Senior management of China Petroleum & Chemical Corporation (Sinopec) announced on December 15 this year that the acquisition of a share in Canadian Tanganyika Oil Company Ltd (TYK) had won the approval of the Chinese government, marking the final stage of the purchase. Sinopec's offer to TYK is for 31.5 Canadian dollars (US$26.46) per share.
China National Petroleum Corporation (CNPC) and Sinopec, the two national oil giants, both suffered heavy losses due to hoarding of oil reserves while the international oil price was at its highest point. A business insider notes that having recognized the importance of controlling upstream oil reserves during the huge recent fluctuations in the oil price, Sinopec is attempting through this buyout to establish a presence in the upstream oil market of the Middle East.
TYK's reserves are mainly in Syria, and heavy oil constitutes the largest portion. Available information indicates the identified oil reserves at 184 million barrels. Based on this figure, the cost of the purchase is estimated to be US$10 per barrel.
The acquisition, the subject of rumors since September this year, is another example of a successful Chinese acquisition in the overseas market at a perceived bargain price. Approval of the buyout is a reflection of central government's economic strategy amid the worldwide financial hurricane.
Some foreign media sources reported on September 25 that Sinopec International Prospecting Company (SIPC), a Sinopec subsidiary, had made a conditional offer to TYK in which SIPC valued the company at CA$31.5 per share; the total price amounting to 13 billion yuan (US$1.90 billion). This offer represented a 21.2 percent premium against TYK's closing quotation the previous day and was supported by the TYK board, who agreed to sell Sinopec a 16.2 percent share in the company. Two days later, Sinopec confirmed the deal and submitted it to relevant government departments for review.
Prior to this deal, TYK had in fact been in contact with several other buyers and invited some to launch due diligence – none of these bore fruit as offers from the prospective investors did not meet TYK's expectations. The preliminary agreement with SIPC fixed the terms of the deal, and provided for a CA$65 million (US$54.57 million) penalty clause in the event that either party was unable to conclude the deal on the agreed terms.
However, the continued drop in the international oil price since Sinopec's offer has given rise to doubts and criticism about the company's move. The value of the investment in relation to the price paid has been the center of focus. International investors have maintained a careful watch over the deal.
Its limited access to the upstream oil market has steadily become a bottleneck on Sinopec's further development, and this purchase represents a sound opportunity to access Middle Eastern oil reserves. Su Shulin, Sinopec's general manager, comments: "The company will continue to focus on purchasing overseas oil and gas as its business strategy in our drive to become a transnational energy and chemical company with genuine international presence."
Yue Laiqun, a research fellow at the Ministry of Land and Resource, points out: "As a major operator in the oil business, Sinopec cannot afford to think short-term. The acquisition of TYK provides a shortcut to the Middle East by way of Canada." He also observes that outwith their projects in Iran, Sinopec's influence in the Middle East is very limited. This Syrian-oriented purchase is a step on a path that will ultimately lead to Iraq and its neighboring countries, where the serious reserves of crude oil are to be found.
How Sinopec will raise the funds for the buyout remains an issue. As a result of febrile market conditions, CNPC and Sinopec's losses during the first 10 months this year have amounted to 180.4 billion yuan (US$26.41 billion).
One analyst indicates that Sinopec has applied for a 10.2 billion yuan (US$1.4 billion) bank loan to bridge any gap in financing the investment, taking the company's debt ratio from 54 percent to 59 percent.
(China.org.cn by Maverick Chen, December 19, 2008)
