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Oil turmoils test Chinese buyers' risk appetite

By Charlie Zhu and Wendy Lim

SINGAPORE/HONG KONG (Reuters) - Chinese oil firms may have snared large foreign assets at fair prices, fanning their reputation as non-aggressive buyers, but their investments are being tested by turmoil in some of the countries.

Major delays in the projects sparked by attacks or violent protests could wipe hundreds of millions of dollars off the present value of the Chinese acquisitions, analysts said.

Prices paid recently by companies such as CNOOC Ltd. <0883.HK> and China National Petroleum Corp. (CNPC) for assets in Nigeria, Syria and Ecuador were regarded by some bankers and analysts as reasonable or cheap.

"We have looked at the price they paid for the deals. Our conclusion is that they are not overpaying," said Gavin Thompson, China country manager for Wood Mackenzie.

"They are actually paying very competitive prices compared to other recent deals partly because they are assuming a lot of above-ground risks," he said.

But militant attacks on Nigerian oil facilities and violent protests in Ecuador pose the question whether the prices paid by the Chinese buyers were low enough to offset the risks.

This would take years to prove. But if disruptions destroyed their acquisition value, Chinese majors might be more wary about bidding for energy reserves in politically volatile countries, their main marketplace for takeovers.

Sellers hoping for more generous Chinese offers could also be disappointed.

"The prices paid by the Chinese for the assets in Nigeria and Ecuador are not high in the context of the current oil price," said a senior investment banker.

"But if you think about the amount of unrest they are facing, the amount of instability in the countries, I would argue that every six months of delay would probably knock about 5 to 10 percent off the value," he said.


CNOOC's overseas moves have raised investor concerns that the interest of minority shareholders could be compromised by national interest -- securing reserves to meet the surging imports from the world's second-largest oil consumer.

CNOOC, China's largest offshore oil producer that mounted a failed $18.5 billion bid last summer for U.S. producer Unocal, last month agreed to acquire a major stake in a Nigerian oil and gas field from a firm controlled by Nigeria's former defense minister Theophilus Danjuma for $2.3 billion.

CNOOC bagged the deal after rival buyer, India's Oil and Natural Gas Corp. , withdrew its bid over what sources said were unspecified risks. CNOOC is buying the Nigerian stake at $7.50 for each barrel of oil in reserves, a price some equities analysts say is reasonable for deepwater oilfields.

But since CNOOC signed the deal, Nigeria's foreign oil facilities have suffered intensified attacks by militants, forcing Royal Dutch/Shell to suspend a total of 455,000 barrels of daily production.

It is not clear whether CNOOC has entered a protective provision known as the Material Adverse Change (MAC) Clause in its Nigeria deal.

Such clauses allow buyers to walk away if there is a material change of events between signing a deal and completing the transaction, such as asset nationalization or a major change in fiscal regimes governing targeted assets.

CNOOC Chief Financial Officer Yang Hua said he could not immediately recall details of the Nigeria agreement. But he said CNOOC put in a cautious bid and was looking at the long-term value of the deal, which has yet to be concluded.

"We have already factored in political risks when making the big acquisition," Yang told Reuters. "People in the oil industry don't just think of today or tomorrow. We have a long-term view."


A CNPC-led Chinese group agreed last year to buy Canadian giant EnCana out of Ecuador for $1.42 billion.

But violent protests recently erupted in the impoverished Latin American country with the poor demanding more petro-dollars for infrastructure projects such as roads.

The protesters at one point forced the closure of a major oil pipeline, in which the Chinese own a stake. The protests ended last week but Ecuador is on guard for demonstrations.

Yet, coping with such risks is a fact of life for Chinese oil companies investing overseas as most assets that they have bought, or have a chance to win, are located in countries such as Sudan which are off-limits to oil majors.

They may be plotting some mega takeovers in developed countries such as Canada's oil sands. But because the developed markets are dominated by Western oil firms and where competition is keener, they may have no choice but to continue forging deals in developing countries and regions rich in hydrocarbons.

"I always believe Chinese oil companies have more opportunities in developing countries," said Tong Xiaoguang, an adviser to CNPC, which last year bought PetroKazakhstan for $4.2 billion in China's largest overseas acquisition.

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