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Oil Giants Map out Overseas Takeovers
China's oil giants are planning a new round of large-scale overseas takeovers in a move to meet rapidly growing domestic demand for oil.

On the blueprint for the targeted takeovers are oil companies and fields in countries in the Middle East, Africa, South America and Central Asia, which boast huge oil reserves with lower development costs.

Experts said more marriage opportunities will be found in countries like Russia, Libya, Algeria, Syria, Iran, Iraq, Kazakhstan, Venezuela and other Southeast Asian countries.

And the move could lead to a "win-win" situation for both sides, experts said, explaining that foreign partners receive funds and technological know-how while the Chinese side secures oil to fuel its fast economic expansions.

Cao Xiaoxi, a senior researcher with the China PetroChemical Corp, said acquiring oil assets in the Middle East could help China secure a stable long-term supply and lower the risk posed by excessive reliance on oil imports. Over 60 per cent of China's oil imports come from the area.

"China could take the advantage of importing oil to gain leverage in negotiations of assets acquisition in the supplying countries," said Cao.

Middle Eastern countries are scrambling for big buyers as oil exports sustain the economies of most of these countries.

Cao said acquisitions may focus on upstream assets whereas there is a slim possibility of Chinese companies seeking refineries because Chinese companies do not specialize in downstream assets.

Earlier this month, the New York-listed China National Offshore Oil Corp, the third largest oil producer in China, announced a landmark deal valued at US$598 million to purchase oil assets in Indonesia.

Following the move, which triggered the latest round of business takeovers, China National Petroleum Corp (CNPC) also inked a deal to pay US$52 million to acquire a 30 per cent stake in two oil fields in Azerbaijan.

"These companies' upcoming international takeovers in 2002 will be much larger than foreign companies' direct stake takeovers in China last year," said Mu Hong, a senior official with the State Development Planning Commission.

According to the official, these companies have already filed documents to his department for approval, and more overseas merger and acquisition deals will take effect in the next several months.

Foreign companies have invested an estimated US$10 billion in domestic enterprises for stake takeovers, accounting for 6 per cent of the US$46.8 billion total of foreign direct investment in the country last year.

An official with China's largest oil supplier, China National Petroleum Corp, said that overseas marriages will bring 35 million tons of oil to the Chinese market by the end of 2005.

"Instead of complete takeovers, most of the deals are forging partnerships with foreign partners to launch joint venture firms in a move to minimize the operating risks," said Li Baogong, deputy chief of CNPC's Department of Capital Operation & Management.

China's demand for high-quality oil products is expected to witness skyrocketing growth in the coming years in line with the country's rapid economic growth, and imported oil is both cheaper and of higher quality.

Demand for high-quality oil, in particular, will surge in the coming years as the country is to pose more rigid emission standards on vehicles in line with its growing commitment to environmental protection.

And Beijing's hosting of the 2008 Olympic Games is expected to speed up the pace of the drive to clean up the pollutants.

"The State Development Planning Commission is now planning to introduce the European III vehicle emission standards to China," said Du Fangci, deputy secretary general of the China Association of Automobile Manufacturers.

According to Du, the Euro III standard is a much tougher standard for the oil refinery industry in China as it has been difficult for domestic oil refineries to provide high-quality fuel in recent years.

"In that case, we will rely more on imported oil products. We have already recommended to the authorities that all the fuel should be imported products in Beijing if the Euro III is to be put into practice before 2008," said Du.

China imported a total of 80 million tons of oil last year, and the amount is to witness fast growth in the coming years.

To date, China controls more than 400 million tons of oil reserves overseas, equal to about 5 per cent of the country's domestic developable reserves.

(Business Weekly February 5, 2002)

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