China's first manned outing into space hasn't been the only mission the country has been focused on recently. There has been an almost surgical focus by China on foreign acquisitions in the energy space, taken one giant step further by the acquisition of Nexen by CNOOC.
CNOOC (NYSE:CEO), the China National Offshore Oil Corporation, has made the largest acquisition ever by a Chinese company by buying the Canadian oil company, Nexen, for over $15 billion. But before we delve into this acquisition some more, let's take a look at the bigger picture of China's mission for acquisitions.
Although the CNOOC/Nexen deal may be hugely significant, it is by no means the first of its kind. It is the latest pinnacle in a trend that has been building over the past few years. It started (or attempted to start) in 2005, when CNOOC failed to buy US company Unocal (it broke down due to political opposition, and Chevron (NYSE:CVX) subsequently bought them), but efforts have been much more successful in recent years as Chinese companies have focused more on joint ventures and minority stakes rather than outright purchases (it induces less scrutiny/hostility).
In 2010 CNOOC itself spent $2 billion buying Texas oil fields from Chesapeake (NYSE:CHK), while another Chinese company, Sinopec (NYSE:SHI), has invested $2.1 billion in a single acquisition in the Canadian oil sands, while also spending $2.5 billion on a joint venture with Devon Energy to develop various shale plays across the US.
Lest we forget, PetroChina (NYSE:PTR) - the largest global oil-producing company after overtaking Exxon Mobil earlier this year - also entered into the fray as early as 2009 through two joint ventures in the Canadian oil sands to the tune of $1.9 billion. As the graphic below illustrates, China has now invested $42 billion in the US, the largest share of this being in the energy sector.
But here is the kicker of this post: The reason for these investments by China has been twofold. By entering into joint ventures in North America, it is firstly cementing key relationships and securing a certain level of energy security going forward. Secondly, North America has led the way globally in technology and innovation for the energy industry; China needs access to this skill set more than most.
This is because China has the largest proven shale gas reserves in the world at 1,275 Tcf (nearly triple the downwardly-revised 482 Tcf in the US), and needs the skills to exploit these resources. China's appetite for commodities is somewhat insatiable: its consumption of natural gas is set to grow threefold from 12 Bcf/d currently to 36 Bcf/d by 2020, while it is set to surpass the US to become the largest oil-consuming nation mid-next decade. Meanwhile, it already holds the accolade of largest global coal consumer, with coal accounting for about 70% of its total energy needs.
But let's circle back to CNOOC/Nexen. There are a number of reasons that this acquisition is fascinating, not least because it gives CNOOC a further solid foothold in North America (both in Canada and the Gulf of Mexico), but also because it gives them significant visibility into Brent crude pricing (a benchmark to 27% of China's oil imports, according to Platts).
This is because Nexen is the second largest oil producer in the North Sea (where Brent crude oil is priced) due to its ownership of the Buzzard oil field. This means that not only can it gain greater visibility into pricing, but through improving efficiencies at the problematic field it can also focus on reducing outages, and hence price volatility for Brent crude oil pricing. This is something which surely must be attractive given China's 1.53 million barrels a day reliance (the aforementioned 27%) on the benchmark.
Anyhow, I have prattled on enough about China for today. Given the political intervention in the CNOOC/Unocal deal back in 2005, there is a good amount of skepticism that the deal will not get done, be it due to investor opposition or intervening regulators in both Canada and the US.
On the flipside, however, a deal may not be disastrous for North America. After all, it would be better for China to strengthen its ties with the US and Canada rather than pursuing other options (Iran? Venezuela?). Regardless of whether this deal happens, other ventures are being discussed on any given day (today for example).
As long as there is reciprocity for US and Canadian companies in benefiting from the development of China's vast resources, China's mission for acquisitions should not be made an impossible one.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.