Related Articles
Forward article link
Share PDF with colleagues

China arrives in North America's unconventional gas sector

CNPC's deal with gas producer EnCana gives it a foothold in Canada's growing shale-gas business and heralds the arrival of China's state-owned oil companies in North America's unconventional-gas sector.

The heads-of-agreement, signed in Ottawa on 24 June, could see CNPC take up to a 50% stake in tracts of EnCana acreage in the Horn River, Greater Sierra and Montney Ridge shale-gas formations, in northeast British Columbia (BC).

For China, the move is strategic, giving one of its international energy champions access to natural gas that could eventually be liquefied on Canada's west coast and shipped to Asian markets. The company will also gain expertise in developing shale gas – essential if China is to build its own domestic unconventional-gas sector (see analysis).

The deal will give EnCana another lump of cash to spend on a land-acquisition and drilling programme in North America. How much is yet to be decided, the company told PE Unconventional. But the Canadian firm is likely to stick with its "75 for 50" strategy: the Chinese investor will pay 75% of the drilling costs for a 50% stake in the developments.

In March, EnCana signed a similar farm-in agreement with South Korea's state-owned Kogas, also covering land in BC's shale-gas fields. Under the terms of that deal, Kogas is to invest C$0.565bn ($0.533bn) over three years to take a 50% interest in 154,000 acres in Horn River and Montney. Among other benefits for EnCana, it allowed the company – which will remain operator of the projects – to open another development area in each play.

The CNPC venture would offer similar advantages and follow the same template. "With this potential CNPC joint venture, we would expect, upon successful completion of a transaction, to lower costs, reduce risks, increase our capital efficiencies, improve project returns, optimise production techniques and tap natural gas opportunities that would otherwise remain dormant for some time," Randy Eresman, EnCana's boss, said in a statement after the deal.

Eresman also hinted at the broader strategic ambition of EnCana's new partners, saying the deal could open a "new market". That means liquefied natural gas (LNG), destined for China. A project under way in Kitimat, north of Vancouver on BC's west coast, would transform the prospects of shale-gas developers in the province's northeast. But it is still in the planning stages. Exports will begin no sooner than 2014.

Acquiring a position in BC's burgeoning gas sector is a sensible move for CNPC, also allowing it to hedge against movements in gas prices. But the real strategic value would materialise only if the export route opens up. BC's government says the province's shale- and tight-gas reserves could amount to 1,300 trillion cubic feet. Yet, for now, say operators, the distance to the big markets of the US northeast adds about $1/m British thermal units (Btu) to the price of BC's gas. That leaves potential output uncompetitive in North America's over-supplied market.

For EnCana, the distance of its gas in BC from US markets puts the onus on driving down its development costs. EnCana says Montney supply costs (excluding land costs, which are low) have already fallen from $6.45/m Btu in 2006 to $3.40/m Btu last year. Those costs will fall still further this year, it says. Yet Nymex natural gas prices remain depressed. On 7 July, the Henry Hub august contract was trading at around $4.60/m Btu – firmer than in recent months, but still dangerously low for the continent's producers.

EnCana may follow its deal with CNPC – which will take months to close – with others. The company's strategy of acquiring large tracts of prospective acreage cheaply has given it "first-mover" advantage, says one company executive. Eresman said in a presentation in Calgary last month that the company had raised C$0.9bn through farm-out agreements this year. The firm could double that amount in the coming months through other sales, he added.

Also in this section
US carbon fight moves to Washington state
23 October 2018
The lack of political enthusiasm for a federal-level US carbon tax contrasts with more positive undercurrents in Washington state’s heated carbon referendum
UK resumes fracking after seven-year hiatus
23 October 2018
Fracking is underway again in northern England, but don’t expect a US-style shale boom any time soon
Saudi Arabia's Vision 2030 looks blurry in Khashoggi aftermath
18 October 2018
International reaction to the disappearance of prominent Saudi journalist Jamal Khashoggi will lead, at very least, to delays to the kingdom’s ambitious reform programme