China, flush with cash, is on a global search to acquire any and all overseas energy assets.
China Petrochemical Corp., known more familiarly as the Sinopec Group, Asia's biggest refiner, will pay $3.54 billion for a 30 percent share in Portugal’s Galp Energia SGPS SA's Brazilian unit, in what is China's 2011 largest overseas energy acquisition.
Portugal’s Galp Energia is Portugal's biggest oil company, but affected by the European Union’s fiscal crisis and currently in need of additional immediate cash, incoming revenue is apparently preferable to long term benefits.
So, why should this elicit anything other than a yawn?
Easy – BRICs are beginning to acquire assets in one another. The feeding frenzy has begun.
In 2001 Goldman Sachs Jim O’Neill coined the BRIC acronym in his study, “Building Better Global Economic BRICs” postulating the imminent and inevitable rise of four economies – Brazil, Russia, India and China.
How right O’Neill was, especially as both the European Union and the U.S. moribund economies are cautiously developing a cap in hand supplicant approach to the nations for loans to bail out their moribund, state of the art capitalist economies.
While this development has attracted attention from Wall Street, the City of London and China, an equally interesting sub-current has passed largely below the radar, which is the BRIC nations attempting to develop inroads into their nations’ colleagues and inevitable competitors.
The acquisition involves cut-out companies as surrogate for national interests and rarely breaks the PR surface but this incident has thrown illumination on how this covert struggle is developing, as a majority owned subsidiary of state owned company, as the Sinopec Group has the Chinese government as a major shareholder.
So why should Beijing be interested in Galp Energia SGPS SA's Brazilian unit?
Galp Energia SGPS is a company that can build on resonant ties back to when Brazil was a colony of Portugal, dating back to the late 15th century. The two nations share accordingly many commonalities, which foreign interlopers such as China lack.
Galp Energia SGPS’s fraternal and cash ties have given it shares in four offshore blocks in Brazil's Santos Basin, including Lula, the largest crude discovery in the Americas since Mexico's Cantarell field in 1976. Now looking to foreign investors, cash starved Galp Energia SGPS is simply following through on its earlier pronouncements this year that it would attempt to raise $2.27 billion through the sale of part of its Brazilian unit.
Under the purchase arrangement Sinopec Group will subscribe for both new shares to be issued by Galp as well as assume current shareholder loans, noting in a press release, "Taking into consideration this investment and projected future capital expenditure, the total cash payout amounts to approximately $5.18 billion at closing." Should the Brazilian government be interested in intervening, the Sinopec Group-Galp agreement still needs approval from the Chinese government.
So, what is Sinopec Group buying into? Galp's main assets in Brazil include four deep-water offshore blocks in the Santos Basin, the site of several recently discovered major oil fields.
It’s just business, to quote Michael Corleone. Mirae Asset Securities Ltd.'s Hong Kong head of regional energy research Gordon Kwan said, “Sinopec Group has been looking at upstream assets globally and will continue to invest billions and billions in overseas acquisitions. Ultimately, the parent will inject those assets into the listed company when those assets become profitable.”
Sinopec Group’s Galp Energia SGPS SA's Brazilian unit purchase is dwarfed by its 2010 $7.1 billion for Repsol YPF SA's Brazilian unit, which was China's largest overseas oil deal since Sinopec Group bought Addax Petroleum Corp. for $8.1 billion in 2009.
Since 2001 Chinese energy companies have bid at least $16 billion for overseas oil and natural gas assets to secure the nation’s looming energy imports.
As for its latest overseas energy acquisition Sinopec Group said in a press release, “The acquisition has further expanded Sinopec's overseas oil and gas business operations, which will make major contributions to the company's oil and gas output growth in the 12th and 13th five-year plan periods.”
Should anyone doubt the Chinese government’s interest in the acquisition, Sinopec Group added that the intended purchase needs approval from the Chinese government.
So what does Sinopec Group get for its $3.54 billion investment? According to the company, possibly 21.300 barrels of oil per day, but a figure Beijing expects to rise by 2024 to 112,500 barrels a day.
Do the math – at a conservative estimate of oil at $100 per barrel, a conservative assumption for 13 years from now, Sinopec Group’s 112,500 barrels of production could $11,250,000 per day, or $4.1 billion annually - not too shabby an annual return on an initial return on $3.54 billion, and that doesn’t include the money generated in the previous 13 years before the field ramps up to full production.
Sometimes it pays to think long term.
By. John C.K. Daly of Oilprice.com