Sinopec: Sinopec’s $2.5-billion purchase of Occidental Petroleum’s Argentine assets is part of a broader political risk swap. With Western firms evacuating the Latin nation’s tightly-controlled energy sector, state-owned Chinese companies are betting they’ll better defend themselves. They may be getting leftovers - but there’s a chance they can make a meal.
Argentina is fast becoming China’s favourite bridgehead in the Americas. Only last month, Sinopec’s state-controlled sibling CNOOC upped its stake in Argentina through a $7-billion joint purchase, with its local partner, of BP’s assets in the country. This partly reflects a paucity of choice. Despite their impressive spending power, Chinese energy firms have frequently been given the cold shoulder in many parts of the world. CNOOC’s $18.5-billion bid for US oil group Unocal, for example, was sunk by political opposition in 2005.
Chinese firms may often be unwelcome buyers, but Western majors are happy to pass off unwanted hand-me-downs. Argentina has been a particularly tough operating environment for oil firms, and Occidental has been no exception. The nation’s persistent strikes and price controls have dragged down the firm’s returns on capital employed to just nine per cent in Latin America overall, compared to 14 per cent in the United States and 19 per cent in the Middle East, according to UBS. Still, these Argentine assets may be more valuable in Sinopec’s hands. China has the financial whip hand over Argentina, making it harder to short-change the Asian giant’s state oil firms. Earlier this year, China lent the Latin American state $10 billion to upgrade its rail system. With Argentina’s credit rating still deep in junk territory, this dependence is unlikely to end any time soon.
And any Chinese efforts to convince Argentina to relax stifling controls on the price and export of energy may be pushing on a somewhat open door. Fuel shortages have been hurting Argentine industry and forcing a reliance on costly gas imports from Bolivia. Such pressures have already led to an expansion of Argentina’s Gas Plus programme, which encourages exploration by allowing producers to charge higher prices. If China manages to nudge Argentina further, it would be good news for the shrinking number of brave Western firms still operating in the country, such as Apache.
This risk swap may make sense for both Chinese and Western firms. Having more politically powerful negotiators on energy may even be good for Argentina.