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Why China is taking a burning interest in North Sea oil and gas

  • @BawdenTom

China's decade-long acquisition spree has taken an unlikely turn as Britain's long-declining North Sea oil and gas industry finds itself at the centre of the Asian juggernaut's latest phase of expansion. China entered the North Sea last year when state-owned Cnooc bought into Britain's largest oilfield in the latest phase of its global asset takeover designed to secure energy for its rapidly growing electricity needs.

Cnooc acquired the 43 per cent stake in the Buzzard oilfield as part of its $15.1bn (£10.1bn) takeover of Canada's Nexen, which also owns oil and gas fields in Canada, the Gulf of Mexico and off the coast of Nigeria. At the same time, China's Sinopec paid $1.5bn for a 49 per cent stake in the UK unit of Canada's Talisman Energy. These acquisitions account for about 200,000 barrels of oil equivalent a day, about 12 per cent of the UK's entire oil and gas production last year of 1.55 million barrels.

"This deal helps Cnooc participate in the North Sea oil and gas business for the first time, which is in accordance with the company's long-term strategy," Cnooc president Yang Hua said last month. "Cnooc has attached a great importance to the North Sea region, an area that cannot be omitted by any major global oil company. We have been waiting for the right time and the right opportunity to make our move," he added.

Today, Cnooc stepped up its North Sea campaign, pledging to squeeze more out of its UK oil and gas fields.

"We fully expect to increase production from the UK North Sea assets. Detailed operational matters have not been finalised, but we are working on specific plans for the North Sea assets," a Cnooc spokesman said.

China's interest in the North Sea stems, in part, from a rapidly growing demand for energy as its rising and increasingly affluent population needs more electricity per head to satisfy its desire for a higher standard of living.

The increase in energy demand will be so vast that it will rewrite the world's geopolitical map, as China seeks to satisfy its needs. The growth in China's electricity demand between now and 2035 will be greater than that of the total current electricity demand in the United States and Japan.

China's daily oil consumption is set to nearly double to 17.5 million barrels a day by 2030, overtaking the US to become the largest consumer. Meanwhile, China's gas consumption is forecast to more than quadruple to about 545 billion cubic metres in 2035.

Not surprisingly, energy assets have been catapulted to the top of China's lengthy shopping list of assets and debts it is buying around the world with the huge foreign currency reserves it has accumulated by producing cheap goods the rest of the world wants to buy. The shopping spree began about a decade ago when China hiked its purchases of US Treasuries, but has since spread to everything from land, buildings and utilities and luxury cars, with Thames Water, Canary Wharf and MG Rover being among its UK investments.

It now wants to buy up as many energy-related assets as possible to glean intelligence from partners as well as to control the assets. China's reported interest in buying a stake in the proposed Hinkley Point C nuclear power plants and its investments in technologically sophisticated hydrocarbon producers like Nexen and Talisman are thought to be motivated by the gleaning factor.

"I expect the large Chinese oil companies to continue to acquire oil and gas reserves. They are going to need to import a growing quantity of oil and gas and buying now is hedging the cost of that," said Andrew Whittock, an analyst at Liberum Capital.

China's interest in the North Sea is related to the rebound in the region's oil and gas fortunes. Although last year's production figure of 1.55 million barrels is well down from peak output of 4.5 million barrels in 1999, the decline has slowed markedly of late, helped by government tax breaks in last year's budget.

The number of new exploration and appraisal wells increased by a third to 65 last year, raising hopes that the region may even see an increase in production in the coming years.

But there is another reason why China takes a keen interest in the North Sea. About 2 million barrels a day of the oil China imports is based upon Brent crude oil prices, which influences prices as far afield as Africa.

This means a rise in Brent prices by $1 a barrel pushes China's oil import bill up by $720m a year. The more oil China can squeeze out of the Buzzard field, a key determinant of the Brent crude oil price, the less the country has to pay for its oil, providing a clear incentive to boost production there. In every sense, China is clamping down on the energy world. In the longer term, Mr Whittock believes China's eyes will light up more at exploration opportunities in East Africa and parts of South America. But for now, the North Sea looks to be a beneficiary.