Addax/Sinopec: Corporate China is nursing its wounds after miner Rio Tinto aborted a partnership with state-owned Chinalco last week. But the mooted £4.8bn bid for UK oil producer Addax by Sinopec, one of China’s triumvirate of oil majors, may offer a sort of consolation prize.
Addax is an oil explorer specialising in high-risk areas that Western majors treat with caution. Iraq, where the likes of Shell have seen their contracts to pump out oil deemed illegal, is one. Nigeria, where militant attacks have led to shut-downs, is another. But China’s studious political isolationism makes such places mainstream investment territory.
Iraq is the real prize. The turbulent country has the world’s third-largest proven oil reserves, according to the Energy Information Administration. Addax has just over one-third of the Taq Taq field in Kurdistan. The region currently pumps out 40,000 barrels a day, but officials say it could prove a 2m-barrel gusher.
Most Western oil majors have focused on Iraq’s mega fields rather than the small fry in Kurdistan, which were left to minnows such as Addax and Norway’s DNO to exploit. But Sinopec is wise to target these smaller morsels. While contracts for the big projects will be fixed-rate service agreements, Addax and DNO enjoy profit shares of 10% to 20%. That means owners enjoy uncapped returns, and can book a share of the oil as their own reserves.
Doubts still surround what exactly Sinopec might get for its money. Profit sharing is anathema to Baghdad, which may yet try to impose less favourable terms. And since oil from the Kurdish fields will be piped out and marketed centrally, planting a flag on Iraqi soil does little to meet China’s own energy needs.
These drawbacks and uncertainties are a probably worthwhile price for getting into Iraq early. And China also has a chance to close a deal after a series of flunks. Memories of CNOOC's $18.5bn bid for Unocal, slapped down by US regulators, still smart. The other obstacles - potential rival bids from Korea’s National Oil Corporation or other oil majors - can be solved with cash. And that’s still China’s forte.
