June 24, 2005
ALL THE WORLD'S A STAGE FOR OIL ACQUISITIONS
Treasury Secretary John Snow and others in Washington have been eager to boost American exports, but the proposed sale of the El Segundo, Calif.-based oil firm Unocal Corp. to China's state-owned CNOOC Ltd. isn't quite what they had in mind.
No matter if Unocal ends up going to a Chinese oil company or ChevronTexaco, which is also trying to buy the California oil company, the scramble to acquire oil and natural gas reserves has arrived on America's shores in earnest.
In a world where finding new, previously unknown oil supplies appears to be an effort destined for diminishing results, the next best game in town is buying what others have already discovered. "It basically indicates desperation for oil on the part of the Chinese that they'd be willing to countenance congressional disapprobation," Stephen Leeb, president of Leeb Capital Management and author of The Oil Factor, tells Forbes. "They know that it will not be viewed favorably by many in our government, yet they are willing to make a bid."
Buying off the shelf is hardly new to the oil game. Indeed, that's why the Seven Sisters of yore have been reduced to four or five, depending on how you define Big Oil. BP's $6.75 billion purchase of a 50% stake in Russian oil firm TNK in 2003 is a recent example. There are of course many others, including the 1998 merger of Exxon with Mobil, BP's acquisition of Amoco in 1999, and Chevron's marriage with Texaco in 2000. Are you starting to see a trend?
Ironically, pundits poring over the earlier deals reasoned that the low price of oil was driving Big Oil into one another's arms. And who could argue at the time? Oil in late 1998, for instance, dipped below $11 a barrel at one point in New York futures trading. Economies of scale helped take the sting out of selling the low-priced commodity. But so did the other, and at the time, less-appreciated factor: the rising cost of exploration and production, which is just oil-speak for fading opportunities for discovering the next big find.
Fast forward to 2005 and the prospect of China, India and others competing for scarcer oil reserves has created more than a little incentive to secure existing supplies, by far the easier, and arguably less pricey pickings compared to searching barren tundras and the bottom of sea beds for formerly hidden supplies of crude.
Indeed, China and India's ascent on the global economic stage, combined with the vanishing odds of a big find promise to be the central issue in energy markets for decades to come. "The emergence of China and India as principal players on the global energy scene represents the most important change in the global energy economy in 30 years," wrote Philip Verleger Jr., a senior fellow at the Institute for International Economics, earlier this year in Energy: A Gathering Storm? "In 1990, consumption in these two countries amounted to no more than 3.5 million barrels per day, approximately 5% of global petroleum use. In 2003, 13 years later, use in the two countries has more than doubled and now accounts for more than 10% of global oil consumption."
Securing existing supplies will take many forms, with the CNNOC bid for Unocal being just one. For those countries with ample supplies above and beyond domestic needs there's no trivial temptation by governments to take a stronger hand. That was true a generation ago when Saudi Arabia and other oil-laden countries in the Middle East nationalized the oil business within their borders. A similar, if less overt strategy is being pursued in Russia, where the Kremlin's defacto takeover of the giant oil company Yukos serves as a reminder that governments still view crude as something more than a commodity to be left to the whims of the marketplace.
In the wake of CNOOC's bid for Unocal, the U.S. is now faced with the question of what to do, if anything, about growing foreign demand for existing energy supplies, including supplies that reside under Corporate America's ownership. The CNOOC-Unocal deal, if completed, would have "disastrous" consequences for the U.S. economy and homeland security, charges U.S. Rep. Richard Pombo, chairman of the House Resources Committee, reports the Houston Chronicle. "This should be a wake-up call for America to get as serious about energy as China appears to be."
The ball for the moment seems to be in Treasury Secretary John Snow's court. In his other role as chair of the Committee on Foreign Investment in the U.S. he's required to review the CNOOC deal for loopholes and, in theory, could reject it on the grounds of national security. For the moment, he's remaining diplomatically neutral, explaining yesterday that the deal remains "hypothetical at this point ... because we don't have a transaction," according to Marketwatch.com.
But theory is quickly giving way to events on the ground. The stakes are high, and so is the price of oil. The final stage in the oil industry's evolution has begun, and the winners will be those with the highest bids and/or a government willing and able to extend a heavy hand.
Posted by jp at June 24, 2005 5:17 AM
It has been remarked that the Japanese learned in the 1980s that it is cheaper to buy oil than it is to buy oil companies. My guess is that the Chinese will soon learn the same thing. Unocal does not have piles of uncommitted reserves (oil or gas). My understanding is that their Asian wells are mostly developed in partnership with host countries that control the actual resource. If China wants to buy the margin at non-economic rates, let them do it.
I believe something similar is happening in the Middle East, Africa and even Latin America - although the cost is not necessarily in economuic terms. China is going to pay the price for supporting dictatorial regimes in what will prove to be a futile effort to secure oil.
US oil majors all has nice contracts with countries in the Middle East in the 1970s. The track record shows that once these contracts become uneconomical for the resource holder, they get renegotiated (or nationalized - which in China's case would be awfully ironic). Trying to corner supplies in a commodity market is like swimming upstream. You can't do it for forever.
Posted by: Jack at June 24, 2005 11:55 AM