PetroChina shale gas talks collapse

PetroChina and Calgary-based Encana have abandoned plans for a joint venture to develop a large shale gas deposit in western Canada, marking the latest in a series of retreats by Chinese companies from proposed natural resource deals overseas.

PetroChina’s investment, set at $5.4bn when the deal was unveiled in February, would have been China’s biggest investment in Canada’s energy sector. It would also have been its largest in shale gas, a type of natural gas deposit that is difficult to extract and for which Chinese companies want to master the technology.

Encana said on Tuesday that after a year of talks with PetroChina “there were different views on various key components” of the deal, including the joint operating agreement determining the responsibilities of each company. It declined to elaborate, citing a confidentiality agreement.

Under the original deal, PetroChina agreed to buy a 50 per cent stake in the project, and fund half of future capital costs, while Encana would continue to operate the fields.

Mao Zefeng, spokesman for PetroChina, confirmed the deal was “unfortunately” ended. “The reason is that we felt we couldn’t reach agreement on the asset evaluation and the procedure . . . however, this will not impact PetroChina’s international strategy in North and South America,” he said.

Although China has gained a reputation for buying up resources around the world at any cost, a string of recent failed deals suggests the country’s resources companies are starting to drive harder bargains and are becoming more selective. In April, China’s Minmetals withdrew a $6.5bn offer for Equinox, an Australian-Canadian copper miner, rather than raise its bid after a higher offer emerged from Barrick Gold.

Chinese oil companies have also recently walked away from, or missed out on, prized oil and gas assets in Brazil (with the auction of the OGX fields) and in Ghana (with the recent IPO of Kosmos Energy).

The failure of the Encana-PetroChina deal is a surprise to the industry because Chinese companies have recently been investing aggressively in shale gas assets to gain the expertise needed to develop China’s own reserves. In the past year, Cnooc, China’s largest offshore oil producer, signed two deals worth billions of dollars with Chesapeake Energy of Oklahoma, to develop shale oil assets in the United States.

Gordon Kwan, analyst with Mirae Asset Securities, said: “I wouldn’t be surprised if there is a counterbid from another oil company, because shale gas assets in North America are in very high demand.”

Laban Yu, head of oil and gas research with Jefferies in Hong Kong, said: “It could be pricing that brought the deal down. Encana may have coveted the generous terms of the Cnooc-Chesapeake deals and tried to get a better offer.”

Encana is considered one of the industry leaders for extracting gas from “unconventional” deposits locked inside rocks such as shale. It said that it now planned to seek partners for various portions of the Cutbank Ridge project. It will also examine a deal involving its pipeline and processing assets in the area.

The company said that, as a result of the joint-venture talks with PetroChina, “a lot of the groundwork of preparing potential assets for sale is done or fairly far along”.

Encana expects that these transactions, as well as various other divestitures and joint ventures, will generate proceeds of $1bn-2bn this year, double its previous estimate.

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