By Jeffrey Jones and Farah Master
CALGARY, Alberta/HONG KONG (Reuters) - PetroChina is purchasing half of a prolific shale gas project from Canada's Encana Corp for C$5.4 billion ($5.4 billion), marking the largest Chinese investment yet in a foreign natural gas asset.
Chinese companies such as PetroChina and CNOOC have been scouring globally for unconventional gas assets to reduce reliance on coal and satisfy its energy hunger to fuel its economy, now the world's second-largest.
In January, CNOOC struck a $570 million shale deal with U.S. natural gas company Chesapeake Energy Corp, its second such deal with the American company in about four months.
On Thursday, shares of PetroChina, Asia's largest oil and gas producer, fell more than 2 percent in Hong Kong trade, lagging the Hang Seng's 0.7 percent fall, as analysts said the deal, to be paid all in cash, was pricey. Encana shares closed down 60 Canadian cents, or 2 percent, at C$30.65 on the Toronto Stock Exchange. It announced the deal after the market closed.
"Not too dissimilar to the CNOOC/Chesapeake deals, the PetroChina/Encana tie-up is another win-win that enables China to acquire quick exposure to the long term shale oil/gas boom in North America," said Gordon Kwan, an analyst with Mirae Asset Management in Hong Kong.
Kwan said the deal will also allow Chinese companies like PetroChina to migrate the technology back to China for its development in domestic unconventional oil and gas resources.
LITTLE THREAT FROM POLITICS
Encana, one of the North America's largest gas producers, and state-owned PetroChina agreed to form a 50-50 joint venture to develop the Cutbank Ridge lands in the westernmost province of British Columbia over several years.
The deal, which is subject to approval by the Canadian and Chinese governments, came after nine months of talks, both companies said.
The venture will allow Encana to accelerate development of its vast reserves while keeping a lid on capital investments at a time when natural gas markets are weak. For the Chinese, it's another step toward the country's goal of tripling the use of the lower-carbon fuel over the next decade.
The venture is likely to go ahead without much political fanfare as the purchase of a 50 percent stake in the Canadian firm's unconventional gas assets was not nearly as threatening as an outright acquisition.
"You can't guarantee it is going to go ahead but I think it is quite likely. These guys are more than happy to take a few billion dollars in there, that is ultimately what it is all about," said Brynjar Bustnes, analyst at JP Morgan in Hong Kong.
The value of the deal surpasses PetroChina's $3.1 billion joint bid with Royal Dutch Shell to buy Australia's coal-seam gas player Arrow Energy last year.
It is also worth more than the largest previous Canadian energy buy, Sinopec Corp's $4.65 billion acquisition of ConocoPhillips' stake in the Syncrude Canada oil sands venture.
"It looks expensive to us," said Neil Beveridge, analyst at Sanford C. Bernstein in Hong Kong.
"If you look at the proven reserves that PetroChina are getting it is one trillion cubic feet of gas for $5.4 billion, so it looks to be about $5.40 per mscf (million cubic feet) on the current proven reserves which looks to be expensive."
The deal has been so priced even as North American gas prices are languishing under the weight of high inventories and the potential production that new technology has opened up in hard-to-reach shale formations.
The price tag represents 3.8 percent of Encana's 2010 estimated production for 24 percent of its market capitalization.
"This is an outstanding valuation for Encana," CIBC World Markets analyst Andrew Potter said.
Cutbank Ridge, comprising 635,000 net acres in northeastern British Columbia, currently produces 255 million cubic feet of gas a day from proved reserves of about 1 trillion cubic feet.
(Additional reporting by Jim Bai in Beijing and Anna Driver in Houston; Editing by Lee Chyen Yee and Muralikumar Anantharaman)