PetroChina invests $5.4 billion in Canada JV

PetroChina becomes the latest Asian company to invest in oil sands, shelling out $5.4 billion in a joint venture with Canada's Encana.

PetroChina will invest C$5.4 billion ($5.4 billion) for a 50% stake in natural gas assets owned by Encana in the largest investment by a Chinese company in Canada.

Barclays Capital is representing the Chinese state-owned enterprise, which is one of the largest oil and gas companies in the world, on the investment. The deal, which was struck on Wednesday, is the result of more than nine months of discussion between the two parties. In June last year PetroChina and Encana signed a memorandum of understanding at the G20 meeting in Canada, which gave PetroChina a six-month exclusivity. The MOU was wide-ranging and some of the intervening period was spent deciding which assets PetroChina would acquire an interest in, said a source. After the exclusivity period expired, the two parties engaged in negotiations on pricing and thus the valuation was agreed however a final agreement is yet to be reached.

Encana, one of North America’s largest natural gas producers, is represented by Jefferies and RBC Capital Markets.

PetroChina will buy a 50% interest in Encana’s Cutbank Ridge assets in British Columbia and Alberta. Details of how much of the C$5.4 billion will be paid upfront and how much will be paid in a phased manner towards development costs are still being negotiated, said a source. Encana will initially operate the assets and market the production. Subsequently, a joint management committee will be appointed by the joint venture.

The deal is subject to approval in China and Canada. Securing approvals in Canada is expected to be fairly straightforward, said a source, as PetroChina is not buying a controlling interest. Further, the shale gas which is produced will be consumed in North America and is not intended to be exported to China. The deal follows a $4.65 billion investment by Sinopec for a 9% stake in Canadian oil sands producer Syncrude. However, that deal saw Sinopec buy the minority stake held by ConocoPhillips.

There has been a spate of investment by both Chinese and Indian companies in shale gas assets in the US. CNOOC and Reliance have done two and three deals respectively over the course of the past 12 months. One of the drivers for these deals, say specialists, is the need for oil and gas majors in both countries to acquire the technology and know-how necessary to develop their own shale gas reserves.

PetroChina worked with Citi on its first substantial overseas foray when it acquired an interest in oil and gas assets in Kazakhstan. Back then, Marc Benton was group head of Asia-Pacific energy, power and chemicals investment banking for Citi. He now heads the oil and gas group at Barclays Capital, which may be one reason why PetroChina chose Barclays for this latest deal. Barclays Capital has strong credentials from a number of recent shale gas deals, having advised Reliance Industries on two acquisitions -- a $1.7 billion investment in a JV with Atlas Energy Resources in April last year, and a $1.3 billion JV with Pioneer Natural Resources in June.

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