PetroChina to buy stake in Shell LNG project

Word on the street is that PetroChina, China’s biggest oil-and-gas producer and distributor, plans to pay slightly more than $1 billion for a 20% stake in a Shell shale gas property in Canada.

For PetroChina to purchase Shell’s Groundbirch operations, located in British Columbia, the companies need approval from both nations, which appears to be in place.

This is not only the latest in a series of Chinese investments in natural gas resources companies, but also the latest pair-up between PetroChina and Shell. PetroChina is the listed arm of state-owned China National Petroleum Corporation, which has been working with Shell for some time.

In June, the two companies signed an agreement pledging to “pursue mutually beneficial cooperation opportunities internationally as well as in China”, according to Shell. Chief executive Peter Voser said of the agreement: “CNPC and Shell are collaborating in a variety of projects globally with the aim of investing for profitable growth, and to meet the world’s growing demand for cleaner, affordable energy.”

Put more simply, one could say that Shell wants into China in a meaningful way, and CNPC needs the technological know-how that Shell has in spades. And the two groups appear to be working well together.

Last March, PetroChina and Shell offered more than $3 billion to buy Australian coal-seam gas company Arrow Energy. When the deal closed in August, PetroChina issued a statement saying: “The acquisition conforms to PetroChina’s business objective to become a competitive international energy company and to accelerate the implementation of strategies of resources, marketing and internationalisation.” Arrow Energy was advised by Citi and UBS. PetroChina was advised by Morgan Stanley on the joint venture with Shell, while Shell was advised on the JV by NM Rothschild.

Indeed, Petrochina, CNPC and Shell have all turned to a variety of bankers for advice — with no one firm nailing the exclusive relationship thus far. It is understood that Citi may be acting as an adviser to PetroChina on this latest deal — and the bank does have a history with the Chinese company. PetroChina worked with Citi when it bought an interest in oil and gas assets in Kazakhstan in August 2005. More recently, in April last year, Citi was one of the bookrunners on CNPC’s $1.85 billion bond. Securing that relationship is a worthwhile effort, for there are sure to be more deals on the horizon.

Consider that immediately after the Arrow Energy deal closed, it then offered $540 million for Bow Energy, seeking more resources to underpin a proposed liquefied natural gas project in Australia — which is a neat way for PetroChina and Shell to consolidate efforts in Australia without highlighting their respective company names in the deal. That transaction won board and regulatory approval in mid-December.

Even if PetroChina doesn’t expend the energy it would take to get the gas out of Canada and/or Australia and back to the mainland, it will surely make money selling that gas in overseas markets.

But that doesn’t solve its domestic problem. How does it use this pair-up to feed its own insatiable need for energy? That’s where you need to go back to the start of the relationship between CNPC and Shell.

In 1999, CNPC and Shell signed a 30-year contract on the natural gas development and production of Changbei Block, in Shaanxi province and Inner Mongolia. The block required more technical skills to retrieve the gas than CNPC had to hand, hence the pair-up — and it took until 2005 before the operation got underway, but it appears to have been worth the wait. The block has produced a total of 18.3 billion cubic meters since it started operations, with incremental rises in output each year. The two energy companies are also cooperating in other gas projects in China. In December, PetroChina and Shell discovered shale gas in Sichuan province, and their gas exploration work in the Fushun-Yongchuan block is continuing.

The competition
CNPC and Shell are certainly not alone in their efforts to dominate the resources sector. China Petrochemical Corporation (Sinopec) kicked off 2012 by announcing plans to invest up to $2.5 billion for a one-third stake in five US oil shale projects owned by Devon Energy. Credit Suisse advised Sinopec on the transaction.

While that was a big outbound deal, it followed on the heels of another standout transaction — in mid-December natural gas distributor ENN Energy and state-owned Sinopec launched a rare Hong Kong hostile takeover in a bid to win control of China Gas, another distributor.

That marks the first time a Chinese state-owned enterprise has backed an unsolicited offer in the city, putting China Gas in a difficult spot as it continues to struggle in the wake of its chairman’s arrest last December on suspicion of embezzlement. Citi is acting as lead financial adviser to ENN and Sinopec.

The outlook, of course, is that there are more such deals to come.