Sinopec's Bid for Addax Highlights China's Shift to Smaller M&A Deals

Sinopec’s reported bid of $7.84 billion for Addax Petroleum is more than just another example of China’s well-documented desire to acquire global energy resources. It also highlights a shift from attempted large-scale acquisitions — such as Chinalco’s failed grab for an 18 percent stake in Rio Tinto — to smaller M&A deals.

Note: There is some question about the vailidity of the bid. Bloomberg reported Monday China Petroleum & Chemical Corp., the official name of Sinopec, did not make a bid for Addax, according to a spokesman. It wasn’t clear if the parent company, China Petrochemcial Corp., had bid.

Last week, BNET discussed China’s interest in Addax, a Geneva-based oil and gas explorer, and Kosmos Energy.Both companies are small exploration companies that concentrate most of their operations in West Africa. China, as I pointed out, has directed much of its attention to areas including Africa, the Middle East and most recently, Singapore, in hopes of avoiding protectionist efforts. Addax also has a stake in the Taq Taq oil field in the Kurdistan Region of Iraq.

Addax and Turkey’s Genel Enerji, which is expected to merge with Heritage Oil, are partners in the Taq Taq oil field. Although foreign companies in KRG were finally allowed to export crude this month, there is still quite a bit of uncertainty swirling around the oil sales. Iraq’s central government in Iraq and KRG continue to battle over how companies will be paid for the oil they export in the Iraq-Turkey pipeline.

As the FT aptly points out, Sinopec, which has been looking at opportunities in the rest of Iraq, will have to weigh whether buying Addax will put its relationship with Baghdad at risk.

Another bidder for Addax is the Korea National Oil Company, which also is operating in KRG. Sinopec, if sufficiently concerned about Addax’s stake in Taq Taq, could sell it off to another company including KNOC, as FT notes.

China’s bid for Addax reveals a shift in the resource-hungry country’s strategy. The grab for Rio Tinto was an embarrassing failure as was its attempts to buy Unocal back in 2005. Investing in major Western companies may be hard to resist, but China has been burned enough times to turn its attention to smaller companies. And the strategy will likely pay off.

As Morningstar analyst Allen Good notes, Western companies are sitting out this acquisition cycle, which bodes well for their Chinese rivals. As China’s asset-grabbing continues, Western companies may find themselves fighting over an ever-shrinking pool of resources.