Encana gas deal puts China market on radar

Share

The new partnership between Encana Corp. and PetroChina has created instant support - and potential supply - for a proposed natural gas export terminal in northern British Columbia.

PetroChina, the state-controlled energy outfit, will have control of 50 per cent of the natural gas production from Encana's Cutback Ridge lands in five years as part of a deal struck late Wednesday. Production will be accelerated now that Calgary-based Encana has a partner with deep pockets that is hungry for energy.

Randy Eresman, Encana's chief executive officer, said the companies are not in discussions with the proposed liquefied natural gas (LNG) export terminal in Kitimat, but because they want to ship natural gas to Asia, it is on the radar screen.

The push to export westward could help develop North America's LNG market while the increased exports could, in turn, prompt gas prices to climb because producers would have access to Asia, a market they have not been able to tap. This could come despite the abundance of unconventional gas fields in Canada and the United States.

"[PetroChina]has expressed a desire to be involved in the North American LNG market," Mr. Eresman said in a conference call Thursday. "We think there's now the capacity from the resources that exist in North America [to]have [a]substantial amount of LNG on the continent and, more specifically, we think there is an opportunity with Asian players who demand more natural gas in their energy portfolios.

"It makes a tremendous amount of sense for that market to be linked to the Asian market …We look forward to supporting that in any way we can," he said.

China is racing to reduce the amount of coal it burns and wants to increase the amount of natural gas it uses by roughly threefold in the next decade. While the country has plenty of natural gas and coal-bed methane, the fields are not well-developed.

"We have multiple points of import for LNG [in North America]but no real export points for LNG and to make the market more fluid and functional, we think it needs both," Mr. Eresman said.

Encana and PetroChina announced a $5.4-billion joint venture agreement Wednesday, which is expected to close in the middle of the year. PetroChina does not have to pay the entire amount at once, Mr. Eresman said, but did not provide further details. Encana's Chinese partner can make its decision on a payment plan when the deal closes.

Despite the size of the deal - it is the largest energy investment China has made in Canadian assets - Mr. Eresman said his company will continue to search for joint venture partners for a "significant" amount of its natural gas leases. Encana had previously laid out plans to strike joint venture deals between $1-billion and $2-billion per year over the next five years. The PetroChina agreement does not mean the company will stop chasing new partners, Mr. Eresman said. However, he notes future deals will be more "paced."

The Calgary-based company lost $42-million (U.S.) in the fourth quarter, compared to a profit of $233-million in the same span last year. Operating earnings, excluding items such as the effects of hedging, dropped to $68-million, or 9 cents per share, from $373-million or 50 cents per share. Encana's cash flow, which hints at its ability to pay for projects, fell to $917-million or $1.25 per share, compared to $390-million or $1.24 in 2009.

The Canadian and Chinese governments both need to approve the Encana-PetroChina deal. Beijing has never rejected a foreign oil and gas transaction, and Ottawa has never blocked a joint venture energy project with an outsider. However, the Canadian government did prevent BHP Billiton Ltd. from picking off Potash Corp. of Saskatchewan.

Encana Corp. (ECA)

Close: $32.02, up $1.37