M&A activity in resources sector losing momentum

The government's ongoing anti-corruption drive is having a diverse effect on outbound mergers and acquisitions activity, despite a growing number of opportunities brought about by dropping crude oil and commodities prices, according to a leading expert.

Jeremy South, global leader of mining M&As with Deloitte Touche Tohmatsu Ltd, says China used to be a "very active buyer in the global energy M&A market", but since the government started to take serious action to fight corruption, "doing nothing has become the preferred strategy for some state-owned enterprises" in the sector.

South says the country's energy M&A market has slowed considerably over the past two years, as the national graft clampdown has picked up pace.

Last week the central government's anti-corruption watchdog said on its website that Wu Zhenfang, the former general manager of state-owned China National Offshore Oil Corp, the biggest offshore oil and gas producer, was being investigated for "serious disciplinary violations". All three of the country's major energy companies have now fallen under the watchdog's spotlight.

China National Petroleum Corp, the country's largest oil and gas producer, and Sinopec Group, Asia's biggest refiner, both have senior officials being investigated.

An insider close to CNPC says energy companies, especially State-owned ones, have become extremely cautious over overseas deals because of the complexities that can be involved and the possibility of being seen as falling foul of international M&A processes.

Han Xiaoping, chief information officer at China Energy Net Consulting Co, says the situation has become such that decision-makers are cautious and that acquisitions have become more than just financial decisions.

He urges the authorities to introduce mechanisms that allow stricter supervision of overseas acquisitions, particularly by the country's oil companies.

According to the CNPC Economics and Technology Research Institute, the top three energy companies spent less than $3 billion in total on new overseas asset acquisitions in 2014, a 90 percent fall on the previous year.

In contrast, private energy companies have been accelerating their investments in foreign lands. The institute's data showed that Chinese private companies invested $2.2 billion in outbound M&A in the oil and gas sector last year, more than double the $1 billion invested in 2013.

"This year will be a better year for M&As because commodity prices are still low; but given the impact of the anti-corruption campaign, private companies will continue to be more active than state-owned ones," says South.

Wang Kunxiao, president of Yantai Jereh Oilfield Services Group Co Ltd, a private oil company based in East China's Shandong province, says low crude prices have had a negative impact overall on the petroleum production chain, but emphasizes that more foreign acquisition opportunities have surfaced as a result.

Wang says Yantai Jereh is currently researching potential oil and gas asset targets in countries including Iraq, Russia and Venezuela.

dujuan@chinadaily.com.cn

(China Daily Africa Weekly 04/10/2015 page23)