade in Southeast Asia. The moves by Sinopec and others to secure foreign sources of oil to ship home and to their trade partners around the region puts China in a position very similar to the one the U.S. has enjoyed for nearly 70 years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.