Chinese oil majors on foreign tech binge

Chinese oil majors are set to accelerate their overseas buying spree in unconventional oil and gas assets, with an eye on technology key to help shift China's reliance on coal to lower-carbon fuel over the next decade.

Such technology will be critical for China to boost energy security and tap its own potentially vast unconventional gas resources -- part of the drive by the world's fastest-growing major economy to triple gas use -- as Chinese firms lack the expertise.

National oil champions PetroChina, Sinopec and CNOOC have poured billions of dollars into overseas acquisitions over the past decade.

The latest trend is that they are giving priority to technology of developing unconventional reserves, such as tight gas, coal bed methane (CBM), shale gas and oil sands, as well as deep-water drilling, bankers and analysts say.

"In the case of China, I don't think they are purely interested in becoming operators for the sake of additional resources," said Peter Gastreich, executive director at UBS in Hong Kong.

"What they are really interested in now is more on the technology side with the aim of applying this expertise to China," he added.

Chinese energy giants may take strategic stakes in firms such as Canada's Encana, to acquire expertise -- often at a premium -- that they can utilise domestically, while raising their exposure to the long-term shale/oil gas boom in North America, analysts said.

PetroChina's USD 5.4 billion deal with Encana, announced last week, is the largest Chinese investment yet in a foreign natural gas asset.

Oil services firms such as Carbo Ceramics that focus on hydraulic fracturing, a critical process needed for developing unconventional gas, may also be targets, analysts said.

"China is at the start of a gas revolution," said Neil Beveridge, analyst at Sanford C. Bernstein in Hong Kong.

Jie Mingxun, PetroChina CBM's President, said on Wednesday it is open to foreign mergers and acquisitions, provided there is an adequate technological need and the right economic environment. Regardless of size, companies with specific, required technology would likely be targets.

Chinese firms are hoping to learn how to develop the fields, optimise drilling techniques and well design, said Peter O'Malley, HSBC's Head of Resources and Energy Group for Asia-Pacific.

The speed of the technology transfer from foreign firms to China's state-owned energy giants is likely to be a matter of many months rather than many years, O'Malley said.

For Chinese firms, potential M&A targets or joint ventures may be with companies such as Canadian oil sands major Suncor Energy, Canada's number 2 independent oil producer Canada's Cenovus Energy and Norway-listed Seadrill Ltd, a top deep-water driller, bankers and analysts said.

"Probably like a Nexen, it's around a USD 12 billion market cap company. It has great oil sands properties, significant international assets. It makes sense potentially for China," said a Hong Kong banker, who was not authorised to talk on the matter.

Calgary, Alberta-based Nexen is one of Canada's top independent oil exploration companies.

There are lots of upstream companies between USD 8 billion and USD 20 billion that could be potential targets, he added.

China appears ready to pay a premium for access to technology. PetroChina's USD 5.4 billion price tag represents 3.8% of Encana's 2010 estimated production for 24% of its market capitalisation.

Similarly, CNOOC paid Chesapeake an average of nearly USD 11,000 per acre for the Eagle Ford acreage, higher than the USD 10,000 per acre that Wall Street expected.

Like other overseas deals out of China, political risk is a key factor deciding the final outcome. Hence, Chinese firms are more cautious about making outright bids following CNOOC's failed USD 18.5 billion bid for US oil firm Unocal.