Exclusive: In rare Chinese move, Sinopec seeks partner for Canada shale

BEIJING Fri Oct 25, 2013 5:22pm EDT

A Sinopec sign displayed at its gas station is seen behind a Chinese New Year lantern installation in Hong Kong February 5, 2013. REUTERS/Bobby Yip

A Sinopec sign displayed at its gas station is seen behind a Chinese New Year lantern installation in Hong Kong February 5, 2013.

Credit: Reuters/Bobby Yip

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BEIJING (Reuters) - Sinopec Group wants to sell half of its two biggest shale gas fields in Canada to spread costs and accelerate their development as the Chinese energy company focuses increasingly on return of investment, an executive said.

The sale of an overseas asset would be a rare move for one of China's state-owned energy companies, which have spent hundreds of billions of dollars investing in hydrocarbon resources from North America to Australia to secure China's energy supply, often to hostile reaction.

Canadian Natural Resources Minister Joe Oliver told Reuters in Ottawa that Sinopec's stance shows "a state-owned enterprise that is acting like a commercial operation": buying, selling or bringing in partners when appropriate.

Sinopec would join a number of other companies seeking partners in the shale regions of Western Canada, in what has become a buyer's market, albeit a popular one because the high-value shale gas is likely to soon find a ready market in Asia.

"We are not only buyers, but also actively seek joint-venture partners to optimize assets," said Feng Zhiqiang, newly appointed chairman of North America operations at Sinopec International Petroleum Exploration and Production Corp, Sinopec Group's main acquisition vehicle.

"There is no such thing that a state-owned company's job is only to obtain resources. Scale is important, profitable scale is more so," Feng told Reuters in an interview.

Sinopec Group, the parent of top Asian refiner Sinopec Corp, is looking for an equal equity partner for Montney and Duvernay, two Western Canadian shale gas plays totaling some 500,000 acres (2,000 sq. km). They are operated by Daylight Energy, which Sinopec acquired in 2011 for more than $2 billion and later expanded.

A sale could be viewed positively in Canada, where a landmark $15.1 billion acquisition of domestic company Nexen by state-owned Chinese oil firm CNOOC Ltd generated intense political debate and a policy backlash that centered in part on whether state-owned firms would follow market signals like normal commercial companies.

Oliver, who visited China earlier this month, said he got no sense of a diminished interest in Canada's resources.

"There was a lot interest and enthusiasm for our resources and investing in resource sectors in Canada at the very highest level in the government, right up to and including the president (Xi Jinping)," Oliver said.

"The president commented (that) ...there is a real complementarity between our countries' strategic interests, particularly in the energy sector. We need to diversify our markets. It's a strategic imperative. And they want to diversify their sources of supply and want to make investments in that context as well."

STEPPING UP EXPANSION

Feng declined to give a price tag for the stakes in the acreage but said their combined recoverable reserves were in the range of tens of trillions cubic feet.

Thanks to successful exploration and a low purchase price, Sinopec has boosted the value of Montney "many times over", but the cost of the drilling to monetize the unconventional resource is too heavy for Sinopec to handle alone, said Feng. Sinopec wants to remain the operator.

Sinopec, which supplies nearly half of the Chinese oil market, has so far spent $10 billion in Canada, around 14 percent of its total overseas investments.

It pumps an oil equivalent of 3.5 million tonnes a year, or 70,000 barrels per day, from its two main acquisitions there -shale gas-focused Daylight Energy, and a 9.03 percent stake in heavy oil producer Syncrude.

That is a fraction of the nearly 5 million barrels a day Sinopec buys on the international market for Chinese refineries.

As a result of very high development costs and weak gas prices following the U.S. shale boom, Sinopec's Syncrude operations have so far generated returns below expectations, and Daylight is still seeing negative cash flows, Feng said.

Despite that, Sinopec wants to accelerate expansion over the next few years in Canada, potentially a major and stable supplier to China, which overtook the United States last month as the world's top net oil importer. Canada holds the world's third-largest oil reserves after Saudi Arabia and Venezuela.

Sinopec also hopes to be a sizeable gas player in Canada, building on the Daylight business and targeting annual capacity of 10 million tonnes of liquefied natural gas by around 2020 to help feed China's rapidly growing demand for the cleaner fuel.

"There are few other pairs of countries like Canada and China that best complement each other," Feng said.

But regulatory hurdles and lack of key infrastructure may hinder the growth of the Canadian energy sector, he said.

The Canadian government has raised the bar for future acquisitions of its vast oil sands reserves by state-owned enterprises, limiting them to being minority stake holders.

Sinopec also holds a 5 percent stake in Enbridge Inc's planned $5.8 billion Northern Gateway pipeline, which would take oil sands crude from Edmonton, Alberta, to the Pacific Coast port of Kitimat, British Columbia.

The line is awaiting a final decision from federal regulators, expected by yearend. But the provincial government of British Columbia is wary, and the project faces solid opposition from environmental groups and aboriginal communities.

Changing market conditions have brought Sinopec many takeover targets, but it will be picky and aim for "fair price" deals, Feng said.

"Many companies are chasing us as a lot of oil sands and gas companies are in financial difficulties. But most of them still have very high expectations and believe that Chinese or Asian companies are ready to pay significant premiums," he said.

Talisman Energy Inc, Canadian Natural Resources Ltd, Athabasca Oil Corp and others are already looking partners for their holdings in the Montney and Duvernay shale gas regions.

The two regions have become attractive to the oil industry despite low natural gas prices. Not only will the gas from the regions' fields find a ready market in Asia once planned LNG plants are completed on the British Columbia coast, but the regions also contain millions of barrels of high-value natural-gas liquids such as ethane and propane.

(Additional reporting by Scott Haggett in Calgary and Randall Palmer in Ottawa; Editing by Muralikumar Anantharaman and Peter Galloway)

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