In a few weeks’ time, two oil rigs off the coast of Brazil will move smoothly into production, pumping thousands of barrels of oil a day out of the Peregrino oilfield in the Campos basin. They would be unremarkable if it were not for the story that lies behind the field and its investors. Owned by Statoil of Norway, another investor in the project is Sinochem, a Chinese state-owned energy and trading group, which won a bid for 40 per cent of the field in one of the most hotly contested bidding rounds in the industry last year.

Brazil and China sign Peregrino Oil DealSinochem paid $3.1bn for that stake, sealing the deal last June. It is not unusual for Chinese oil companies to make big acquisitions these days – last year they spent more than $30bn on overseas mergers and acquisitions, accounting for roughly one-fifth of global deal activity in the sector.

But the Peregrino story is unique because the process pitted three of China’s largest oil companies against each other in heated rounds of bidding – a scenario that is a harbinger of Chinese oil majors expanding their hunt for assets overseas.

It was not long ago that all of the country’s outward-bound investments were carefully choreographed by Beijing. Big state-owned enterprises would lobby for months to convince their regulators to approve investments overseas. That system had one major advantage: it prevented Chinese oil companies from bidding against each other for overseas assets, since the regulator would not usually grant approval for two companies to bid for the same thing.

However, that changed in 2007-08 when regulators in Beijing started taking a slightly more hands-off approach. The result is that Chinese companies have started competing for assets overseas with each other, not only with their western peers.

One of the clearest examples of this was the bid contest for the 40 per cent stake in the Peregrino oilfield. The block was contested by no less than three Chinese state-owned oil companies: Sinochem, which grew out of China’s state oil trading arm; Sinopec, which historically has run most of China’s refineries; and Cnooc, which specialises in offshore oil production.

“[In] the Peregrino auction … Sinopec and Sinochem were extremely competitive, aggressive. Cnooc was there but wasn’t quite as aggressive,” says one person involved in the deal.

The hot bidding meant the companies’ strategic approach to the deal became a key factor in determining who won. According to two people who worked on the deal, Sinopec offered the best financial terms, but insisted on standard conditionality and due diligence. Sinochem, meanwhile, made an unconditional bid, according to one insider – an unusual gamble for the industry but certainly an attractive proposition for the seller.

Statoil also seems to have been drawn by the prospect of working with Sinochem in the future. “I am pleased that we also have agreed to sign an MoU [memorandum of understanding] to jointly investigate further opportunities in Brazil and elsewhere,” said Helge Lund, chief executive of Statoil, when the deal was announced.

Sinochem is relatively new to China’s overseas oil rush. The company’s $3.1bn spend on the Peregrino stake was nearly twice as much as the total amount it had previously spent on overseas oil projects. Although it is a large conglomerate, with roughly $15bn in assets at the end of 2009, it has traditionally been focused on importing oil and trading oil and chemicals, including fertilisers.

China’s Sinochem now owns a 40 per cent stake of the Peregrino oilfield off the coast of Brazil

Peregrino is 85 km (53 mi) off the coast of Brazil in a water depth of up to 100 m (328 ft). This map also indicates the general vicinity of Brazil's offshore basins.
Peregrino is 85 km (53 mi) off the coast of Brazil in a water depth of up to 100 m (328 ft). This map also indicates the general vicinity of Brazil’s offshore basins.

Sinochem made its first overseas energy acquisition just eight years ago, in 2003. But it did not take long for the company to make a mark in the global oil M&A field. Most recently, it explored the possibility of launching a counterbid for Anglo-Australian mining group BHP Billiton’s $39bn hostile bid for PotashCorp, the potash mining company based in Saskatchewan, Canada. Sinochem eventually decided not to pursue the deal – partly because of opposition from Chinese regulators concerned about overpaying for the assets.

In many ways Sinochem is typical of the Chinese companies making waves in global M&A. They have been extremely fast to move into the sector they are interested in, and those who have worked with them describe Sinochem’s M&A team as savvy and sophisticated.

One particular coup was Sinochem’s decision to walk away from a potential acquisition of Nufarm, an Australian agricultural company, in 2009. Today, Nufarm shares are trading at a less than half of what Sinochem was offering at the time, before the deal fell through.

That is not to say that there has not been a learning curve. As with any companies doing overseas M&A for the first time, Chinese resources companies have been learning the ropes. Sometimes that has been painful, as with Cnooc’s failed bid for Unocal, the US oil group, in 2005, which was derailed by loud political opposition out of the US. But China’s state-owned companies have largely been remarkably fast learners.

Investment shift

China’s overseas investments in oil and gas have become an important driver of the industry. Last year, Chinese energy companies spent more than $30bn on overseas energy deals, about one-fifth of global deal activity. To give a sense of the pace of the change, consider that in 2008, Chinese energy deals accounted for just 4 per cent of the global dealbook.

While this shift towards overseas investment has been initiated at the highest levels of government as part of the “go out” strategy under which state-owned enterprises are encouraged to venture overseas, it is also driven by commercial considerations.

“In general, the Chinese can take a more long-term view. They are probably on balance less payback-focused [than other oil firms] and more focused on improving the number of barrels produced,” one oil and gas banker observes. “This makes them very competitive bidders.”

Some industry experts say that Chinese oil companies have a history of overpaying for assets, although a recent report from the International Energy Agency refutes this claim.

The country’s large oil companies have a mandate to boost production, and their ownership structures usually make shareholder value a secondary consideration (one exception is Cnooc, which is structured differently from Sinopec or CNPC, China’s largest oil and gas producer). This structure allows companies to take longer-term bets on oil than their western peers, because they do not have the pressure to turn around their investments as quickly.

Many state-owned oil companies cut their teeth on assets that were not hotly contested by global oil competitors, sometimes in investments in Africa or the Middle East in countries deemed too risky or unpalatable for most energy firms. This is rapidly changing, though – as the Peregrino oilfield saga shows.

By Leslie Hook | The Financial Times | London