What Would be the Ramifications of Sinopec-Chesapeake Deal?
The rumors that Sinopec is nearing a deal with Chesapeake are even louder than those that preceded Carl Icahn‘s investment in the beleagured natural gas giant. And we know how that turned out.
To get a sense of what Sinopec might want to buy, it’s worth looking at what Chairman Fu has already acquired in the U.S., both during his tenure at Sinopec as well as his days running Cnooc.So let’s assume that a deal will happen and that it will mean a few more billion towards Chesapeake’s remaining $7 billion funding gap for this year.
Cnooc has done two JVs with Chesapeake. In 2010 it bought a 33% position in Chesapeake’s Eagle Ford shale position for $1.1 billion. Then in 2011 it added a 33% stake in Chesapeake’s Colorado acreage in the Niobrara shale for $1.3 billion.
And since Fu joined Sinopec in mid-2011 he has also cut a big deal with Chesapeake’s cross-town rival Devon Energy. In January Sinopec agreed to pay Devon $2.5 billion for stakes in five plays: the Niobrara, the Utica shale in Ohio, and lesser-known positions in Louisiana, Oklahoma and Michigan.
Taken together, these acqusitions give the Chinese state-controlled giants experience in many of America’s prominent liquids-rich shale plays. It would make sense that Fu wants to get a look at as many different geologies as possible. China is thought to have even more potential shale plays than the United States, and China’s best hope for efficiently unlocking them is to understand how American drillers have done it over here. With that in mind, it would make sense for Fu to make his next investment in a new region, such as the Permian basin of Texas, where Chesapeake has shown eagerness to sell its entire position for upwards of $6 billion.
But would Sinopec (NYSE:SNP) want to take on the risk of buying a 100% stake in a big U.S. play? Not only would that be risky from an operational standpoint (it doesn’t yet operate any U.S. drilling campaigns itself), but from a political one as well. Recall the outcry in 2004 when Fu, then at Cnooc, attempted to purchase Unocal for $18 billion.
But the world has changed since then. Neither the U.S. (nor Chesapeake) can afford to turn down Chinese investments. It only makes sense that the Chinese would want to exchange some of their $1 trillion in U.S. treasuries for more intrinsically valuable U.S. assets. Besides, in recent years we’ve seen a spate of foreign companies grabbing giant pieces of shale. BHP Billiton Petroleum in 2011 acquired Chesapeake’s Fayetteville shale position for $5 billion, then followed that up by gobbling Eagle Ford pioneer Petrohawk Energy for $15 billion. Statoil, the Norwegian state oil company, bought Brigham Exploration last year for $4.5 billion. Like Sinopec, Statoil is majority owned by its home government. If no one made a peep about Statoil’s deal, they can’t very well try to block Sinopec.
Still, any big Chinese grab of U.S. oil and gas will trigger a circus. Politicians will fall over each other to demand that in exchange for approving the deal Sinopec must stop buying oil from Iran and abide by sanctions. A tough choice: Tehran or Texas?Read the rest of the article here.
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