Argentina: China’s New Investment Frontier

Courtesy of The Financial Times, a report on China’s increased investment in Argentina.  As the article notes:

When China’s largest oil producer looked overseas 14 years ago for places to invest, it settled on the then-untapped riches of Sudan.That investment, in 1996, kicked off a string of deals in Africa, as Chinese state-owned oil companies snapped up resources in countries often deemed untouchable by western companies.

But today the Chinese oil majors are sending their money in a different direction: Latin America, which has dominated headlines this year for upstream oil and gas deals. Chinese oil companies have spent more than $15bn in upstream deals there this year – and industry executives say there is more to come.

“There is not a single CEO of a major oil company in Latin America, not one, who has not been approached by the Chinese,” says an M&A banker at a western bank.

Last week’s decision by China Petrochemical Corp to buy Occidental Petroleum’s operations in Argentina for $2.45bn has underscored the trend. The deal came on the heels of Cnooc and Bridas’s agreement to pay $7bn for BP’s 60 per cent stake in Argentina’s Pan American Energy.

Earlier this year, Cnooc invested $3.1bn for a 50 per cent stake in Bridas, a private energy company, describing the deal as a “beachhead in Latin America”.

The shift towards the region is happening partly because China’s oil groups are increasingly confident of competing against their western peers in mergers and acquisitions. Some of China’s earliest overseas oil deals, such as in Sudan, were negotiated on a government-to-government basis, a far cry from a modern corporate boardroom setting.

“Five or 10 years ago the Chinese [oil] companies were buying assets by negotiating directly with a limited number of countries, and there’s a certain shifting perception now,” says Gavin Thompson, head of north-east Asia for consultancy Wood Mackenzie. “They are operating in the real world now, alongside all these other companies who have been doing this sort of thing for far longer in terms of international growth and deals.”

Argentina and Brazil have benefited from the trend. This year, when a share in the Peregrino oilfield off the coast of Brazil went up for sale, at least two Chinese oil companies joined the bidding fray. The state-owned chemicals group, Sinochem, emerged victorious with its $3.1bn offer, even though it had less than a decade of offshore drilling experience.

Argentina’s oil industry has seen the deal as a key sign of confidence at a time when many western oil groups are put off the country’s onerous tax regime and heavy state regulation, and are hoping that it will boost upstream investment. China’s oil majors can afford to take longer-term bets than some of their western peers, thanks to state support at home and access to cheap credit.

One senior Cnooc executive admits: “Argentina has a tough fiscal regime. But that even happens in Australia.” Cnooc is betting Argentina’s energy tax policies may change soon. “We see some encouraging signs that it is going in the right direction,” the executive adds.

The announcement by YPF, the former Argentine state monopoly controlled by Spain’s Repsol, of a huge 4,500bn cubic feet discovery of tight gas in the province of Neuquén – equivalent, if confirmed, to a third of Argentina’s current gas reserves – is only likely to intensify Chinese interest.

Argentina has potentially rich oil and gas reserves offshore, but investment in exploration overall has been constrained by price controls.

BP’s stake in Pan American Energy, while money-making, was seen as peripheral to the British company’s operations for this reason.

“China is probably the only country that would actually buy in [to Argentina], because of the political pricing system there,” says Laban Yu, oil and gas analyst at Macquarie in Hong Kong.


Mineral resources provide additional attraction

In 2004, China’s investments in Argentina added up to a mere $12.9m, according to Julián Peña, a lawyer who sits on the board of the Argentine-Chinese Chamber of Commerce, writes Jude Webber in Buenos Aires

By 2009 that had grown tenfold to $136.7m. This year has seen a series of energy deals, including last week’s decision by Sinochem to buy Occidental Petroleum Corp’s operations in Argentina for $2.45bn. And earlier this year, China promised to invest a further $10bn in Argentina’s rail network.

The bulk of China’s interest has been in energy, but the country is also hungry for other resources in which Argentina is rich, including minerals and fertilisers. It is investing some $600m in urea production in Tierra del Fuego in southern Argentina, and Shandong Gold has also reached a deal to explore for gold in the northern province of La Rioja.

“Argentina has huge mineral potential – there is a large percentage of the country which is unexplored,” said Damián Altgelt, head of mining executives’ chamber CAEM. He said the legal regime in the sector was “quite favourable” despite Argentina’s often unpredictable politics.

China is a big customer for Argentina’s agricultural commodities and is planning a $100m project in the southern province of Río Negro to grow soyabeans for domestic consumption. It has also invested in the Belgrano Cargas railway line which is vital for Argentine soyabean transport, and has fishing ventures.

“China has been sending committees and groups of Chinese officials constantly for the last few years. They are making a lot of effort to understand how things work here,” said Juan Duggan, a lawyer whose firm, Hope, Duggan & Silva is active in negotiations with China.

China is involved in bidding for port and dredging operations in the construction of a new port in the city of La Plata near Buenos Aires.”

This entry was posted on Saturday, December 18th, 2010 at 4:11 pm and is filed under Argentina, China.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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