Musings: China's Energy Shopping Spree Stops In Canada Again

Last week EnCana announced a blockbuster deal with PetroChina that will increase China's activity in the tight gas and gas shale region of western Canada. PetroChina will buy a 50% interest in EnCana's assets located in the Montney area in western Canada for C$5.4 billion. The transaction involves EnCana's 635,000 acres in an area spanning the Alberta and British Columbia border, which contains approximately 255 million cubic feet a day of natural gas production (representing roughly 7.5% of EnCana's production) and an estimated one trillion cubic feet of proven natural gas reserves. The price to be paid by PetroChina was substantially above the equivalent value assigned by the stock market based upon EnCana's share price when the deal was announced. This suggests that EnCana's assets were being undervalued by investors and analysts. Some investment analysts are suggesting that this transaction may lead to an increase in the value investors place on other Canadian oil and gas assets, especially given that this transaction is happening when natural gas prices are at very low levels relative to long-term views about the appropriate economic value of these assets once they are developed.

PetroChina will buy a 50% interest in EnCana's assets located in the Montney area in western Canada for C$5.4 billion

The agreement means that EnCana and PetroChina will jointly own and develop the resources in this acreage block. Importantly, the PetroChina investment represents another deal in the energy shopping spree China has been undertaking during the past year.  Estimates are that with this investment, Chinese energy companies have now spent $46 billion in energy acquisitions worldwide since the start of 2010 with about a quarter of the deals in Canada. 

Why the energy shopping spree? Simply because China's economy will need substantial energy and other natural resources in order to meet its projected growth trend. China has taken a keen interest in the development of the Kitimat liquefied natural gas (LNG) terminal to be located on the west coast of British Columbia. The application seeking Canadian regulatory approval for the terminal's construction and its natural gas supply infrastructure investment is in the early stages of the approval process. China certainly could be looking to this LNG export terminal as a source of gas supply for its economy in the future. That would be consistent with the recent BP (BP-NYSE) energy outlook forecast that calls for China to overtake the United States as the largest global oil consumer within the next 20 years. The Wall Street Journal recently reported that China has begun to stockpile rare earth metals, which are important raw materials in the production of clean energy technologies, demonstrating further evidence of the Chinese government's concern about having available adequate energy supplies for the future. 

China certainly could be looking to this LNG export terminal as a source of gas supply for its economy in the future

China's current energy and metals consumption is huge and growing. For example, last December, China imported 2,999 metric tons of uranium fuel, a ten-fold increase over the volume imported in December 2009. That import volume is likely to continue to increase if China fulfills its nuclear power growth initiative. At the present time, the country has 10.8 gigawatts (GW) of installed nuclear power generating capacity that is expected to grow to 80 GW by 2020. China is also currently the world's largest coal consumer using 3.2 billion metric tons per year to fuel the country's population of coal-fired power plants.

The reasons China is stockpiling rare earth metals is for use in its own growth in clean energy production and because the government wants the economy to become the global supplier of clean energy equipment. In addition, China has been embarked on a significant clean energy building effort for its own power needs and to meet global pressures for the country to reduce its greenhouse gas emissions. At the present time, China has 44 GW of installed wind power with plans to increase that to 248 GW by 2020. It expects to increase its hydroelectric power generating capacity from the current 214 GW of installed capacity to 449 GW in 2020. The biggest clean energy growth, however, will come in the solar energy sector where the country's installed capacity is projected to climb from 625 megawatts (MW) today to 17 GW in 2020. Despite that explosive growth, solar energy will still represent only a tiny portion of China's total energy supply.  In order to capitalize on all this investment in new clean energy supplies, China anticipates investing $1.7 trillion by 2020 according to the country's electricity council.

Gas shales do exist in China and are projected to play an important role in the country's future energy supply mix

The bottom line is that given China's population and its need to grow its economy, the supply of energy and minerals will continue to be a concern to the government. Securing supplies of these resources around the world has formed a large part of the government's political and economic plan for a number of years. While Chinese companies have successfully invested in gas shale developments in the United States, these investments are in their early stages and were more likely made to gain knowledge of the technological issues with drilling and completing wells in this complex natural resource. Gas shales do exist in China and are projected to play an important role in the country's future energy supply mix. On the other hand, the energy and mineral investments in Canada and elsewhere around the world probably reflect assets that could find their way back to China in the future, especially natural gas in the form of LNG from Western Canada. 

Will this natural resource spending spree ever end? As China strives to ensure it has sufficient resources for its economy to grow without knowing exactly how much that may be, we suspect its government will continue to promote strategic energy and mineral investments for many years into the future. The pace of the current shopping spree may slow somewhat in 2011 because the optimum market conditions for making deals probably have peaked, but we still expect to see China buying resources strategically. The pace will all be determined by how China views current energy and mineral prices relative to their view of what they may be in the future. The more concerned China is about the adequacy of future global supply, the more aggressive they will be in buying sooner rather than later. 

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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