CNOOC Seeks US$3.1-bil. JV with Bridas Corp. to Expand Latin American Foothold

CNOOC Bids for Bridas

The state oil company China National Offshore Oil Corp. (CNOOC) has released a statement announcing that it has proposed establishing a 50/50 joint venture (JV) with the Argentine oil company Bridas Energy Holdings. CNOOC will pay around US$3.1 billion in cash for the 50% stake, making it the largest acquisition announced by the Chinese NOC to date. CNOOC said that it expects to complete the transaction in the first half of 2010, subject to regulatory approval in China and Argentina. Bridas' main asset is a 40% interest in Pan American Energy—a JV with BP (60%)—which has interests in oil and gas blocks in Argentina, Chile, and Bolivia. According to data from the Argentine Institute for Petroleum and Gas (IAPG), Pan American Energy is the country's second-largest oil producer, accounting for 18.8% of all oil production in December 2009, and the third-largest gas producer, accounting for 13.78% of total gas production. Pan American Energy's main areas of operation in Argentina are located in the Austral, Golfo San Jorge, and Neuquén basins. It is also part of the consortium developing the offshore Carina and Aries field in the Maritima Austral Basin, along with Total (the operator) and Wintershall, and operates the Cerro Dragón concession, where the company announced a discovery in early 2008 containing an estimated 100 mmboe of reserves. Meanwhile in Chile, Pan American Energy partners the state oil company ENAP in a special operating contract for the Coirón exploration block and in Bolivia it has a 25% stake in the Caipipendi block, where the Margarita mega gas field is located, but lost its other exploration and production (E&P) assets in the country after its 50% stake in Chaco was nationalised in 2009.

CNOOC was expected to step up the hunt for overseas assets in 2010 following its announcement of a planned 29.5% increase in capital expenditure and a 24% increase in output, now pegged at 275-290 mmboe for the year. CNOOC is heavily dependent on oil reserves from the Bohai Bay region offshore eastern China and has been looking to expand overseas in view of the limitations of its resource base in China and so that it might compete with China National Petroleum Corp. (CNPC) and Sinopec, which unlike CNOOC were successful in making large acquisitions over 2009. The choice of Bridas as an acquisition target therefore reflects CNOOC's attempts to grow its oil reserves and provide a base for increased profitability going forward. Bridas Corp.’s oil and gas production has been growing over the last decade and the acquisition is expected to boost CNOOC's reserves by 12%, or 318 million barrels, and boost average daily production by 46,000 b/d. Moreover, Bridas’ onshore assets reportedly have on average a lower cost of production than CNOOC's current assets, which can help raise margins on sales of oil and gas. The acquisition of a 50% stake in Bridas will enable CNOOC to gain a foothold in Argentina, Bolivia, and Chile, helping to provide a foundation upon which to expand operations in Latin America in line with CNOOC's long-term strategy of establishing a global upstream portfolio equivalent to those of IOCs. Having run into domestic opposition over its efforts to unilaterally acquire Unocal Corp., the Bridas bid reflects CNOOC's strategy of seeking tie-ups as a way of increasing the success of overseas acquisitions. Indeed, CNOOC may be hoping to utilise the operational and regional expertise of Bridas’s management and the relations between the prominent Argentine businessman Carlos Bulgheroni and the Argentine government to gain approval from the government for the acquisition. The company seems optimistic about receiving approval and expects to complete the acquisition by the first half of this year. This together with the company's official statement on the bid could suggest that Bridas Corp. has virtually accepted the offer.

Outlook and Implications

Argentina has in recent years become one of the main destinations of outward foreign direct investment from China, but the US$5 billion in planned investments earmarked for the Argentine energy sector that was promised during a visit by Chinese president Hu Jintao in November 2004 has been slow in coming. There had been earlier rumours of deals on the cards, from reports that CNPC was looking to buy some of Bridas's assets to reports that both CNOCC and CNPC were interested in acquiring the former state-owned oil company YPF (see Argentina: 29 November 2005: CNPC Reportedly Interested in Acquiring Bridas Assets in Argentina and Argentina: 3 July 2009: Several Offers Received for YPF Stake, Says Repsol and Argentina-China: 11 August 2009: CNPC, CNOOC Reportedly Propose US$17 bil. for Repsol-YPF Argentine Unit). However, despite the strong media interest attracted by the alleged offer for YPF, the story lacked credibility not only because Chinese NOC's have tended to go into oil ventures in Latin America as minority partners with more experienced players but because the Argentine government would have most likely blocked any bid from a foreign company to acquire a controlling stake in a company regarded to be of strategic importance.

In contrast the acquisition of a 50% stake in Bridas is more in line with the pattern of Chinese investment already seen in the region. It will go into Argentina in partnership with two established players, Bridas and BP, and acquire an upstream portfolio that includes several fields already in production. However, even though CNOOC may be playing it safe with the acquisition of a stake in a company like Bridas, its entry into the Argentine oil sector will not be without risks. Despite some recent improvements, such as the implementation of the Gas Plus and Petroleum Plus programmes and, in the case of Pan American Energy, favourable contract renegotiations with provincial governments, the operating environment remains difficult. Low domestic prices and frequent rule changes as well as increased government intervention in the sector have created added regulatory uncertainty in recent years and contributed to a fall in investment that has resulted in declining reserves and production. A further indication of the gravity of the situation came last week with news that the country has been forced to import gasoline (petrol) for the first time in 30 years. In this context CNOOC cannot automatically expect to export all of its share of Pan American Energy's production, although for Argentina's oil sector the anticipation of future investment from a new entrant is to be welcomed.

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