China National Petroleum Corp. to Issue $3.13 Billion in Bonds

Many investors, battered by more than two and one half years of global recession, have turned from traditional investment havens to “thinking outside the box” and investigating overseas markets.

Some of these attracting increasing scrutiny are the so-called “BRICs” – Brazil, Russia, India and China. While all have local peculiarities for the foreign investor, the quartet’s dynamic economies are all tearing past projections for the anemic American economy, projected to grow

Federal Reserve Bank of San Francisco President John C. Williams expects a sluggish two percent growth in the U.S. Economy for the final six months of 2011.

Brazil, the world’s second-largest emerging market after China, has recently seen the Banco Central President Alexandre Tombini state that the bank will reduce its current forecast of four percent growth later this month.

And Russia? Russian Prime Minister Vladimir Putin estimated that the economy’s growth for 2011 would be between 4.2 and 4.3 percent.

In contrast, China’s economy is projected to grow 9.2 percent by the end of 2011.

So, where to park your dollars, in a two percent growth economy, or a 9.2 percent one?

An opportunity to do the latter is emerging, as China National Petroleum Corp. has announced its intention to issue $3.13 billion in ten-year bonds, a not insignificant announcement, as state-owned CNPC is China’s largest integrated oil and natural gas company, the parent of PetroChina and as of June 2010, the world’s second largest energy company by market capitalization, exceeded only by ExxonMobil.

Information on the proposed bond issue remains slight. According to several Chinese sources with knowledge of the arrangement, the CNPC bond issue is still subject to regulatory approval, but, assuming that it goes forward, will be underwritten by China Galaxy Securities Co. Ltd. are Other companies reportedly to be involved in the bond issue include China International Capital Corp., China Development Bank Corp., Hong Yuan Securities Co., Guotai Junan Securities Co. and Citic Securities Co.

CPNC had no comment on the reports.

So, where is this largesse to be spent? According to the insider sources, it will go towards expanding the capacity of a West-East pipeline network delivering natural gas from Central Asia by more than 80 percent. The Chinese and Kazakh governments have signed an accord to build the Kazakh section of Pipeline C, which will originate from Turkmenistan and transit Uzbekistan and will flank two existing natural gas pipelines running through the three Central Asian nations. The pipelines represent a major diplomatic triumph over Russia, which previously took advantage of the Soviet-era pipeline network to buy the bulk of Central Asian natural gas production at bargain prices. Turkmenistan began natural gas deliveries to China in December 2009 and remains at present the sole nation transporting gas to China by pipeline.

Of the CNPC bond issue money, $2.48 billion will go towards constructing Pipeline C, with the remaining $620 million going towards operating costs. According to a statement on its website, CNPC will finish construction of its second West-East gas pipeline by 2012, allowing Central Asian natural gas to be piped to Guangxi Zhuang autonomous region and Hong Kong. China is also in discussions with Russia for natural gas supplies via pipeline but the negotiations have been mired over pricing disagreements.

So, the question becomes, why the bond issue? According to Bloomberg, CNPC already has the equivalent of $82 billion of bonds and loans due to mature by 2042, so its “brand” is already well known in the investment world.

In this case, the reasoning behind the CNPC decision would seem to be twofold. First, CNPC is embarked on a global campaign to diversify its portfolio of oil and natural gas leases as broadly and quickly as possible, and a bond issue for the West-East pipeline infrastructure would free up capital for its efforts overseas in such nations as Iran, where last month Iranian deputy oil minister Ahmad Qale'bani said China would invest more than $6 billion in the development of north and south Azadegan oilfields, where in 2009 CPNC signed an agreement with Iran’s National oil company to develop both fields. In Iran China now has an inside track, as it simply ignores threats of U.S. sanctions, which have deterred many European and Asian companies from investing. CNPC now has 30 international exploration and production projects with operations in Azerbaijan, Burma, Canada, Iran, Indonesia, Oman, Peru, Sudan, Thailand, Turkmenistan, and Venezuela.

But speaking of politics, CNPC’s operations in Burma, Iran, Sudan and Venezuela are all in nations that have sparked political controversy, and in expanding the West-East Pipeline, the fact remains that it transits three post-Soviet nations before reaching China, and the uncertain politics and policies of those nations entail some not inconsiderable risks. As Beijing is committed to a policy of diversifying its energy sources at any cost, spreading the risk and securing investment accord neatly with the country’s overall national energy policy.

All in all, an intriguing opportunity for the stalwart investor willing to “think outside the box.”

By. John C.K. Daly of OilPrice.com