Trading Places: Sinopec and Total Ink Deal for Offshore Nigerian Oilfield

Trading Places: Sinopec and Total Ink Deal for Offshore Nigerian Oilfield

By Tim Daiss

Chinese oil major Sinopec is swapping places with France’s Total in offshore Africa in a move that has geopolitical ramifications. In late November Sinopec signed a deal with the French oil giant to buy its 20 percent interest in Nigeria’s offshore OML 138 block, which contains the Usan field, for $2.5 billion in cash. The agreement is subject to approval by Nigerian officials.

This disclosure brings several factors into play. For starters, it re-enforces a paradigm shift in Africa that has been ongoing since 2005. As China’s presence in Africa continues to intensify, the West’s is diminishing. China first overtook France as Africa’s second largest trading partner and then surpassed the US in 2009.

Chinese cash infusion in Africa is immense and still growing. In fact, the Middle Kingdom’s investment in Africa is projected to rise by 70 percent to $50 billion by 2015 from 2009, as it seeks to acquire resources, Standard Bank Group, Africa’s largest lender said last year. Bilateral trade between China and Africa is forecasted to hit $300 billion by 2015, double the 2010 level.

The Sinopec-Total deal also confirms Sinopec’s aggressive, “going global” philosophy in securing hydrocarbons in some of the world’s most dangerous places.

“In 2009, facing the severe challenges posed by [the] global financial crisis and fierce competition in the global market, the group [Sinopec] accelerated its ‘going global’ pace,” Sinopec states on its website. The company boasts that their overseas oil and gas business achieved new “leapfrog” status by its firm efforts to strictly follow the going global strategy.

The US Energy Information Administration (EIA) hits the nail on the head regarding this, stating that China is taking advantage of the economic downturn to step up its global acquisitions and using its vast foreign exchange reserves (over $3 trillion in 2012) to help purchase equity in projects or acquire stakes in energy companies. Since 2009, China’s three large oil companies CNPC, Sinopec and CNOOC have purchased assets in the Middle East, North America, Latin America, Africa, and Asia.

In Africa to stay

Sinopec has had operations in Africa for nearly a decade. They have been involved in oil and gas activities in Gabon since 2004 and have equity oil fields in Sudan, and production in Algeria. Sinopec also has interests in Angola, Ethiopia, Nigeria, and Chad.

In 2009, Sinopec acquired Addax, a Geneva-based company, for $7.3 billion in the nation’s biggest overseas takeover, gaining oil reserves in Iraq’s Kurdistan and West Africa.

And in May, Sinopec and PetroSA (South Africa’s national oil company) announced plans to build a refinery in South Africa at a cost of $9-$11 billion, with production to reach 400,000 bbl/d.

However, all is not well for the Chinese oil-giant. The company’s Q3 profits dropped 9.38 percent year-on-year to 18.33 billion yuan ($2.91 billion), a 1.89 billion yuan drop from 20.22 billion yuan in the same period last year.

In a Hong Kong Stock Exchange disclosure Sinopec stated that the decline was “mainly due to plummeting results of the chemicals segment which resulted from changes in the chemical market and demand.”

Also, Sinopec’s crude oil production reserves declined from 3.3 billion barrels in 2007 to 2.8 billion barrels at the end of last year, Bloomberg reported.

However, the Usan field, which began production in February, will help offset this decline. With the purchase, Sinopec will have approximately 100 million barrels of recoverable resources as per its share of interest. The field’s current equity oil output is 24,000 bbl/d and projected to turn out 26,000 bbl/d net to Sinopec at its highest production level, around 1.3 million tons a year, according to a Sinopec press release.

Protection against oil price swings is another reason for the purchase, particularly since Sinopec (the world’s second largest refiner with about 5 million bbl/d capacity) has historically been a maker of oil products and has to acquire a large part of its crude on the open market.

With the acquisition Sinopec is also trying offset the effect of government-controlled fuel prices, which hit hard at company coffers. In efforts to control inflation, China’s National Development and Reform Commission (NDRC), regulate fuel prices, thereby preventing companies from fully passing on higher crude costs to its customers.

In fact, when international crude oil prices rose in 2010 and 2011, the NDRC didn’t increase downstream fuel prices concurrently. China’s refiners incurred profit losses on their downstream businesses and consequently increased their fuel product exports.

China’s NOCs, experiencing negative margins, often use their upstream and other business segments to offset losses on downstream sales.

Though Sinopec is eager to gobble up African energy assets, it is not without risks. In 2007, things turned ugly when ethnic Somali gunmen raided a Chinese-owned oilfield in Ethiopia’s Ogaden desert, leaving 74 dead, including 9 Chinese oil workers. Seven were kidnapped.

The situation is even more precarious in Nigeria. In 2010, two French nationals, a Canadian and two Americans were kidnapped in a pre-dawn armed attack on an oil rig off Nigeria’s coast.

Attacks against foreign oil interests in Nigeria are common. In February, The Movement for the Emancipation of the Niger Delta (MEND), a group fighting for a greater share of Nigeria’s oil wealth in the country’s delta region, claimed responsibility for an attack on an oil pipeline in an area operated by Italian firm Eni SpA, stoking fears that the group was renewing its offensive against foreign oil companies.

And, last month, MEND (commenting on constant stealing of crude oil in the area) released a statement claiming that oil sabotage would continue, and lead the way for a new wave of insurgence, according to Aljazeera.

It seems, however, that China either negates these dangers in Nigeria as it has in Sudan, Chad and other African hot spots, or more likely, simply must have access to Nigeria’s massive oil reserves, despite the sacrifice, to keep its economy moving forward as well as placating its 1.3 billion citizens who increasingly demand the lifestyle that those hydrocarbons provide.

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