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artemis boundary, page-37

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    China's oil companies are increasingly finding the value of partnering with foreign firms in their push abroad, especially in areas where they have run into trouble trying to go it alone.

    The most recent example of the strategy's success came Monday, when Australian energy company Arrow Energy Ltd. said it agreed to a $3.15 billion offer from Royal Dutch Shell PLC and PetroChina Co. The deal, if approved by regulators, would give PetroChina access to supplies of coal seam gas to feed China's growing hunger for the fuel as well as exposure to a technology of tapping gas trapped in coal that could increase China's own domestic natural-gas supplies.

    Several recent deals signal that the shift toward joining forces with foreign firms is panning out, for a variety of reasons: Securing China's energy needs often goes smoother with a partner, helping Chinese firms avoid the kind of nationalist backlash that famously torpedoed Cnooc Ltd.'s 2005 bid for California-based Unocal Corp.

    The alliances also make China and international oil companies more codependent on each other's success, tying together China's energy security with the security of global energy supplies.

    The benefits work the other way too: Chinese oil giants have themselves become more attractive, with their own direct line to ample state funds and credit and a growing reputation for being able to operate in areas where others won't, such as Iraq.

    "In recent years, Chinese oil companies' overseas mergers and acquisitions were not very smooth for many reasons. We think we found a more reliable way to reach success, partnering with Western or other strong oil companies," said Mao Zefeng, spokesman for PetroChina, the Hong Kong-listed subsidiary of China National Petroleum Corp. "This is a change in thinking. It's a business, not a political behavior."

    China has a mixed track record in resource-rich Australia, where some are afraid of dominance by Chinese companies. Domestic backlash contributed to the failure of metals company Aluminum Corp. of China's audacious bid for a bigger share of Rio Tinto PLC. Partnering with a big foreign company can make a bid appear more like a regular business decision, rather than resource grabbing by a state-backed entity.

    Another example of the shift came March 14 when Cnooc said it will buy half of Argentinean oil and gas company Bridas Corp. for $3.1 billion. Part of Bridas's operations is a joint venture that is 60% held by the British energy giant BP PLC.

    "Cnooc Ltd. believes that forming a joint venture with a local partner is critical for its success in overseas expansions," the company said.

    Even as Cnooc has been able to get into Argentina through a joint venture, efforts by Cnooc and other Chinese companies to take over the Argentinean part of a Spanish-owned oil company have stalled, people familiar with the situation say. Both Cnooc and CNPC have been looking to buy the Argentinean part of Repsol YPF SA since at least August, bankers and analysts say.

    In Iraq, China's track record of operating in harsh conditions and unstable regimes made it an attractive partner for international oil majors looking to invest in that country's recovering oil industry. In November, PetroChina's parent company, CNPC, joined with BP for the rights to operate the Rumaila oil field, one of the largest producers in the world. Some investors criticized the investment as low-margin, but BP said it would benefit by being able to tap into CNPC's lower labor and equipment costs.

    In December, PetroChina joined with France's Total SA, and Malaysia's Petroliam Nasional Bhd., or Petronas, for the giant Halfaya oil field. The contracts don't give key ownership of the reserves underground, but are like oil-service contracts that generate revenue that can be paid in oil.

    Analysts and industry executives say the partnerships make sense for many reasons. Chinese oil companies are strong on reviving aging fields, and are good at building large engineering projects. Since the financial crisis, Chinese companies are increasingly attractive because of their access to ample credit. In countries such as Iraq, for many commercial independent firms, partnering with a state-backed company can reduce some risks. With more of the world's oil locked up in politically less stable regions, Chinese partners will be more appealing.

    "The Chinese are willing to invest and put a lot of money on risky projects," said Samuel Ciszuk, an analyst with IHS Global Insight. "They're good partners, from that point of view."

    For Chinese companies, working with more internationally savvy oil firms gets them access to better exploration and complex project management skills that they still lack.

    Total of France and Cnooc are shortly expected to conclude a deal to buy a third of Tullow Oil PLC's oil assets in Uganda, a region that has just opened up for major new oil fields. That is in contrast to Cnooc's solo efforts in Kenya, where its wells are coming up dry.

    Meanwhile, the joint bid with PetroChina is just one aspect of Shell's cooperation with the state-owned Chinese company. Shell said last week it is in talks with both PetroChina and Cnooc to jointly build and operate new refining capacity, in a bid to increase its exposure to Chinese markets.

    To be sure, Chinese firms are still pursing many overseas projects independently, especially in Central Asia. The biggest takeover by any Chinese firm was Sinopec Group's $7.2 billion takeover last year of Addax Petroleum Corp., based in Switzerland and listed in London and Toronto. It is one of the largest independent oil producers in West Africa and the Middle East by volume.

    Addax also owns oil fields in Kurdistan. Baghdad has declared as illegal contracts negotiated with the Kurds, and in retaliation, froze out Sinopec from last year's bidding rounds. Sinopec officials are still trying to get the ban lifted.

    That points to another weakness: inexperience in dealing with geopolitics can sink a deal. "They need a bit of tact," said one observer. "Go partner with someone like BP, be quiet, get a pen and listen."

    (Guy Chazan in London contributed to this article.)
 
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