/ 
Chinese overseas oil & gas M&A jumps 130% as SOEs focus on downstream acquisitions
Chinese overseas M&A in the oil & gas sector increased to US$9.9 billion in 2017, up 130% from 2016’s US$4.3 billion
2 May 2018 | Janette Chen

CHINESE overseas M&A in the oil & gas sector increased to US$9.9 billion in 2017, up 130% from 2016’s US$4.3 billion, according to a recent report from Ernst & Young (EY). In terms of volume, Chinese overseas M&A deals in oil and gas increased to 14 last year, up 27% from 11 in 2016.

At the same time, Chinese SOEs are focusing more on downstream acquisitions, rather than the upstream, according to Nicholas Song, partner at law firm Dechert, talking to The Asset.

“There has been more of a recent focus on downstream projects developments, such as petrochemical facilities and refineries,” says Song.

Based in Beijing, Song represents a number of China’s SOEs on cross-border M&A and investments. According to EY’s report, most of the top Chinese overseas oil and gas M&A deals in 2017 are downstream.

In the petroleum value chain, upstream activities encompass exploration and production; midstream encompasses transportation of oil and natural gas, such as shipping and pipelines; and downstream relates to refining and distribution.

“In the last 12 months, there has not been much upstream M&A activity. The top three SOEs – China National Petroleum Corporation (CNPC), Sinopec, and China National Offshore Oil Corporation (CNOOC) – have not much upstream M&A activity. They’ve been focusing on digesting the assets they bought up to 2012,” according to Song.

“Chinese SOEs had made a lot of significant investments and have been rationalizing and integrating these assets into their portfolios,” says Song.

Song says that Chinese investors used to be willing to take on investments that require them to explore and look for the oil and gas. However, recently, Chinese investors’ interest has been moving down the value chain. “The Chinese investors have been more focused on producing assets, which reduces the risk of their investment and also the assets will then be immediately cash flow generating,” he adds.

The trend is in line with the entire market in general. Investors are shifting from upstream to downstream in recent years, according to Deloitte. “I expect that to be quite a big driver in the mid-stream and downstream this year,” according to Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions, Deloitte Services LP.

“I still take a good hard look at the continued rise in US exports and the need to actually put infrastructure in place, which will increase the capacity to take hydrocarbons, whether it's oil, whether it's refined products or natural gas, into export markets, international markets. Although typically these macro changes in the price environment, in the business confidence, they do affect the upstream more than the downstream,” says Slaughter.

Belt Road countries have been among the most the popular destinations for Chinese SOEs' overseas M&A deals in oil and gas, according to Song. “The concept of what constitutes the Belt Road has become very broad in terms of the geographical scope,” says Song, noting that Chinese investors are not just focusing on the Belt Road but also looking at projects in regions such as Russia and the Middle East.

“In terms of oil and gas upstream investments, Kazakhstan has been attracting quite a lot investment by the Chinese SOEs – not just the big ones, but also the middle tier SOEs as well, in terms of undertaking investment in the oil and gas sector,” says Song.

Have you read?