Energy Ink

Encana-PetroChina deal falls apart

New suitors must be found to help develop B.C. gas assets

June 21, 2011

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We’ve spilled a lot of ink here at Alberta Oil writing about the interest the Canadian oil patch has in accessing Asian markets. But the news that a proposed $5.4 billion joint venture between Encana Corp and PetroChina is dead shows that reaching that market won’t be easy.

When the Calgary-based natural gas producer announced the union in February, which was tied to developing its Cutbank Ridge unconventional gas assets in British Columbia, the potential deal-breaker was thought to be whether the Canadian government would give the arrangement its regulatory blessing. In the end, it was Encana and PetroChina themselves who couldn’t come to terms.

The failed deal doesn’t look too good on Encana’s management, particularly its president and CEO Randy Eresman. The PetroChina announcement was a rare bit of good news for Encana in 2011 as it dealt with disappointing first quarter profits, as well as an admission that it was backing off its plan to double production over five years. But don’t feel too bad for the company. It says it will look for a new partner or partners for the Cutbank Ridge project and it may very well find some willing suitors.

It’s true that China represents a huge emerging market for natural gas producers. At the recent Oil and Gas Expo conference in Calgary, Wood Mackenzie analyst Noel Tomnay said demand for natural gas in the Middle Kingdom is expected to grow to 45 billion cubic feet per day (bcf) by 2033 from the 11 bcf per day the nation consumes today.

Yet China (and its state-owned oil and gas companies) isn’t the only jurisdiction looking to invest in Canada’s shale and tight gas plays. Earlier this month, Calgary-based Progress Energy Resources Corp. announced it had struck a framework agreement to sell a 50 per cent interest in three Montney gas plays to Malaysia’s national oil company Petronas. The goal of the partners is to build a liquefied natural gas (LNG) export facility on B.C.’s west coast to ship chilled gas to new markets.

Also keep in mind that 22 per cent of Japan’s power supply comes from LNG and it is seriously reconsidering its reliance on nuclear energy in wake of the meltdown of the Fukushima power plants. If Japan says no to nukes, it will likely need more LNG to fuel its power needs. And I haven’t even brought up other voracious Asian LNG consumers like South Korea. In short, expect Encana to be announcing another joint venture for its Cutbank Ridge assets – likely with another Asian buyer – in the next 12 months or so.

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