Sinopec condiders a bid for Addax Petroleum, but the dispute over Kurdistan’s oil exports may cause problems

Addax Petroleum shares were up almost 14 per cent on Monday morning after the Sunday Times report at the weekend that Sinopec of China had made an indicative offer, valuing Addax at about £4.8bn.

The listed Sinopec group said it had not made a bid, but left open the possibility that its state-owned parent group might have made an approach.

The news follows the emergence of last week of the Korea National Oil Company as a possible bidder.
The possible bid or bids turn the spotlight on Jean Claude Gandur, Addax’s chief executive and president, who has a hold over almost 40 per cent of the shares.

The outcome is also likely to be tightly bound up with the politics of Iraq.

Addax’s traditional base is in Africa, where it had all its production last year – most of it in Nigeria – and most of its reserves. But it has developed a significant field in the Iraqi region of Kurdistan, Taq Taq, and begun exporting oil to world markets through the main Iraq-Turkey pipeline.

Those exports are highly controversial, however, and the exporting companies do not know how – if at all – they will get paid for the oil they are pumping.

Hussain Shahristani, the Iraqi government’s oil minister, has said the companies operating in Kurdistan will not be paid through the country’s centralised oil sales programme, and declared the contracts that they are operating on are illegal.

When Iraq’s long-awaited oil law is finally signed, that will change, but the political deadlock over that law has now dragged on for years, and seems no closer to being broken.

In that environment, investing in the Kurdish region seems to be a quick way to make enemies in Baghdad. KNOC is already highly active in Kurdistan, operating on five blocks, and has been shut out of contracts in the rest of Iraq, for reasons unspecified, but probably related to those operations.

KNOC, it seems, might as well be hung for a sheep as a lamb: it has nothing left to lose in terms of contracts with Baghdad.

Sinopec, on the other hand, is not in Kurdistan, and has been seeking opportunities in the rest of Iraq, some of them much bigger than Taq Taq. In considering a bid for Addax, it would have to weigh up how badly that would sour relations with Baghdad.

Some analysts believe the Iraqi government is enthusiastic enough about Chinese investment that it would overlook Sinopec’s involvement in Kurdistan. But the tension between communities over the control and finances of Iraq’s oil and gas resources is sufficiently bitter that one should not necessarily bank on it.

Of course, Sinopec could always sell Taq Taq on to someone else; perhaps even KNOC. It has made clear that Africa is a focus of its interest in overseas aquisitions, and Addax’s African operations are attractive enough in themselves. But the political complexities should at least make Sinopec think hard before bidding.

Related links:

Chinese bid £5bn for UK oil explorer (The Sunday Times, 14/06/09)
Bid decision for Addax chief (FT, 15/06/09)
Kurdish exports resume despite Iraq impasse (FT, 27/05/09)

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