Tags: china | us | shale | oil

Chinese Oil Co. Buys Big Stake in U.S. Shale

Monday, 11 Oct 2010 09:47 AM

China's top offshore oil producer, CNOOC Ltd, agreed to pay $1.1 billion for a stake in a U.S. shale oil and gas field, testing the U.S. political climate for the first time since its 2005 failed bid for Unocal.

CNOOC shares hit a three-year high on news of the deal with Chesapeake Energy Corp , which could be the start of more outbound acquisitions as the Chinese company races to meet its aggressive production growth forecasts to feed the country's fast-growing economy, analysts and bankers said.

"We expect them to expand their footprint in the Canadian oil-sands and also in Brazil's deepwater. That's the last frontier where you can extract big oil volumes," said Gordon Kwan, head of Asian energy research for Mirae Asset Securities, adding that Nigeria and Angola could also be attractive.

Canadian oil firm Opti Canada Inc and its peer Nexen Inc have drawn interest from CNOOC, Asia- and Canada-based bankers have said.

CNOOC, along with its China's Sinopec Group, is also bidding for stakes in assets owned by Brazilian oil and gas start-up OGX SA in a potential $7 billion deal, sources with direct knowledge of the matter said in mid-September.

The 10 deals so far this year for China's oil and gas companies have been worth $18.6 billion, already eclipsing the $15.8 billion in deals for all of 2009, according to Thomson Reuters data.

Most of the outbound acquisitions by China's oil firms have been in risky areas such as Africa, which Western rivals have avoided, or in locations with ageing assets.

Now they are also eyeing the United States, which was once deemed off limits to the Chinese due to protectionist sentiment.

"Ninety-five percent of the world's E&P (exploration and production) companies are in North America," said an Asia-based investment banker who has advised Chinese oil firms on outbound deals. "If you have to move the reserve needle, you have to buy U.S. companies."

U.S. oil and gas companies are gradually warming to Chinese investment, partly because their companies are now short of cash, Kwan of Mirae Asset said.

In contrast, China's state oil giants including PetroChina and Sinopec have access to ample credit, giving them more firepower to execute deals.

 

NO REGULATORY HURDLES

The Chesapeake agreement shows that China is confident that the purchase of a 33 percent stake in the Eagle Ford acreage in South Texas will get the backing of U.S. regulators and politicians, who stepped in five years ago to block CNOOC's effort to buy U.S. oil company Unocal.

Outside the energy realm, political concerns have also surfaced from time to time involving efforts by Huawei China's top telecoms equipment maker, to crack the U.S. market.

While U.S.-China tensions over the value of China's currency persist, ties between the two countries have grown since 2005, with China becoming a major global economic force.

Mirae Asset's Kwan said the structure of the latest deal will make it more likely to get regulatory approval.

"With Unocal, it was buying an entire company, taking over the staff. Here they're buying a 33 percent stake in one of many Chesapeake projects," he said.

By working with Chesapeake, which would remain the operator of the project, the deal could help CNOOC gain exposure to the complicated shale-gas extraction technology that it still lacks.

CNOOC shares closed 4.5 percent higher at HK$16.82, their highest since Oct. 30 2007, and outperforming the broader market, which was up 1.23 percent. Chesapeake shares were up 3.5 percent at $23.85 in early trading in New York.

 

OTHER SHALE INVESTMENTS

Despite low natural gas prices, interest has been rising in shale formations that could hold enough natural gas to satisfy U.S. demand for a decade.

CNOOC's purchase comes after a flurry of investments by energy companies in shale -- underground rock formations that hold reserves of oil and natural gas.

Norwegian oil firm Statoil said on Sunday it was expanding its shale gas operations in the United States, creating a joint venture with Canada's Talisman to acquire acreage on the Eagle Ford prospect in Texas for $1.3 billion.

CNOOC agreed to fund 75 percent of Chesapeake's share of drilling and completion costs until an additional $1.08 billion has been paid, which Chesapeake expects by year-end 2012, the companies said. The transaction is expected to close in the fourth quarter.

"Partnering with Chesapeake on this project to develop shale oil and natural gas jointly ... satisfies the spirit of Sino-U.S. cooperation in the energy sector," CNOOC Chairman Fu Chengyu said in a statement.

CNOOC swooped in after talks with Indian energy company Reliance Industries and Chesapeake collapsed last week.

Shale gas accounts for 15-20 percent of U.S. gas production but is expected to quadruple in coming years, touching off a scramble among producers such as Statoil, Exxon Mobil , Mitsui & Co and Royal Dutch Shell .

The Eagle Ford shale is seen as especially attractive as it is believed to be rich in natural gas liquids and condensates, which command higher prices than regular natural gas.

Chesapeake's adviser on the transaction was Jefferies & Co, and CNOOC's was Tudor, Pickering, Holt & Co. Securities. China-focused private equity firm Hopu Investment Management played an advisory role in the transaction, according to a source with direct knowledge of the matter. 

© 2017 Thomson/Reuters. All rights reserved.

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China's top offshore oil producer, CNOOC Ltd, agreed to pay $1.1 billion for a stake in a U.S. shale oil and gas field, testing the U.S. political climate for the first time since its 2005 failed bid for Unocal.CNOOC shares hit a three-year high on news of the deal with...
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