PetroChina and Canadian company Encana failed to reach an agreement to co-develop shale natural gas in Canada, Encana said in a statement on June 21, 2011.
The failure of negotiations on PetroChina Co's proposed C$5.4 billion (US$5.5 billion) purchase of Canadian shale natural gas assets may indicate that China is becoming more selective in overseas energy acquisitions.
Encana Corp said last week that it failed to reach a deal with China's biggest oil and gas company on the purchase of a 50 percent stake in Encana's Cutbank Ridge assets in western Canada.
The two parties had been in negotiations for nearly a year on a deal that would have been PetroChina's biggest overseas acquisition.
In the past few years, Chinese companies have been acquiring oil and gas assets around the globe to quench the nation's thirst for energy. Some acquisitions have failed, most notably CNOOC Ltd's bid for American oil producer Unocal Corp in 2005 after the US government balked for political reasons.
Politics don't seem to be behind the failed Encana deal, which involved a stake purchase, not a takeover. Encana, Canada's biggest gas producer, would have remained the operator under the proposed deal, and output from Cutbank Ridge would have remained in the North America supply system, according to details announced earlier.
An impasse on asset valuation and price was behind the failed agreement, according to a PetroChina spokesman. The company has no plans to abort its overseas expansion strategy, he added.
PetroChina's 50 percent stake in Cutbank Ridge, which lies along the border of British Columbia and Alberta, would have amounted to production about 255 million cubic feet of gas equivalent per day and involved proven reserves of about 1 trillion cubic feet.
Swiss bank UBS said PetroChina's offer of US$5.5 billion for the Cutbank Ridge stake was too high.
"The cost looked high when compared to what US company Apache paid for similar 1.3 trillion cubic feet reserves in mid-2010," UBS analysts Peter Gastreich and Benson Chen wrote in a note, referring to Apache Corp's US$3.25 billion purchase of BP Plc's gas assets in about the same region last July.
The Cutbank Ridge purchase would have increased PetroChina's global gas production by 500 million cubic feet daily at peak capacity, or about 2 percent of its 2011 oil-gas output level, according to Mirae Asset Securities analyst Gordon Kwan.
The collapse of the Encana deal may indicate Chinese energy companies are becoming tougher and more discerning after an energy sector acquisition frenzy marked by offering premium prices, said Shi Yan, a Shanghai-based analyst at UOB-Kay Hian.
Beijing-based PetroChina had called Cutbank Ridge "a platform for entering the major market in North America" in February, when the first details of the proposed deal were announced.
Analysts had predicted PetroChina would use the stake purchase as a vehicle for improving shale gas exploration technology back home. China has vast untapped gas resources.
Shale - oil and gas-bearing rocks underground - was uneconomical to extract until advanced technologies were deployed in the United States. China's shale gas holdings are estimated to be more than 10 times its proven conventional gas deposits, according to the Ministry of Land and Resources.
At present, China needs to import the technological expertise to extract it. Drillers need to inject water and chemicals into the dense rocks to release oil and gas.
In 2009, the US became the world's largest gas producer, ahead of Russia, because of output from shale fields. Failure of the Encana deal hasn't changed China's desire to latch on to advanced technology. China National Petroleum Corp, PetroChina's state-owned parent, recently signed an agreement with Anglo-Dutch energy giant Royal Dutch Shell Plc to establish an equally owned well manufacturing company for unconventional gas exploration.
