INTERNATIONAL BUSINESS: Chinese Oil Giants Grow Up Fast

They're finally becoming serious global players

Ever since they emerged on the global scene a decade or so ago itching to invest, China's energy companies have acquired a reputation as the greenhorns of the oil patch. They struck seemingly promising exploration and pipeline deals in Venezuela, Russia, and Kazakhstan -- only to see them unravel or find they had grossly overpaid. They gained notoriety by going it alone in rogue states shunned by most established Western players, such as the Sudan, Iraq, and Burma. And all too often, the Chinese drove negotiators nuts with ever-shifting terms and maddening delays.

China Inc. is growing up fast. In mid-December, London's BG Group PLC (BRG ) decided to shop an 8.3% stake in oil and gas fields in the North Caspian Sea that could be as important as Alaska's Prudhoe Bay. ExxonMobil Corp. (XOM ) and Royal Dutch/Shell Group (RD ) also own stakes. So CNOOC Ltd., a unit of Beijing's China National Offshore Oil Corp. (CEO ), leaped at the chance. Executives hastily arranged visas and jetted to London. The deal, for $615 million, was struck in a few weeks and closed in mid-March. "I was blown away by the quickness of their response," says Cai Jinyong, managing director of Goldman Sachs (Asia) LLC, which advised BG. "Chinese companies have come of age." The fields require hefty investments, but analysts say CNOOC paid a fair price. The deal is part of an increasingly aggressive Chinese global oil investment blitz that is likely to accelerate from Central Asia to North Africa. The mission: to lock in oil and gas supplies to meet China's voracious energy demands in the coming decades, and to ease what Beijing regards as a dangerous reliance on the Persian Gulf. The Iraq crisis has heightened China's sense of urgency: The doubling of oil prices in the past year has hammered China's burgeoning, energy-guzzling industrial sector. China imports 60% of its oil from the Mideast. Any big disruption of shipments, Chinese leaders fear, could threaten national security. What's more, the gap between China's domestic output and its needs has been widening far beyond projections. By 2015, predicts the U.S. Energy Dept., China may have to import 8.6 million barrels a day, up from 2 million now. "They are desperate to secure all the supplies they can get," says Paik Keun-Wook, a China oil expert at London's Royal Institute of International Affairs. In recent months, however, China's long-term anxieties have eased considerably thanks to a string of offshore breakthroughs. Beijing's China Petrochemical Corp., parent of the listed Sinopec Group, also bought a stake in the Caspian reserves in March. Around the same time, Chinese companies snared rights to other important fields in Indonesia's East Kalimantan province. That came soon after CNOOC bought huge Indonesian offshore reserves from Spain's Repsol YPF for $585 million. Another coup could come in early May, when new Premier Wen Jiabao travels to Moscow. Wen is expected to close a deal to build a $2.5 billion pipeline that would bring millions of tons of Siberian crude annually to China's Northeast. The 1,500-mile pipeline venture with private Russian oil giant Yukos had been snarled in red tape and infighting for four years, as rival Russian oil companies pushed their own plan to build a pipeline to Japan. Moscow is still weighing both projects, but Prime Minister Mikhail Kasyanov has said the government is leaning toward approving the Chinese pipeline first. There are political implications to the deal as well. "Selling oil to China is a good thing for Russia," says Stephen O'Sullivan, research director for Moscow-based United Financial Group. "It increases trade and dependency and helps align the two countries' interests." That's better than angering a huge neighbor by not sharing Russia's mineral wealth. The Chinese also are making big strides in securing liquefied natural gas, which Beijing is pushing hard as cleaner fuel than coal, which now provides 60% of electricity output. In August, CNOOC bought a stake in Australia's huge North West Shelf that will bring 3.5 million tons of LNG annually to South China for the next 25 years. Using its big market as leverage, China secured the gas at about 15% less than rival offers from South Korea and Japan. Why the sudden successes? The biggest factor is the growing savvy of China's three biggest oil companies since they listed shares overseas. CNOOC, which made its first overseas acquisition a decade ago, is by far the most experienced and has recruited young, Western-trained talent. China National Petroleum Corp. (CNPC ), the largest oil and gas producer, has drastically downsized its bloated workforce and injected key exploration and development assets into PetroChina, listed in both New York and Hong Kong. Sinopec, China's biggest refiner, has begun looking offshore for its own crude. "These companies no longer are acting as agents of the state," says Scott C. Roberts, Cambridge Energy Research Associates' China representative. "They have to go abroad and act commercially, and are under pressure to deliver returns quickly." The North Caspian Sea deals illustrate China Inc.'s rising clout. The Kashagan field has estimated recoverable reserves of 13 billion barrels of oil equivalent. CNOOC paid more than Shell and ConocoPhillips did for similar stakes last year. CNOOC figures the premium is justified because productive wells have been dug, reducing risk. "This is a fabulous acquisition," boasts CNOOC Chief Financial Officer Mark Qiu. "This gives us a firm foothold in probably the most prolific oil and gas basin outside the Middle East." The deal also helps amend earlier Chinese fiascos in Kazakhstan. In 1997, Beijing announced with great fanfare a $3.5 billion deal by CNPC to buy a stake in a Kazakh oil company and build a 1,875-mile pipeline to western China. It then learned the fields wouldn't put out enough crude to justify the project's huge expense. CNPC shelved another pipeline that would have carried oil from Kazakhstan to the Persian Gulf, where it would have been loaded onto Chinese tankers. Getting the oil economically from the Caspian to China remains a challenge. But CNOOC hopes to use pipelines already built or planned by international consortiums. CNOOC also suggests it could do a swap, giving its Caspian output to European partners and in return getting oil from their refineries in Asia. Still, China's business practices have a ways to go. Its oil companies continue to have a reputation for negotiating far-reaching pacts and then changing their position. Many analysts also question China's obsession with owning equity stakes in foreign reserves -- rather than saving money by striking long-term procurement contracts with existing players. Even so, it's encouraging that China's oil companies seem increasingly intent on joining the global club rather than remaining an outsider. As it joins the mainstream, China may lose the urge to chase dubious deals.

By Pete Engardio in New York and Dexter Roberts in Beijing, with Catherine Belton in Moscow