China's $2 billion joint venture with Chesapeake Energy has us thinking about the Asian giant's first attempt to tap into the US energy reserves. In 2005, the China National Off-shore Oil Company (better known as "CNOOC") made a multi-billion dollar bid for Unocal. When this set firestorm of controversy about whether this would threaten national security, the bid was dropped. Apparently, Americans are happy with China owning huge portions of our government debt but not our oil companies.
So will China have better luck this time around? I decided to sit down and talk to America's richest oilman, Harold Hamm, CEO of Continental Resources, and Kevin Book, Managing Director of Research at ClearView Energy Partners, to ask about the deal.
LL: What does CNOOC’s latest attempt into the U.S. energy reserves mean to the industry?
HH: I think it is a disaster. Before they were stopped by the State Department from buying Unocal. I don’t believe that we should be selling our minerals and Oil & Gas reserves to a foreign entity. They don’t reciprocate with us. We couldn’t go over there and buy a portion of their reserve base — they wouldn’t let us do this.
I don’t think our government should look at this favorably. This is changing the basic fundamentals of supply and demand of the industry today. These joint ventures with foreign entities and pay for through participation for several years. In the past when the market was oversupplied, we would slow down development and not waste. With this, there is no slowing down. Even if the market is terribly oversupplied. This provides a basis for waste.
LL: CNOOC's latest deal is the country's second move into the U.S. oil and gas market. Do you think the political environment is better now? Will China succeed?
KB: If anything, the political environment vis-à-vis China has been worsened by recession and zero-sum competition for export markets. What’s better is the commodity price environment. Even if Washington hasn’t yet internalized the resource potential unlocked by horizontal drilling and hydraulic fracturing in shale, stable oil prices and cheap natural gas have undercut political risk.
The biggest factor enabling success of the transaction may be that CNOOC doesn’t have an obvious “competitor” gunning for the same assets; they did in 2005. Moreover, this is a financial investment in production, not an acquisition of resources, an eminently less threatening prospect.
LL: China has an insatiable energy appetite. Is this just the beginning?
HH: It may be. Who knows. I guess they could move across LNG. Whether they will do that or not, I don’t know. They are buying into natural gas production. If we were to begin exporting crude oil that would be unheard of. In fact I think there is still legislation to stop anyone from exporting crude oil.
KB: The worst part about the CNOOC-Unocal outcome in 2005 for U.S. companies was that the world’s one price-indifferent bidder had just been chased away from acquiring assets from companies that were eager to sell.
Scaring China out of the market took the bid out of oil and gas M&A (consider: ConocoPhillips acquired Burlington Resources at the equivalent of $9/MMBtu natural gas). It’s safe to say that a single Chinese investment appears eminently feasible, but a wave of acquisitions — no different than Japanese acquisitions in the 1980s — could potentially inflame latent protectionist sentiment here in the U.S.
LL: Will this highlight now the energy reserves of the United States?
HH: It very well could. I don’t know about highlighting it. This is two or three times that companies like Chesapeake have done joint ventures with foreign national companies. StatOil in the Marcellus, BP in the Woodford.
LL: Harold, has CNOOC approached you? Would you be willing to sell some of your land to the Chinese?
HH: They have not approached me and we are not pursuing any joint ventures.
LL: Kevin, if China is cleared to go ahead, how many jobs will be created? What will it mean for the local economies?
KB: Foreign direct investment in U.S. conventional energy has been declining for years and any new dollars chasing new resources are likely to create direct and indirect jobs. Unlike sending tax dollars overseas to manufacture solar panels in other countries’ factories for assembly and installation here in the U.S., oil and gas upstream FDI puts the fat tail of the value chain on U.S. shores, which has positive economic implications across the board, especially by driving demand for skilled personnel.
LL: Harold, let's talk about the job opportunities fracking is creating in this country.
HH: We estimate 18,000 jobs are open right now in the Welliston Basin. We have an additional 10,000 plus in another area and in Montana there are a whole lot jobs open. With natural gas real low we might see some slow down in that area but in oil prone areas, I think we will have a lot of jobs added.
The oil patch pays good. They're decent jobs paying between 50 and 70 thousand a year. Fracking has a big impact on the oil consumption in the United States. We should see imports of less than 50 percent in the next five years which I think is tremendous. In the North Bakken for example it's the largest new play and it presents a tremendous opportunity for oil production.
LL: Are there any downsides to this?
KB: A cynic might suggest that the arrival of a price-indifferent bidder at the shale auction puts a “top” on the M&A trend.
LL: What are you advising clients when it comes to this? Where should investors be putting their money?
KB: We remain bearish regarding the underlying demand for oil and natural gas outside of the BRIC countries and we don’t anticipate a rally in U.S. lower-48 natural gas prices until the third quarter of 2011, when firms drilling to “hold” leases by producing them will begin to taper off capex. Even then, gas in working storage could crest above 3.5 Tcf, pushing a bid on natural gas back into 2012 or 2013 and only if end-user demand in the U.S. regains its resilience.
LL: What's your outlook on the price of oil?
HH: Range bound between 75 and 90 dollars and I'm still in that range. Its a good range to be in. I don't see it beating 90 dollars
KB: We’re at $80 for 2011 and $90 in 2012. Our range for 2013 is $95 to $105.
Companies mentioned in the post
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."