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PetroChina Plans $60 bn of Overseas Expansion

Source: Bloomberg 3/29/2010, Location: Asia

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PetroChina Co. plans to spend at least $60 billion in the next decade on overseas acquisitions, challenging Exxon Mobil Corp. and BP Plc in the race to control oil and gas fields.

“Ten years ago, PetroChina was a state-owned oil company, but now we have a goal of becoming an international, integrated energy company,” Jiang Jiemin, chairman of the world’s largest company by market value, said in a March 25 interview, where he announced the investment plan.

Beijing-based PetroChina spent almost $7 billion in the last year to buy refineries and reserves in Australia, Canada, Singapore and Central Asia. The expansion pits PetroChina against Irving, Texas-based Exxon, which agreed to pay about $30 billion for U.S. gas producer XTO Energy Inc. in December.

“Every five, 10 years or so, you’ll get the occasional $30 billion deal, but this is at least $6 billion every year and that’s significant for any major oil company,” said Neil Beveridge, an analyst at Sanford C. Bernstein Ltd. in Hong Kong. “This puts PetroChina on par or exceeding some international oil majors in spending.”

Exxon is counting on gas to provide the bulk of its future growth with the acquisition of XTO Energy as well as new developments from the South Pacific to the Celtic Sea. BP, vying with Royal Dutch Shell Plc as Europe’s biggest oil company, paid at least $8.3 billion to acquire assets over the past 12 months. PetroChina teamed up with Shell last week to buy Australian gas producer Arrow Energy Ltd. for $3.2 billion.

Record Spending
Spending by Chinese companies on mining and energy acquisitions reached a record $32 billion last year. China Petroleum & Chemical Corp., Asia’s largest refiner, said yesterday it will pay $2.5 billion to purchase a stake in an Angolan oilfield from its parent to boost production.

“A total investment of not less than $60 billion is needed to form our five regions of global oil and gas cooperation, by 2020,” Jiang said. PetroChina spent between $2 billion and $3 billion annually in the past five years, so the planned investment “is clearly a step up,” Beveridge said.

The shares snapped a five-day losing streak in Hong Kong, rising 1.6 percent to HK$8.89 and outpacing the 0.9 percent gain in the benchmark Hang Seng Index.

“Investors have been encouraged by what the company has had to say about acquisitions overseas,” said Shi Yan, an analyst at UOB-Kay Hian Ltd. in Shanghai. “They are putting forward a lot of money to buy assets and it also involves a significant increase in the production of oil and gas.”

Gas Growth
Longer-term investors are betting on PetroChina’s success, driving the shares up 43 percent in the last 12 months. That beat the 36 percent gain in BP and well outperformed the 3.1 percent decline in Exxon.

The Arrow deal would help PetroChina develop the country’s coal-bed methane reserves that may be as much as 38 trillion cubic meters, said Jiang, 54. The Chinese company plans to boost its annual output capacity of the fuel to 4 billion cubic meters within five years, Jiang said.

That could be 20 percent of China’s coal-bed methane output by 2015, which may reach 20 billion cubic meters by then, according to Sun Maoyuan, chairman of China United Coalbed Methane Co., a unit of China National Coal Group Corp., Nov. 2.

PetroChina wants half its oil and gas to come from abroad by 2020, Jiang said in Hong Kong. The company, more than 80 percent owned by the state, currently gets less than a tenth of its production from overseas.

Avoid ‘Indigestion’
The energy explorer and refiner plans to produce 400 million metric tons of oil and gas a year by 2020, Jiang said, without stating which countries are favored for investment. Purchases will be largely funded by the company’s cash flow and earnings, he said.

“We aren’t going to operate in every oil-producing country,” said Jiang, who was elected as chairman in May 2007. “It’s not the more you eat, the better. You will suffer from indigestion if you eat too much.”

Politics is the biggest risk PetroChina faces in its expansion, Jiang said, without elaborating.

Domestic rival Cnooc Ltd. dropped an $18.5 billion offer for El Segundo, California-based Unocal Corp. in 2005, the biggest overseas acquisition attempted by a Chinese company at the time. The offer met resistance from U.S. lawmakers on grounds the takeover would threaten national security.

‘No Threat’
Cnooc hadn’t sought a majority stake in any overseas deal until this year when it agreed to buy half of Argentina’s second-largest oil producer Bridas Corp. for $3.1 billion.

“Tell those who care about PetroChina, PetroChina will never ever be a threat to anybody,” said Jiang, previously a vice governor of Qinghai province in China’s far west.

China wants to triple the use of gas to about 10 percent of energy consumption by 2020 to reduce use of coal. The country plans to import 68 billion cubic meters of the cleaner-burning fuel a year from Russia through two pipelines, Jiang said. That’s about 80 percent of China’s gas production last year.

PetroChina’s parent, China National Petroleum Corp., has been in talks with Russia on gas imports for more than a decade and has made “good progress” over the past two years with an initial pricing agreement signed at the end of 2009, Jiang said.

The company will focus on its oil and gas business and won’t invest in renewable energy including wind and solar for now, Jiang said.

China’s dependency on imported crude will continue to rise, he said. The country’s annual domestic oil production is unlikely to exceed 200 million tons by 2020 while demand may increase to about 600 million tons by then, Jiang said.

The world’s second-largest energy consumer relied on imports to meet more than half of its oil needs last year.

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