Special Report: The education of China's oil company

Mon Oct 7, 2013 12:18pm EDT
 
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By Charlie Zhu and Bill Powell

HONG KONG/SHANGHAI (Reuters) - Yang Hua was a rising star at Chinese oil giant CNOOC Ltd back in 2005. Then, the 44-year-old chief financial officer participated in one of corporate China's biggest belly flops ever.

Yang helped CNOOC, the publicly listed arm of state-owned China National Offshore Oil Corp, craft an $18.5 billion bid for Unocal Corp of Los Angeles. It turned into a debacle. Political opposition exploded in Washington, where the company had done little preparation. At home in Beijing, some board members revolted after being blindsided by the bid, and some of China's leaders were said to be queasy. CNOOC stood down and Unocal was sold to a rival, Chevron Corp.

Seven years later, Yang appeared to triumph. On February 26, CNOOC closed China's largest foreign acquisition in modern Chinese history: the $15.1 billion all-cash takeover of Calgary-based Nexen Inc. The deal caused far less rancor than the aborted Unocal effort, and it was a landmark, touted in China as foreshadowing a bigger global role for the state-owned giants that dominate the world's second-largest economy.

At a small briefing for reporters from the official Chinese media the next day, CNOOC Vice Chairman Yang Hua smiled broadly and said: "I slept like a log last night."

CNOOC had demonstrated that China's state-owned enterprises can play on the world stage, said one banker involved in the deal. "They learn from their mistakes and don't repeat them," the banker said. "In terms of the process, the Nexen deal was very smooth, and Yang was the key to that."

But as deftly as it was done, it is now anything but clear that the Nexen acquisition was wise for CNOOC's constituents - the Chinese government and shareholders in the publicly traded company.

As one company insider told Reuters: "For CNOOC, the closing of the deal marked the end of euphoria, and the beginning of pain."

The central problem, analysts say, is that in a global energy industry transformed by the shale gas revolution in North America and elsewhere, CNOOC overpaid. And it underestimated the risks of monetizing the landlocked oil-sands and shale-gas assets in Canada that account for 75 percent of Nexen's proven and probable reserves.   Continued...

 
A logo is seen on the wall at the entrance of China National Offshore Oil Corp (CNOOC) office tower in Beijing, in this March 20, 2013 file photo. Picture taken March 20, 2013. To match Special Report CNOOC-NEXEN/ REUTERS/Petar Kujundzic/Files (CHINA - Tags: BUSINESS ENERGY LOGO)