The Chinese oil & gas landscape is evolving, and when you juxtapose the transformative impact shale has had on the U.S. oil & gas market with the shale prospects in China, it’s difficult to overstate the potential opportunities related to shale in China.
If it’s fair to consider shale as the biggest potential for future oil & gas industry growth in China, perhaps the greatest challenge to that growth is overcoming the technical difficulties associated with China’s lacustrine (lake) shale reservoirs. Other significant challenges facing shale players would include limited infrastructure and legal systems that do not easily accommodate shale development and production, as well as some truly daunting terrain.
We are also witnessing a transformation in the strategic approach of China’s NOCs, which will impact future deal-flow in the region. In response to various domestic and international pressures, we have observed several key changes in the NOC approach:
- an increased focus on operational activities and ‘digestion’ of existing assets
- participation in state-mandated divestments and restructurings
- increase in joint ventures with International Oil Companies (IOCs) on higher-risk, often unconventional projects – both internationally and for domestic projects
- participation in asset swaps with IOCs – to both diversify portfolios and minimise transaction costs
- increasing investment in gas-related infrastructure (both pipeline and LNG)
- development of global oil & gas trading capabilities.
So where to from here?
With China projected to replace the United States as the world’s largest consumer of liquid fuels by 2035, the long-term fundamentals remain strong.
It is expected that Chinese NOCs will continue to seek M&A opportunities, especially if they are to remain competitive with IOCs pursuing deals in the wake of the Shell-BG merger.
Similarly CNPC, Sinopec and CNOOC have publicly indicated that they are considering global M&A. However it is clear that there will be greater selectivity. Any M&A activity undertaken by the Three Barrels or other Chinese SOEs will be closely aligned to broader strategic business objectives. No longer will we see companies acquiring reserves as an end in itself. It is also unlikely that we will see a return, any time soon, to the mega-deals of the past decade.
Within China, private companies (Chinese and international) are now playing a greater role in the Chinese market (from upstream exploration of conventional and unconventional plays to direct downstream purchase/importation of oil & gas products), and the ability to form and manage viable alliances will become a key strategic differentiator.
Legal developments in the sector have also opened up investment opportunities for international companies in China. Most notably, in April this year changes were made to the Catalogue of Industries for Guiding Foreign Investment which revises some investment categories affecting the oil & gas sector. Essentially, the Catalogue provides guidance to foreign investors on investments in different industries. The changes resulted in a lifting of the joint venture restrictions on foreign investments involving enhanced oil recovery technology, geophysical prospecting and well drilling and services. Foreign investors in these sectors may, if desired, now invest by way of wholly foreign-owned enterprises. The changes to the Catalogue also clarified the distinctions between conventional and unconventional oil & gas. Such clarifications are helpful in avoiding issues that might otherwise have arisen over the implementation of conventional oil & gas and unconventional oil & gas projects that overlapped in fields with complex, unclear or variable geology.
Finally, we are also witnessing a range of exciting new entrants into the Chinese oil & gas markets – ranging from private equity firms to commodities traders, and from foreign specialist services companies to Chinese privates and conglomerates.
While the market will become increasingly competitive, it will also become increasingly sophisticated. Notwithstanding the recent slowdown, significant opportunities exist for those players who are agile in their strategic approach and innovate.