Mergers and Acquisitions By China's Petroleum and Chemical
Companies

By Peter Zong

In the world of mergers and acquisitions (M&A), deals by Asian
players usually account for around 15% of the activity. In 2005
and 2006, however, this proportion increased and was estimated
to be 18% - 20%. With the sustained rapid growth of the economies
of China and India, the two biggest developing countries in Asia,
and the gradual recovery of the Japan's economy from its recent
low ebb, M&A activity in the Asia-Pacific region has increased
rapidly. Despite quite a few setbacks, a series of M&A activities
conducted by Chinese petroleum and chemical companies such as
CNPC (China National Petroleum Corporation), Sinopec Group
(China Petroleum Corporation), CNOOC Ltd. (China National
Offshore Oil Corporation Limited), Sinochem (Sinochem
Corporation) and ChemChina (China National Chemical Corporation)
has had widespread impact on M&A activities worldwide.

  1  Overseas acquisition

As overseas acquisitions conducted by publicly held companies
can be quite risky and are often denounced by shareholders, the
holding companies usually take charge of these activities.
Holding companies transfer what has been acquired to their
subsidiaries when the whole process is completed. CNPC and
PetroChina have proceeded this way, for example.

(1) CNPC and PetroChina

On April 15th, 2002 PetroChina Company Ltd. acquired Devon
Energy's oil/gas assets in Indonesia, the latter is the fifth
largest petroleum company in the world. On October 14th, 2003
CNPC acquired 100% of the equity in a joint venture enterprise
- Texaco-North Buzachi, which is engaged in the development of
North Buzachi Oilfield in Kazakhstan.
   On October 27th, 2005 CNPC acquired (PK) PetroKazakhstan at
a price of US$4.18 billion, and got the final verdict from the
Canadian court and completed all the legal procedures (CCR 2005
No.31). It is the biggest overseas acquisition deal completed
by CNPC. PK is an international petroleum company registered in
Canada. Its assets of oil/gas fields and refineries are totally
in the territory of Kazakhstan and its crude oil production
capacity is more than 7.0 million tons a year.
   As a matter of fact, CNPC owns great quantities of oil/gas
assets in Xinjiang, which is located in the western region of
China and borders Kazakhstan. The acquisition of PK can also help
CNPC prepare for the construction of the 10.0 million t/a
refinery project in Dushanzi of Xinjiang. CNPC then sold PK to
PetroChina in which it holds the major equity. Among the newly
independent Central Asian countries Kazakhstan is the country
with the most abundant prospective oil reserves and also one of
the target countries for China's petroleum industry to implement
the "going abroad" strategy. The exploration of oil resources
in Kazakhstan has made substantial progress since 2001. Its
proven onshore reserves have reached 2.4 billion tons and
reserves on the continental shelf of the Caspian Sea have reached
7.0 billion tons. Kazakhstan produced 50 million tons of crude
oil and exported nearly 35 million tons in 2002. It is expected
that the crude oil output of Kazakhstan will exceed 100 million
tons in 2015.
   On December 20th, 2005 CNPC and Indian Oil/Gas Company
jointly acquired 38% of the equity held by Canadian Oil Company
in Al Furat Petroleum Company. Nevertheless, CNPC has met a
series of setbacks in Russia, from the many changes of the oil
transmission pipeline routes to the acquisition of Rosneft and
Yukos.

(2) CNOOC Ltd.

On June 8th, 2005 CNOOC Ltd. officially disclosed that it
intended to acquire Unocal at a price higher than US$16.0 billion
offered by ChevronTexaco. It was perhaps the most newsworthy of
all Chinese M&A activity. At that time the market cap of Unocal
was around US$11.0 billion, with a net debt of US$2.68 billion
while the market cap of CNOOC Ltd. was around US$21.5 billion.
   On August 2nd, 2005, however, CNOOC Ltd. announced its
withdrawal from the deal. The explanation offered by CEO of CNOOC
Fu Chengyu was that according to the revised "Energy Practices"
of the United States, such a deal requires an evaluation of
China's energy policy and the deal can be closed only after the
completion of the evaluation. As there is no time limit for the
evaluation, CNOOC shareholder risk would increase.
   On January 9th, 2007 CNOOC Ltd. announced acquisition of 45%
of the deepwater oilfield operation rights under an offshore oil
production license (OML130) subordinate to South Atlantic
Petroleum Ltd. (SAPETRO) with US$2.268 billion (equivalent to
around RMB18.4 billion) in cash.
   Nigeria is the fifth largest exporter of crude oil worldwide.
The Niger Delta where OML130 is located is one of the basins with
the most abundant oil/gas reserves in the world. The area of
OML130 is around 500 square miles, including Akpo Oilfield
discovered in 2000 and other 3 major discoveries - Egina, Egina
South and Preowei.
   When commenting on this acquisition Fu Chengyu said that
signing the agreement enabled CNOOC Ltd. to gain an important
right to this oil/gas field and an expansion of China's reserves.
In addition, the deal fully conforms to the long-term strategy
of CNOOC Ltd. to grow the company and diversify regional
distribution of oil/gas assets through exploring and developing
offshore oil/gas fields.
   The profits as high as RMB48.0 billion in 2006 will likely
help the company succeed in the acquisition deal.

(3) ChemChina

On January 17th, 2006 China National BlueStar (Group)
Corporation subordinate to ChemChina acquired the whole assets
in Adisseo of France at a price of 400 million euros (equal to
around RMB4.0 billion).
   "It is the first overseas acquisition to arise in the basic
chemical sector of China," said ChemChina General Manager Ren
Jianxin.
   The State Development Bank of China gave it firm support with
the main loan enabling this acquisition. Adisseo of France is
the biggest professional producer of animal nutrition additives
worldwide. When speaking of the prospect, Ren Jianxin said that
it complies with the worldwide trend of shifting the
manufacturing industry to China and has filled a gap in the
utilization of external resources by China's chemical industry.
   On April 3rd, 2006 ChemChina successfully acquired 100% of
the equity in Qenos Holding Pty. Ltd., the biggest ethylene
manufacturer in Australia. The successful acquisition has
brought the total assets of ChemChina to more than RMB80 billion.
   According to Ren Jianxin, compared with the acquisition of
similar projects inside China, the successful acquisition of
Qenos has even higher property/price ratio. It will provide a
sound platform for ChemChina to develop business in the
Australian market and help ChemChina extend the existing
chemical new materials chain upstream.

(4) Sinochem

On May 12th, 2004 Sinochem started the activity of acquiring
Inchon Refinery of Korea and offered an acquisition price of
644.0 billion won. At that time Inchon Refinery already had
approval from the court of Korea to sell the company to Sinochem.
Compared with the other three Korean bidders, the price offered
by Sinochem was the most competitive. The acquisition of Inchon
Refinery was al