July 12,2009

CNPC and CNOOC Battle Over Repsol's Argentine Operations

By CT JohnsonC
  The outcome will say much about how the government intends to manage the growth of its corporate behemoths.

CNPC is thought to be mulling a $14.5 billion offer for a 75% stake in YPF, Repsol’s Argentine division.  That offer price is significantly below the $15-$17 billion that many analysts believe Repsol will command for YPF.  If the money issues can be dealt with, however, a tie-up with CNPC might be attractive to Repsol, because of CNPC’s strong balance sheet and experience.   

"By virtue of its high capital reserves, strong state backing, and technical expertise in enhanced oil recovery, CNPC is likely to be an attractive bidder," said Tom Grieder, energy analyst for HIS Global Insight.

This would be CNPC’s third attempt to acquire YPF, having failed twice in 2007 to acquire the company outright. 

CNOOC, on the other hand, has publicly declared its interest in a minority stake and appears to be considering a bid for a 25% share in YPF.  The company appears to be most interested in establishing a long-term partnership with Repsol to develop projects in other countries.

"CNOOC’s strategy is still focused on looking for cooperation rather than mergers and acquisitions," CNOOC president Fu Chengyu told the Oriental Morning Post.  "Our cautious stance will not change." 

Both firms are following a well-worn path for Chinese companies, seeking to secure the raw materials needed to sustain China’s growing economy.  A recent government report stated that the country plans to increase its spending on petroleum exploration and development by 47% by 2015.  The report also said that China’s total investment in exploration and development projects might rise from 190 billion yuan ($28 billion) to 280 billion yuan ($41 billion) in the same time period.

Earlier this year, PetroChina, a division of CNPC, acquired a 45.5% share in Singapore Petroleum for $1.3 billion.  Last week, Sinopec, China’s second largest oil company, agreed to purchased Swiss oil exploration company Addax for $7.2 billion, giving it access to reserves in Iraqi Kurdistan and West Africa.   

"Acquiring YPF would give CNPC and CNOOC immediate access to significant quantities of crude oil given that 92 out of the company’s 113 Argentine blocks are producing, which could help diversity imports away from the Middle East and help consolidate China’s long-term oil supply security," Mr. Grieder noted.

Other bidders for YPF include India’s Oil and Natural Gas Corporation and several unnamed Russian firms, almost certainly Gazprom and Lukoil. 

One of the most interesting aspects of this contest is the emerging role of China’s National Development and Reform Commission (NDRC).  The NDRC, which is responsible for formulating and executing policies to guide the development of China’s economy, plays a key part in deciding whether state enterprises may pursue acquisitions of overseas assets.  Up to this point, the NDRC has mainly been concerned with ensuring that the acquisition plans of Chinese companies support the country’s economic development strategy, not deciding between rival Chinese bidders.  The YPF bid may change that.

CNOOC’s Fu left no doubt where he stands on the question of letting state ministries decide commercial matters.  "Right now the government doesn't have any policy directorate charged with making corporate decisions and it can't intervene in companies' routine strategies. State companies, both abroad or at home, should be autonomous in their operations," Fu told Caijing magazine. 
Reports emerged Friday that the NDRC would resolve the matter by having the companies cooperate on an offer.  "All the parties involved are in discussions for a joint bid," an unidentified source close to the transaction told Reuters.
If true, the arrangement would be a neat solution to NDRC’s problem of having to choose between rival firms.
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