Petronas buys into Canadian shale gas, eyes LNG

BANGALORE/CALGARY Thu Jun 2, 2011 3:57pm EDT

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BANGALORE/CALGARY (Reuters) - Progress Energy Resources Corp PRQ.TO said on Thursday it will sell a half stake in Canadian shale gas assets to Malaysia's Petronas PETR.UL in a C$1.07 billion ($1.09 billion) deal that intensifies the race to open up lucrative markets in Asia.

Progress and Petronas will also study the feasibility of a new liquefied natural gas terminal on Canada's West Coast as a way to secure higher prices for shale gas produced from fields in northern British Columbia's Montney region.

North American gas prices are stubbornly weak due to the rapid development of shale supplies throughout Canada and the United States and because of static domestic demand.

It is the Malaysian state oil company's first foray in Canada and will allow Progress to develop its shale gas holdings at a fraction of the cost of doing so itself, Chief Executive Michael Culbert said.

Other Asian oil majors such as PetroChina (601857.SS) (PTR.N), Korea Gas (036460.KS) and Mitsubishi (8058.T) are also venturing into North American shale gas plays and finding ready partners who seek capital to fund exploration in the unconventional assets.

Several players, including Apache Corp (APA.N) and Royal Dutch Shell Plc (RDSa.L), are eyeing LNG terminals for the Pacific Coast as a way to absorb burgeoning output from the Montney and Horn River areas. No operations are expected to start up before 2015.

"There are a number of projects at various stages, but I think there is room for a lot of LNG projects with the vast resources we have in British Columbia and Western Canada," Culbert said in an interview.

Petronas is an ideal partner due to its expertise with LNG at home and in Australia, Egypt and Britain, he said. The technology involves super-cooling gas into a liquid so it can be loaded onto tankers and shipped to markets.

Investors welcomed the deal, driving shares of Calgary-based Progress up 73 Canadian cents, or 5 percent, to C$14.71 on the Toronto Stock Exchange. Earlier they touched a 32-month high.

"Petronas's business is in world LNG production and distribution. So it seems to imply they have an interest in securing the good supply source that Montney represents," said analyst Kim Page of Wellington West Capital Markets.

The Montney is seen as one of the top shale gas regions on the continent, along with such others as the Marcellus in the eastern United States and Eagle Ford in Texas.

"CARRY" TRANSACTION

Like many of the other shale gas deals, Petronas will pay for much of the acquisition by agreeing to cover Progress's capital spending as the two companies develop the fields.

The Progress and Petronas holdings are in the north part of the region and include the Altares, Lily and Kahta properties, comprising 149,910 acres. There is scant current production but Petronas said possible resources could be as high as 15 trillion cubic feet.

Petronas will pay C$267.5 million in cash when the deal closes, likely in the third quarter. The remaining C$802.5 million will form 75 percent of Progress's share of capital spending on the assets over the next five years.

Progress, a mid-size producer with a market value of C$3.2 billion, will operate the assets. Plans call for development spending of C$250 million to C$300 million between the deal's close and end of 2012, Culbert said.

For the LNG export venture, Petronas will provide a standby equity financing commitment of up to C$600 million for Progress's capital needs. Petronas will own 80 percent of the venture and Progress the remainder.

($1=$0.98 Canadian)

(Additional reporting by Krishna N Das in Bangalore; Editing by Jarshad Kakkrakandy, Savio D'Souza and Rob Wilson)

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