Sinopec seeks capacity, reserves with Addax bid

SHANGHAI — Sinopec, with its $7.2 billion bid for Addax Petroleum, is seeking crucial production capacity and coveted reserves in West Africa and the Middle East to help balance its heavy reliance on crude oil processing.

News that Addax’s board had approved the offer by Sinopec, formally known as China Petroleum & Chemical Corp., helped push the Beijing-based company’s shares up more than 2 percent Thursday, though they later fell back to close just 0.4 percent higher at 10.56 yuan.

The deal would be the largest ever overseas takeover by a Chinese company, although is only half the size of last year’s acquisition by Aluminum Corp. of China, with Alcoa Corp., of a 12 percent stake in global miner Rio Tinto PLC. That deal was worth $14.3 billion.

The proposed acquisition must still be approved by regulators. But a takeover would help cushion Sinopec — China’s largest refiner by capacity — against spikes in global crude oil prices that have caused it billions in losses in recent years due to caps on domestic fuel prices.

China is aggressively pursuing major acquisitions of scarce resources needed to fuel its fast growing economy, often running into heavy resistance in the host countries of its takeover targets.

Four years ago, China National Offshore Oil Company Ltd. withdrew an $18.5 billion bid for the Unocal Oil Company because of a tremendous backlash in Washington.

This month, the Anglo-Australian miner Rio Tinto dropped plans for a $19.5 billion investment from Aluminum Corp. of China, or Chinalco, amid a political firestorm in Australia over resource acquisitions by Chinese companies.

Still Beijing seems likely to persist in using its massive wealth — nearly $2 trillion in foreign reserves as well as huge cash piles held by state companies — to secure access to strategically vital resources such as oil, gas and minerals.

Sinopec’s move for Addax is “more than an indication of China’s appetite for energy resources,” said Shang-Jin Wei, a Columbia economics professor who specializes in Chinese business. “I read it also as a reflection of its desire to diversify its foreign asset holdings away from U.S. government securities.”

As the U.S. government’s debt grows and the dollar looks set to slip, he said, “China considers it prudent to diversify its foreign asset holdings into more ‘real’ assets such as energy and natural resource companies relative to ‘financial’ assets such as foreign government securities.”

The biggest takeover before Sinopec’s bid for Addax was offshore oil-services provider China Oilfield Services’ acquisition last year of Norway’s Awilco Offshore, in a deal valued at $2.5 billion,

State-owned Sinopec has its own imperatives for seeking overseas assets, given its heavy reliance on refining. Its net profit fell 47 percent in 2008 as government caps barred it from passing on costs of surging crude oil prices.

The company has seen a gradual improvement thanks to hikes in domestic fuel prices and the decline in international crude oil prices from their peak of nearly $150 per barrel in July.

Though it has forecast that first-half earnings will rise by more than 50 percent from a year earlier, its heavy exposure to refining remains risky.

“It’s still not exactly a money-making enterprise for Sinopec, the domestic market,” said Simon Wardell, an oil analyst with IHS Global Insight in London.

“Last year it was crazy. They were losing on every single barrel, every gallon they processed,” he said.

Sinopec said it views the acquisition of Addax, which produced 134,700 barrels of crude oil a day in the first quarter of this year, as a “tranformational acquisition.”

“We trust that this acquisition suits Sinopec’s strategic goals, that it will strengthen Sinopec’s presence in west Africa and Iraq and is a major step in its globalization,” it said in a statement posted on the company’s Web site.

Addax’s oil and gas exploration and production is based mainly in west Africa and the Middle East, including joint operation of the Taq Taq field in Iraq’s self-ruled Kurdish region with Turkey’s Genel Enerji.

Such deals may be the best that relative newcomers to the global oil scene like Sinopec can expect when trailing majors like Exxon Mobile Corp. and Royal Dutch Shell that have a long history of exploration and development in major producing regions, analysts said.

“Good reserves in stable places have been locked up by the big multinationals,” said Nick Lardy, an expert on China’s economy at the Peterson Institute, a Washington think tank. “If you’re a new player and you have a substantial appetite for access to oil on some long-term basis, then you are more or less forced to go into high risk places where the majors are not willing to tread.”

There is no guarantee that the deal will go through.

Addax, which is listed on exchanges in London and Toronto, said it retains the right to consider any proposals superior to Sinopec’s $46.17 per share offer.

But the price is a 47 percent premium to the closing market price for Addax on June 5, the day prior to its public announcement of sales talks, and Sinopec promised to keep Addax’s top management intact, Addax said.

“We are pleased that Sinopec has recognized the highly attractive asset portfolio and exceptional team that we have assembled at Addax Petroleum,” CEO Jean Claude Gandur said in a statement.

Shares of Addax Petroleum Corp. rose 7.25 percent to $48.96 Canadian ($42.44) Wednesday on the Toronto stock exchange.

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Associated Press Writer Rob Gillies in Toronto contributed to this report.