Belated Alarm From Nigeria's Tension

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WTI crude oil price approaches 69 in European morning as the MEND, the most famous rebel group in Nigeria, said that it attacked a major pipeline owned by Shell. Representative from Shell confirmed the damage but could not estimate the impact on production. However, news said the sabotage campaign may reduce Nigeria's oil production to 1.3-1.4M bpd, down from 1.8M bpd in 1Q09. According to OPEC, the largest oil exporter in Africa produced 1.721 and 1.74M bpd in April and May, respectively.

Gold price for August delivery moves sideways after the volatile movement Wednesday. USD will continue to be the key factor on the precious metal's performance USD seems to have stabilized after soaring against the euro yesterday. However, the greenback continues to show strength against other major currencies such as Japanese yen, British pound and Canadian dollar. Clearly, the Fed's decision to leave the asset purchase program unchanged and more optimistic outlook on economy are still taking effect.

Stock markets in Asia rebounded with the MSCI Asia Pacific Index gaining +1.1%. In Japan, Nikkei 225 Stock Average rose +2.15% to close at 205.8, South Korea's Kospi Index rose +2.1% after the government lightly upgraded its 2009 GDP forecast to -1.5% from -2%. In China the CSI 300 Index dropped -0.1% while Hong Kong's Hang Seng Index added +2.14%. All 3 Hong Kong-listed oil giants in China surged on recovery in oil price. Petrochina (0857.HK) climbed 1.93%, CNOOC (0883.HK) gained + 1.58% and Sinopec (0386.HK) added +0.36%.

Among the 3, CNOOC is the biggest beneficiary should oil price rise as it has pure upstream exposure. Sinopec, on the other hand, has the least leverage to oil price given its focus on refinery market. Also, the Chinese government's control on product prices has given refiners hard times over years. We believe today's price hike of Sinopec was driven by another news.

Sinopec's unlisted parent will acquire Addax Petroleum at RMB 8.3B ($7.2B) in exchange of reserves in Iraq's Kurdistan and West Africa. The deal will imply acquisition cost of $39/bbl on proven reserves, compared with median of $15-20/bbl for reserves in Middle East and Africa in 2005-2007. In the near-term, we do not see much impact to the listed company but asset injection in the future is likely so as to strengthen the upstream arm of the listed company. Currently, Sinopec's E& P division supplies about 20% of the crude throughput for its refinery arm while the rest are purchased from Petrochina and CNOOC. However, it's cheaper to use internally supplied crude than purchase from outside, therefore, in the long-term, asset injection from the parent is both sensible and earning accretive

In order to secure oil supply, oil companies in China have been engaging in international M& A activities and the pace accelerated in the latter half of 2008 as crude oil price tumbled. WTI crude oil price slumped more than 70% from all-time high of 147.27 in July 2008 to almost 30 December 2008. Moreover, credit tightening all over the world created opportunities for large oil companies in China to acquire oil reserves from overseas as they possessed strong balance sheets and government supports.

Domestic oil reserves in China have been declining and getting mature while crude replacement is in downtrend. In 2008, the crude reserve replacement ratios for Sinopec and Petrochina were below 100%, suggesting difficulties in replacing crude reserves. Both the government and shareholders were in favor of securing oil reserves from overseas. Moreover, through taking over foreign companies, China can also acquire the management and technical skills of those companies, thus enhancing competitiveness.

So far, acquisitions in China were mainly done in the Middle East, North and sub-Saharan Africa, South America, Russia and Eurasia, and Southeast Asia. Assets located in these regions were far away from the West, thus reducing competition.

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