"Mergers should be targeted more on boosting a company's core competences, rather than simple expansion," advised Shao Ning, deputy chief of the State-owned Assets Supervision and Administration Commission (SASAC), in 2008 China Management 100. He was referring to the acquisition craze amongst state-owned enterprises.

Fu Yucheng, chairman of China Offshore Oil Corporation (CNOOC) seems to be an advocate of this theory. In reply to public doubts about the company's acquisition of Awilco Offshore ASA (AWO), a Norwegian oil exploration contractor, he openly declared: "I don't see anything wrong with the purchase."

Technology is the target

CNOOC's subsidiary, China Oilfield Service Limited (COSL) announced on July 7 this year the decision to acquire 100 percent of AWO's shares for approximately HK$19.5 billion (US$2.52 billion). Only four days later the price of crude in the NY futures market hit a record breaking US$147.27 per barrel.

But on December 5, five months after the acquisition, the oil price fell back to US$40 per barrel. The plunging oil price has raised doubts about CNOOC's acquisition: did the company make the right decision?

Fu points out that CNOOC could not predict that the oil price would plummet quite so far, neither could it predict the extent of the US financial crisis. "But we are at least clear about one thing – about what we want, what is the objective of the purchase, and what value it will bring to us."

The cost of the acquisition, and the validity of the decision, are to be judged from two different perspectives. As Fu also points out, "If we are in the market for crude oil, there is certainly a huge difference between US$147 and US$47. But we are buying the technology for offshore oil-drilling, not the oil itself."

It's an essential

The key criterion behind the acquisition is not the oil price, but the company's long-term interests. "We want to be able to move into deep-water drilling. AWO has at least 3 platforms capable of 1500-meter drilling; currently we can go no deeper than 300 meters," Fu emphasizes.

According to the source from the CNOOC deep water project, due to the technology gap, CNOOC usually launches co-operative projects with foreign partners or leases their drilling facilities. "The leasing cost of a deep water drilling platform is extremely high, and that doesn't include maintenance expenditure", the source says. And Fu also points out that the platform CNOOC will put into service at the end of this month carries a daily leasing charge of US$500,000.

The acquisition of AWO is central to CNOOC's strategy for offshore oil exploration, according to Fu. "We've identified several new oil fields in recent years, but due to technological shortcomings we've been unable to explore them, and this at a time when the oil price was soaring. Exploration of some fields has been delayed for years because of a lack of technology."

It is said that China National Petroleum Corporation (CNPC) and China Petroleum & Chemical Corporation (Sinopec) are now starting to compete in the field of offshore oil exploration, a privilege once monopolized by CNOOC.. CNOOC's merger with AWO will therefore help to "consolidate its leading position in the offshore oil business", a business insider reveals.

Files show that AWO owns and operates 5 newly-launched self-elevated drilling platforms (jack-ups), 2 accommodation platforms, with 3 jack-ups and 3 semi-submersible platforms (semi-subs) in the process of construction. In addition, they also have options on 2 further semi-subs.

"If we were to build these ships (platforms) ourselves, we would end up spending more than the cost of the acquisition, and we can't afford to wait that long", the CNOOC boss explains. "It's true that we can't tell how the oil market will fluctuate, but we are aware of our own needs."

Recent news indicates that CNOOC will be investing 200 billion yuan over the next 10 to 20 years for exploration of South China Sea oil and gas reserves, and a large part of this investment will go to deepwater offshore oil exploration. CNOOC has also recently discovered a 733 million-barrel reserve in Bohai Sea that will require technical backup.

"Therefore, to this extent, I don't see anything wrong with the purchase. I think we ought to be clear about our own strategy, even when we are unable to predict the future," the chief reiterates.

(China.org.cn by Maverick Chen, December 18, 2008)