Chinese companies on shopping spree

The two largest deals in the last 30 days (Jan. 16-Feb. 15) involve Chinese companies buying into shale assets in North America. With the aggressiveness China has shown on acquiring oil and gas resources to supply fuel for their burgeoning economy, this won't be the last we'll hear from the Asian economic powerhouse.

On Feb. 9, Canada's EnCana Corporation signed a C$5.4 billion (US$5.5 billion) cooperation agreement with PetroChina International Investment Company Limited, a subsidiary of PetroChina Company Ltd., to acquire a 50% interest in EnCana's Cutbank Ridge business assets in British Columbia and Alberta. Under terms of the agreement, the two companies would establish a 50/50 joint venture that would ambitiously grow natural gas production from the Cutbank Ridge lands for years ahead.

The joint venture deal is China's largest Canadian upstream transaction ever recorded and demonstrates that the Chinese are willing to pay a premium to secure North American resources necessary to feed the growing Asian economy. Commenting on the deal, IHS Herold's Christopher Sheehan said that securing energy supply, rather than price, is the key driver for PetroChina and the Chinese government.

The deal will give PetroChina access to Canada's shale gas resources, while EnCana will obtain additional capital to fund its gas development plans.

China has also shown an interest in the development of the Kitimat LNG terminal, which will be situated on the west coast of British Columbia. The terminal is currently in the early stages of the approval process by the Canadian government.

The other major deal involving a Chinese company is between CNOOC Limited and Oklahoma City-based Chesapeake Energy Corporation. The two companies entered into a partnership agreement in the Niobrara Shale-focused Denver-Julesburg (DJ) Basin in northeast Colorado and the Power River Basin in southeast Wyoming. This is the second partnership between the two companies in the past several months. The first project cooperation agreement in the Eagle Ford Shale in South Texas was announced on Nov. 15.

Under the agreement, CNOOC will purchase 33.3% undivided interest in Chesapeake's 800,000 net oil and natural gas leasehold acres in the DJ and Powder River basins. The consideration for the transaction will be $570 million in cash at closing. In addition, CNOOC has agreed to fund 66.7% of Chesapeake's share of drilling and completion costs until an additional $697 million has been paid, which Chesapeake expects to occur by year-end 2014. The transaction is expected to close in the first quarter of 2011.

As the operator of the project, Chesapeake will conduct all leasing, drilling, completion, operations, and marketing activities for the project. Chesapeake is currently operating 16 producing wells in the DJ and Powder River basins that have reached initial production rates of up to 1,000 barrels of oil and 3.0 million cubic feet of natural gas per day.

Over the next several decades, the companies plan to develop net unrisked unproved resource potential up to 5.0 billion barrels of oil equivalent (after deducting an assumed average royalty burden of 20%). Chesapeake is currently utilizing five operated rigs to develop its DJ and Powder River basins leasehold and with the additional capital investment from CNOOC, anticipates increasing its drilling activities to approximately 10 rigs by year-end 2011 and 20 rigs by year-end 2012.

CNOOC will have the option to acquire a 33.3% share of any additional acreage acquired by Chesapeake in the area and the option to participate with Chesapeake for a 33.3% interest in midstream infrastructure related to production generated from the assets.

Chesapeake's advisor on the transaction was Jefferies & Company Inc., and CNOOC Limited's advisor was Tudor, Pickering, Holt & Co. Securities Inc.

In another deal involving shale assets, the UK's BG Group paid Dallas-based EXCO Resources $230 million for a 50% stake in oil and natural gas assets in the Marcellus shale development that EXCO recently purchased from Chief Oil & Gas LLC and other parties.

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