China bids for chunk of UK's oil, world price influence

China's top offshore oil producer CNOOC on Monday offered to pay $15.1 billion for Nexen while China's top refiner Sinopec will buy 49 percent in the UK unit of Talisman for $1.5 billion.

Neither firm put much emphasis in their statements on the importance of North Sea oil as a global benchmark while offering to pay hefty premiums, including a 61 percent premium offered by CNOOC for Nexen.

"It is a material share of North Sea oil production," said Lindsay Wexelstein, lead analyst at consultancy Wood Mackenzie. WoodMac's calculations showed both firms would directly own 13 percent of all UK liquids production in 2012 if both deals went through.

Including production, which Nexen and Talisman operate, the two handle around 300,000 bpd, according to Reuters calculations, or almost a third of the dwindling UK North Sea oil output of roughly 1 million bpd. But falling output appears to have done little to put off Chinese oil giants.

The jewel in the crown is the Buzzard oilfield, operated by Nexen with a 43.2 percent stake. It lies in the North Sea about 60 miles northeast of Aberdeen and pumps about 200,000 bpd and is the UK's largest.

Oil from Buzzard, although only 0.2 percent of global supply, plays a crucial role in setting prices because it is the largest contributor to the Forties oil blend, one of four North Sea crude streams making up the Brent oil benchmark.

Forties usually sets the value of dated Brent, a benchmark used for pricing more than half of the world's crude, including oil from Africa, Europe, Asia and the Middle East. Dated is part of the underlying market for Brent crude futures.

A drop in supply of Forties, and particularly from Buzzard because it is the largest of the more than 70 fields that feed into the Forties blend, can boost the prices paid by companies buying crude on a basis related to dated Brent.

This was seen last year and into 2012 when Forties shipments were subject to an unusual level of delays and cancellations due mainly to production problems at Buzzard, which boosted prices and the premium at which Forties trades to dated Brent.

The shipment delays have also highlighted the lack of information about supplies of crude affecting Brent. Some participants found out about the delays and cancellations to Forties cargoes before others.

"If you own the equity in the oil, you are a step closer to the absolute source of the information," said a North Sea trader with another oil company. "Nexen distributes the information a lot of the time. So CNOOC will know at the same time as Nexen."

China buys about 2 million bpd of crude priced off dated Brent, including West African crudes. According to Reuters calculations, a $1-per-barrel rise in Forties' differential to dated Brent can add $60 million a month to its oil import bill.

High premiums for Forties have repeatedly contrasted this year with a collapse in values for similar crudes. Forties rose due to field outages and due to exports to South Korea, which removed supply from northwest Europe.

As well as the North Sea, Nexen owns assets in regions including Western Canada, the Gulf of Mexico and Nigeria, encompassing conventional oil and gas, oil sands and shale gas.

Nexen acquired the Buzzard field in 2004, three years before production began. According to Nexen's web site, the other field partners are Canada's Suncor (29.89 percent), BG Group (21.73 percent) and Edinburgh Oil and Gas (5.16 percent).

(Editing by William Hardy)

Source: http://www.ibtimes.com/articles/20120723/china-bids-for-chunk-of-uks-oil-world-price-influence.htm

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