HONG KONG/HOUSTON China's top offshore oil producer, CNOOC Ltd (0883.HK), will pay $1.1 billion for a stake in a U.S. shale oil and gas field, testing the U.S. political climate for the first time since its 2005 failed bid for Unocal.
CNOOC shares hit a three-year high on news of the deal with Chesapeake Energy Corp (CHK.N), which could be the start of more outbound acquisitions as the Chinese company races to meet its aggressive production growth forecasts to feed the country's fast-growing economy, analysts and bankers said.
"We expect them to expand their footprint in the Canadian oil sands and also in Brazil's deepwater," said Gordon Kwan, head of Asian energy research for Mirae Asset Securities.
The deal comes at a time of rising tensions between the United States and China. A huge trade imbalance has fueled perceptions that Americans are losing jobs to China and the U.S. House of Representatives passed a bill last month putting pressure on China to let its currency rise faster.
But because it is an investment rather than an outright purchase, the company should have a better chance to win approval from the government than the failed Unocal deal, said Lane Watson, a lawyer at Day Pitney LLP in Hartford, Conn.
The Eagle Ford Shale, located in a patchwork of counties in southeastern Texas, is believed to hold vast amounts of oil and natural gas that has a high liquids content, seen as more valuable in a time when gas prices are depressed.
Natural gas with a high liquids content is more valuable than "dry" gas as condensate can be stripped from the gas and sold at a premium, prompting companies of all kinds to scoop up acreage in areas such as the Eagle Ford.
The 10 deals so far this year for China's oil and gas companies have been worth $18.6 billion, already eclipsing the $15.8 billion in deals for all of 2009, according to Thomson Reuters data.
Most of the outbound acquisitions by China's oil companies have been in risky areas such as Africa, which Western rivals have avoided, or in locations with aging assets. Now they are also eyeing the United States, which was once deemed off-limits to the Chinese due to protectionist sentiment.
"Ninety-five percent of the world's E&P (exploration and production) companies are in North America," said an investment banker who has advised Chinese oil companies on deals. "If you have to move the reserve needle, you have to buy U.S. companies."
U.S. oil and gas companies are gradually warming to Chinese investment, partly because they are now short of cash, Kwan of Mirae Asset said.
In contrast, China's state oil giants, including PetroChina (0857.HK)(601857.SS)(PTR.N) and Sinopec (0386.HK)(600028.SS)(SNP.N) have access to ample credit.
NO REGULATORY HURDLES
The Chesapeake agreement shows China is confident the purchase of a 33 percent stake in the Eagle Ford acreage in South Texas will win the backing of U.S. regulators and politicians, who stepped in five years ago to block CNOOC's effort to buy U.S. oil company Unocal.
"We are basically taking money from India, Russia and other foreign countries for energy deals," said Fadel Gheit, oil analyst with Oppenheimer& Co. "If we single out the Chinese and say their money smells, it's not going to sit well. Obviously, Chesapeake tested the waters in Washington before they did this."
By working with Chesapeake, which would remain the operator of the project, the deal will help CNOOC gain exposure to the complicated shale-gas extraction technology it lacks.
"I call it legalized industrial espionage," Gheit said.
CNOOC is paying an average of nearly $11,000 per acre for the Eagle Ford acreage, higher than the $10,000 per acre that Wall Street expected, CapitalOne Southcoast said in a research note on Monday.
CNOOC shares closed 4.5 percent higher at HK$16.82, their highest since October 30, 2007, and outperforming the broader market, which was up 1.23 percent. Chesapeake shares rose 1 percent to close at $23.30 in New York.
OTHER SHALE INVESTMENTS
Despite low natural gas prices, interest has been rising in underground shale formations that could hold enough natural gas to satisfy U.S. demand for a decade.
Some say the technology used to extract the gas from the rock -- hydraulic fracturing -- can pollute drinking water, prompting the government to consider stiffer regulations.
"It's interesting that the Obama administration is fostering the export of American fracking technology while failing to embrace it domestically and advance a U.S. energy policy that puts a premium on domestic natural gas production," oilman T. Boone Pickens, who advocates cutting dependence on foreign oil imports, said in a statement.
CNOOC's purchase agreement comes after a flurry of shale investments by other energy companies.
Norwegian oil company Statoil (STL.OL) said on Sunday it was expanding its shale gas operations in the United States, creating a joint venture with Canada's Talisman Energy Inc TLM.TO to acquire acreage on the Eagle Ford prospect in Texas for $1.3 billion.
CNOOC agreed to fund 75 percent of Chesapeake's share of drilling and completion costs until an additional $1.08 billion has been paid, which Chesapeake expects by year-end 2012. The deal is expected to close in the fourth quarter.
CNOOC came in after talks with Indian energy company Reliance Industries Ltd (RELI.BO) and Chesapeake collapsed.
Shale gas accounts for 15-20 percent of U.S. gas production, but is expected to quadruple, touching off a scramble among producers such as Statoil, Exxon Mobil Corp (XOM.N), Mitsui & Co Ltd (8031.T)MITSY.O and Royal Dutch Shell Plc (RDSa.L).
Chesapeake's adviser was Jefferies & Co and CNOOC's was Tudor, Pickering, Holt & Co Securities. China-focused private equity firm Hopu Investment Management played an advisory role, according to a source with direct knowledge of the matter.
(Reporting by Sui-Lee Wee and Anna Driver; additional reporting by Joseph Chaney and Denny Thomas in HONG KONG, Paritosh Bansal in NEW YORK and Jeremy Pelofsky in WASHINGTON; editing by Ken Wills, Dave Zimmerman, Matthew Lewis and Andre Grenon)