The decision by Sinopec of China to pay US$1 billion for the right to explore for oil in deep water off Angola has shocked the West, which fears it could be left behind in a global scramble for resources.
The rights to prospect for oil off the coast of the impoverished African country were selling for US$35 million less than a decade ago, when Western oil giants such as BP and Shell had the field almost to themselves.
The rising power of oil companies from fast-developing and energy-hungry nations such as China and India have contributed to soaring oil prices. This week, they hit record highs of US$75 a barrel.
"It's just like the British housing market. You have a lot of people chasing a few opportunities. The difference with oil is the companies have huge amounts of cash," said Derek Butter, an analyst at energy consultants Wood Mackenzie based in Edinburgh, Scotland.
Lining up
And it is not just Angola that is benefiting. The Nigerian government has just sold 16 exploration licences in deep-water areas for US$500 million and secured promises that the buyers will spend a further US$20 billion on new infrastructure projects such as gas-processing facilities.
Licences have been offered recently in the Gulf of Mexico, Brazil and Libya. It is only in fast-declining areas such as the North Sea that large companies have lost interest, although drilling activity has risen there, too.
The oil grab is also triggering a merger and acquisition bonanza. China National Petroleum Corp recently bought PetroKazakhstan for US$4.2 billion, while China National Offshore Oil Corp caused panic in Washington last year when it tried to buy the US oil group, Unocal.
In the past, the forthcoming stock market float of controversial Russian giant Rosneft -- expected to be valued at US$80 billion -- might have been avoided by respectable Western companies fearing damage to their reputation. But BP and others say they might not be able to turn down such an opportunity if the price is right, partly because it would offer vital access to an increasingly protected Russian market.
Wary of foreigners
Russian President Vladimir Putin opened the door for BP to buy Moscow-based TNK, but has since made it almost impossible for anyone to do a follow-up deal. Most governments in the oil-rich Middle East are even more wary of foreign oil firms.
The growing power of left wing, nationalistic governments in South America is forcing Western firms to pay more or leave. Bolivia has just requisitioned assets from Repsol YPF of Spain and has increased gas export prices to Argentina by 45 percent.
With oil prices continuing to bubble along, oil industry experts are increasingly convinced there will be a US$40-plus oil price environment for the foreseeable future. This compares with a US$20 expectation barely two years ago. BP made a ?3 billion (US$5.5 billion) profit in the first three months of this year and looks set to easily beat this in the second quarter, having built up a mountain of cash from record earnings in recent years. Billions of dollars have been given back to shareholders at BP, Shell and ExxonMobil, but large oil companies worldwide are also desperately pouring money into trying to replenish their reserves.
The bidding war that has driven up the price of exploration rights in Angola was not just the work of Sinopec. Total of France spent US$670 million on a 40 percent stake in the assets next door on block 17.
And national oil groups such as Sinopec are often more flexible on how they structure deals. The Korea National Oil Corp recently won an area in Nigeria through a barter deal in which fellow South Korean conglomerate, Daewoo, will build a shipyard and railway link. Similarly, the Oil and National Gas Corp of India has teamed up with local steel group Mittal to offer a range of services to Kazakhstan in return for oil rights.
Saudi Arabia tried a similar move some years ago when it said it would allow major Western oil to companies to explore on condition they helped build gas plants and desalination plants. BP and others turned this down on the basis that it was outside their expertise, although Shell has started a more limited drilling program in the Empty Quarter.
The race for assets has even included territories formerly shunned by the West, such as Libya. The Libyan government attracted better tax terms from Western firms than anyone expected. The Iraqi government should be able to do the same.
Price increases
But Butter said it is wrong to blame national companies from China and India for the inflation that has also hit the price of rigs and staff as shortages develop. US-based Anadarko Petroleum has just made a US$21 billion bid for local rivals Kerr-McGee and Western Gas Resources, while ConocoPhillips bought another US oil firm, Burlington Resources, for US$35.6 billion last December.
"Whilst it is true the international expansion of the Asian national oil companies has increased competition for opportunities in some areas, we question the conventional wisdom that they are unfairly dominating the upstream sector and indulging in a win-at-all-costs strategy," Butter said.
But he said he had struggled to see how Sinopec can explain the cost-competitiveness of spending US$1.1 billion in Angola.
Bruce Evers, an oil analyst with Investec Securities in London, said asset prices are likely to continue to increase.
"It's absolutely staggering what companies are forking out," he said.
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