CNOOC Parent Comes to Rescue

By newsdoug on January 27, 2012

CNOOC parent shields listed company from liabiltiy The week-long Chinese New Year holiday is winding down in mostly quiet fashion, but a newly announced settlement for damages from a leaking oil well co-owned by CNOOC Ltd (HKEx: 883; NYSE: CEO) is making headlines by once again shining a spotlight on the shell games that big state-owned Chinese companies play. Under the new settlement, the publicly listed CNOOC basically escapes completely harmed in terms of monetary liability, as its state-run parent is taking all the financial responsibility for the mess, along with joint venture partner ConocoPhillips (NYSE: COP). (company announcement) Under the settlement with China’s Ministry of Agriculture, CNOOC’s state-run parent, whose books are completely separate from the listed company, will commit 250 million yuan, or a relatively minor $40 million, into a fund aimed at cleaning up the mess from a series of leaks at an oil field operated by ConocoPhillips in the Bohai Bay off the Northeast Chinese coast. ConocoPhillips will contribute another 100 million yuan to the fund, and will also put another 1 billion yuan into a fund to compensate fishermen and others who have been affected by the spill. CNOOC shareholders must surely be applauding this settlement, as it signals that the company will face little or no liability from this accident, even though the listed company is the official joint venture partner in the project, and actually cited the problem when it had to downwardly revise its 2011 output target last August. (previous post) So the bottom line in this saga seems to be that the state-run parents of major Chinese resource companies will shoulder most or all of the liability for any accidents that occur at their projects, while the listed companies will be able to reap all the benefits from new output and other production. If I were an investor, I would certainly be interested in this kind of company since there is little or no downside from accident liability, which is one of the major risk factors of such companies. CNOOC shares rose slightly on the news in New York, but I wouldn’t be surprised to see a nice mini-rally for the company, along with peers Sinopec (HKEx: 386; Shanghai: 600028) and PetroChina (HKEx: 857; Shanghai: 601857; NYSE: PTR) when this new reality slowly sinks in with investors.

Bottom line: The assumption of liability by the state run parent of CNOOC in a major oil spill shows that listed energy firms will face little or no risk from such major accidents.

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