Chinese energy looks abroad
Beijing is making increasingly more acquisitions in the foreign markets, partly to meet a growing domestic demand for crude oil. However, the results of these transactions are not always shown to comply with expectations

On March 22, 2017, China Petroleum & Chemical Co., Ltd. (so-called "Sinopec") entered into a sales and purchase agreement with Chevron Global Energy ("Chevron") to acquire 70% Chevron South Africa (Proprietary) Limited (The remaining 25% of the shares were held by local trust and fund companies under local law) and related interests and 100% equity interest in Chevron Botswana with a total transaction amount of approximately $ 900 million. The acquisition includes Capetown’s refineries with 5 million tons per year in South Africa, more than 820 gas stations in South Africa and Botswana, 220 convenience stores and depot distribution facilities, and lubricants in Durban, South Africa. As we all knew, South Africa's refined oil demanded for nearly 5% up-going of the annual growth rate over recent 5 years, the total consumption has reached 27 million tons. The acquisition of Sinopec will also be committed to the local economy and the common development of society as it promised. Will maximize the overall stability of local employees in South Africa and Botswana, as well as the integrity of the business operations, Sinopec encourages and guides all existing employees to continue providing quality services in their respective positions.

All aspects of Chinese acquisitions

Sinopec has the international leading technical strength and engineering advantages in the field of refining and chemical industry. It has the know-how and experience of constructing large-scale projects such as 10 million-ton refinery and million-ton ethylene, and has abilities of implementing the comprehensive solution to upgrade oil refining equipment. Upon completion of the acquisition, Sinopec will be committed to helping local enterprises to achieve refining facilities and technology in order to enhance the local growing demand for oil quality and incremental demand. At the same time, Sinopec will cooperate with local partners, including local shareholders. Sinopec also plans and implements the best brand transition plan after the acquisition is completed, then gradually complete the brand replacement of the petrol filling station within 5 to 6 years as the reasonable transition period and make every effort to serve the consumers in South Africa.

A strategy of foreign expansion

Over the past five years, Sinopec has invested in downstream projects such as oil refining, warehousing and petrochemicals in six countries with a total investment of more than $ 6 billion. The acquisition is also an opportunity for Sinopec to take advantage of the "Belt and Road initiative”. Clearly Sinopec wishes to continue expanding and deepening mutually beneficial cooperation with relevant countries, especially on the scale of cooperation in different levels. In November 2015, a wholly owned subsidiary of Sinopec,the International Petroleum Exploration and Development Corporation(IPEDC) and Portugal Galp Energia signed an equity subscription agreement, through the subscription of additional shares and claims, access to Galp Energia in Brazil and the relative Dutch Branch of Galp Energia with 30% stake (about 3.54 billion US dollars), considering the capital increase and part of the follow-up project on construction investment, the total capital injection of about 5.18 billion US dollars.

Over the past five years, Sinopec has invested in downstream projects such as oil refining, warehousing and petrochemicals in six countries with a total investment of more than $6 billion

Growing demand, declining production

China is currently the world's second largest economy, but the dependence on crude oil has exceeded more than 55%. Taking into account the background of the world oil, energy has become the bottleneck of development. In recent years, Sinopec's crude oil production has been getting slower and slower, in 2009 there was only than 1.5% increasing of extraction than in 2008. In the first half of 2016, Sinopec crude oil production fell 5.98% for the first time. Under such circumstances, overseas acquisitions further expand Sinopec's overseas oil and gas business, not only to make a significant contribution to the growth of China’s oil and gas production. Sinopec overseas oil production has accounted for 10% of the total output, I believe, with the accumulation of experience, Sinopec overseas oil production ratio will be further improved, which is of great significance for China's future energy demand.

The risks of foreign expansion and the case of Argentina

China's three major oil companies in recent years prefer acquisitions in overseas market, but the risk of overseas acquisitions is still huge. In 2011, Sinopec acquired 100% stake of and its affiliates of OXY (Occidental Petroleum Corporation)'s Argentine subsidiary for $ 2.45 billion, and is currently the fourth largest oil and gas producer in Argentina. But after a lapse of time, Argentina has introduced a policy which weren’t conducive to the development of foreign oil companies. Prior to the early Sinopec had planned to acquire 57.4% stake of Argentina's largest oil company Repsol-YPF with $ 15 billion, but cancel this deal since the Argentine government wanted to nationalize this company. In February 2012, Argentina abolished two fiscal incentives aimed to encouraging new investments in hydrocarbon exploration, production and refining of large oil companies. The Argentine government thus saved about $ 4.43 million per year, but oil companies would have to spend the same amount of money. In fact, the Argentine government is increasingly intervening in the domestic economy, the operating environment of oil companies was deteriorating, and enterprises expect the government to coordinate the return of the possibility of compensation. But it seemed that the mission was impossible since the government's ability on governance has generally reduced, as well as the political instability. Today, the entry into overseas markets for China's energy companies face lots of problems such as the local government intervention in the labor market and financial disputes. Labor disputes continue to deteriorate, the government's intervention in energy prices has been also strengthened, Therefore China's oil companies will face more challenges.

Improving the effectiveness of foreign transactions

In recent years, the pace of going abroad with Chinese enterprises has relatively accelerated, but the controlling risk is unsatisfactory, the relevant risks include: political risk, financial risk and binding risk. For the three major oil companies, including the large number of energy companies, overseas acquisitions are more positive. However, the effect of overseas acquisitions is worrying. Statistics show that in the past 20 years, the global large-scale mergers and acquisitions, the real effect is only 50% of the expected results, while China’s overseas acquisitions has 67% of unsuccessful, huge economic losses. In the case of CNPC, for example, the political turmoil in the Middle East and North Africa, which has continued in sideline since the end of 2010; In this harsh environment, leads to the suspension of six large project contracts in Libya and Niger of Great Wall Drilling Engineering Company, a subsidiary of CNPC, A total loss of $ 1.2 billion. In overseas acquisitions, Chinese enterprises should strengthen capacity of public relations, as soon as possible to understand the local industry policy. Then preparing the risk aversion; In addition, enterprises should uphold coordination between overseas markets, improve transfer efficiency of interregional equipment, capital, human resources, Prepare for everything in advance. Those state-owned oil companies have to understand the local government's industrial policy, and make a strategic assessment, by hiring a local public relations firm to lobby all levels of affairs, and also need to coordinate local lawyers’ association, so as to avoid greater losses.