The US remains the world’s leading consumer of crude oil, last year accounting for 20.5 percent of global demand. That being said, oil consumption in the developed world has reached a plateau; rising consumption in emerging markets, coupled with constrained supply growth, has driven oil prices higher over the past decade.
According to BP’s (LSE: BP, NYSE: BP) Statistical Review of World Energy 2012, the Asia-Pacific region has accounted for much of the incremental growth in global oil demand. Over the past decade, oil consumption has declined by 2.1 percent in North America and 3.3 percent in Europe. However, demand in Asia surged by 28.7 percent over this time frame, with rapid industrialization and urbanization in China, the quintessential emerging market, fueling an 85 percent jump in Mainland oil consumption. China’s oil demand had grown to 11.08 percent of the global market in 2011, compared to 6.22 percent in 2002.
At the same time, domestic output hasn’t kept pace with China’s rising appetite for crude oil; in 2011 the country’s oil production accounted for only 41 percent of demand.
Source: BP Statistical Review of World Energy
To offset this shortfall, China’s three major national oil companies–China National Petroleum Corp (PetroChina), China Petroleum & Chemical Corp (Sinopec) and China National Offshore Oil Corp (CNOOC)–have aggressively pursued international acquisitions. This strategy not only helps to meet domestic demand but also diversify their supply base and gain experience in deepwater and other unconventional plays.
The national oil companies have a powerful incentive to acquire assets overseas: International expansion is critical to offsetting losses suffered by their refining and marketing operations, which pay elevated prices to import oil and sell the resulting products at government-mandated rates.
Over the past five years, China’s national oil companies have completed 26 acquisitions and announced six pending deals outside Asia. These 32 transactions amount to USD60.05 billion, with upstream (exploration and production) assets accounting for 73.5 percent of total deal value.
These trends shouldn’t come as a shock to North American investors: China’s national oil companies have spent USD40.25 billion on mergers and acquisitions targeting Canadian assets, largely because of the country’s abundant natural resources, stable political environment and a regulatory regime that, until recently, has welcomed foreign investment.
Sinopec (Hong Kong: 0386, NYSE: SNP) earlier this year announced that the firm will acquire a 49 percent stake in Talisman Energy’s (TSX: TLM, NYSE: TLM) business in the North Sea, a segment that includes interests in 46 operated and non-operated fields, 11 offshore installations and one onshore terminal. The USD1.5 billion transaction will bolster Talisman Energy’s balance sheet and enable the company to expand its planned capital expenditures. Meanwhile, Sinopec will gain further experience in exploiting offshore reserves and grow its oil output.
This deal was soon overshadowed by CNOOC Ltd’s (Hong Kong: 0883, NYSE: CEO) USD15.1 offer for Nexen (TSX: NXY, NYSE: NXY), an exploration and production firm that generates about 28 percent of its annual output in Canada and holds blocks offshore Nigeria and in the North Sea and the Gulf of Mexico. However, questions remain about whether Canadian regulators will approve the deal, especially after regulators in October scuttled Petronas’ initial USD5.21 billion bid for Progress Energy Resources Corp (NYSE: PRQ).
In next week’s issue of Energy & Income Advisor, we’ll explore the appeal of investing in Canada’s resource-rich economy and highlight our favorite income and growth stocks in the country’s energy sector.
Elliott and Roger on Aug. 28, 2014
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