PetroChina International Investment Co. Ltd. has agreed to pay $5.4-billion in a natural gas investment with Encana Corp. that promises to be the largest Chinese investment in Canadian energy assets.
The deal underscores the voracious appetite Asian firms have for North America's vast deposits of oil and gas - and speaks to the growing attraction of Canadian energy assets to overseas companies, which are increasingly looking at ways to buy western reserves that can some day be delivered to consumers in China and South Korea.
It also points to the politically cautious approach Asian companies have taken to investing in Canada. Rather than swoop in for prize assets, as BHP Billiton Ltd. did in its failed bid for Potash Corp. of Saskatchewan Inc., Chinese state-owned enterprises have avoided trying to buy full control of major Canadian resource assets that are in production. Instead, government-controlled firms have opted to buy mining or oil and gas properties that are in development and in need of capital, or they have taken minority positions in major assets.
That strategy is aimed at avoiding rejection by Western governments, which have been wary of Chinese state-backed firms gaining control of major production assets.
China National Offshore Oil Corp. (CNOOC) withdrew an $18.5-billion (U.S.) bid for oil producer Unocal in 2005 after the offer created a political firestorm in Washington. Similarly, China Minmetals walked away from plans to bid for Canadian miner Noranda in the face of government concerns.
On Wednesday, Encana said it will form at 50-50 joint venture on its Cutbank Ridge assets with the Chinese firm. Those assets currently produce 250 million cubic feet of gas a day, but have one trillion cubic feet of reserves underlying 250,000 hectares of land in the Dawson Creek area of B.C. Under the terms of the deal, PetroChina will also fund half of all future capital costs, which is likely to substantially raise the value of the agreement in coming years.
Although it will require Chinese and Canadian government approval, the Encana deal is unlikely to ruffle feathers in Ottawa as it does not give PetroChina control of the natural gas reserves or the relatively small amount of natural gas that the Cutbank Ridge assets currently produce. Encana will initially operate the joint venture and, once the transaction is completed, it will operate under a joint management committee.
The deal "represents both a significant achievement and major milestone in the developing relationship of our two companies," Encana chief executive officer Randy Eresman said in a statement.
After years of buying oil sands assets, Asian firms have increasingly turned to natural gas purchases. Their attraction to gas comes partly from its clean-burning properties, but also from its abundance in North America, which has severely depressed prices and opened a window for foreign firms to buy in.
"This demonstrates the Chinese national oil companies are not just interested in the oil sands but that they are interested in energy," said Chris Lee, who leads the energy and resources group for Deloitte in Calgary. "And right now, from their perspective, it is a good price [to pay]"
China, which is working to triple its natural gas usage in the next decade, is home to about 108 billion cubic feet of shale gas reserves. But the country has drilled only one shale gas well and, as exploration continues, that number could explode. Overseas deals give Chinese firms access to the expertise required to tap gas from such deposits.
In the past 14 months, Chinese firms have committed over $13-billion to energy deals in Canada. In April, PetroChina rival Sinopec paid $4.65-billion (U.S.) for a 9-per-cent stake in oil sands producer Syncrude Canada. In May, China Investment Corp. agreed to pay $817-million for a 45-per-cent stake in an Alberta oil sands project owned by Penn West Energy Trust. It also agreed to pay $435-million for a stake in Penn West.
China is pursuing a similar strategy globally. Last year, CNOOC agreed to buy a major stake in oil and gas deposits owned by Chesapeake Energy Corp. for $1.1-billion, plus an additional $1.1-billion in drilling costs. China National Petroleum Corp., PetroChina's parent company, also bought Australian company Arrow Energy with Royal Dutch Shell PLC last year.
For Encana, foreign partners offer deep wells of additional capital it can dip into to fast-track production from its broad portfolio of gas-rich lands.
"We've had a strategy for quite some time to double our production and accelerate the value for shareholders in our enormous reserve portfolio," Encana spokesman Alan Boras said. "These kinds of joint ventures help us do that."
Energy companies have discovered tremendous volumes of natural gas in British Columbia as part of the shale gas "revolution" that has swept North America. But that revolution has also begun tapping gas deposits in places like Pennsylvania and Louisiana that are far closer to major consuming markets.
As a result, B.C.'s gas must compete against the long distances - and substantial expenses - involved in transporting product across the continent. That has stirred interest in exports of liquefied natural gas from the B.C. West Coast, where ships could bring gas to hungry Asian markets that have far higher gas pricing.
On Wednesday, in fact, the National Energy Board released a schedule for hearings into a gas export licence for Kitimat LNG, a $3.5-billion proposed terminal. If granted, that licence would be Canada's first - and Encana confirmed that exports are a possibility.
"There is no existing LNG exports at the moment, but of course Kitimat is on the drawing board," Mr. Boras said. For now, Encana will continue to focus on North American buyers. But once an export terminal is built with sufficient capacity, "we would look at expanding markets," Mr. Boras said.
The PetroChina deal will also give the Chinese firm 50 per cent ownership of 700 million cubic feet per day of natural processing capacity, about 3,400 kilometres of pipelines and a natural gas storage facility in Hythe, Alta.
Observers credit Canada's warming political relations with China for opening the floodgates to new investments in the past two years. But Wenran Jiang, the Mactaggart Research Chair of the China Institute at the University of Alberta, said the PetroChina-Encana deal remains minor compared with the investments the powerful Asian state has made in other parts of the globe.
"This is still a small scale deal given Canada's energy and resource potential," Mr. Jiang said. "Don't get overexcited as though we have big deals. It is a moderate deal by Chinese standards."
Barclays Capital, which also advised London Stock Exchange Group PLC on its merger with TMX Group, was the sole adviser to PetroChina on the deal. RBC and Jefferies advised Encana.