China paves way for £14bn BP oil stake

China paves way for £14bn BP oil stake

The Observer has learnt that in recent days Beijing has agreed to allow BP to enter into a joint venture with Sinopec, the foreign-listed arm of China Petroleum Chemical Corporation, which is China's biggest oil producer and refiner.

This could see BP take a $14bn stake - equivalent to 25 per cent of Sinopec's shares.

The signal from senior Chinese government figures that it has sanctioned an investment into one of its most important energy firms represents a spectacular breakthrough for the UK energy giant, though it appears to rule out a total takeover of the Chinese firm by BP.

But a deal will put BP at a strategic advantage, making it the most significant overseas player in what will shortly be the most voracious energy-consuming country in the world. If successful with a tie-up, BP will rival Exxon as the world's biggest energy firm. For Sinopec, a deal with BP will help with its exploration activities - an area where it currently lags behind its two national rivals.

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BP said it was unaware of the Chinese government's change of position: 'This is news to us,' a spokesman said. But privately it welcomed the news. BP chief executive Lord Browne of Madingley and top Chinese officials have for sometime been negotiating to reach an agreement on a formal partnership. Lord Browne met Hu Jintao, China's president, in New York last September and in London last November.

But talks so far are understood to have stumbled on the reluctance of the Chinese government to allow a strategically important company to become heavily involved with a western global giant.

Beijing, however, is acutely aware that BP can help it alleviate power shortages as the country, buoyed by double-digit economic growth, rapidly industrialises. There is no guarantee that a deal will be reached, as China is notoriously cautious about signing major international commercial agreements.

BP is already Britain's largest investor in China. It has built up a stake in China Aviation Oil, a supplier of aviation fuel to 100 airports in the country. It has long made clear that it wishes to expand in China. Last year Browne said: 'I see great potential for future growth. We are the largest British investor in China, but this needs to be expanded.'

Jason Kenney, oil analyst at ING Financial Markets, said: 'China is the largest market untouched by oil majors. There is now one car per 1,000 people in China. That will grow to one car per 25 people within 25 years. In China you've got a mass market waiting to happen. If you don't get a joint venture or partnership deal, you're probably missing out.'

BP will help Sinopec distribute and sell gas and oil and act as an exploration partner. BP has a total of £3bn invested in the country. Its most significant project is a 50/50 chemical plant joint venture, which is also with Sinopec.