Two of China's major oil producers are bidding for a stake
in a U.S. company that makes and operates equipment used to extract natural gas
from shale rock, another step toward China potentially tapping its own huge
reserves of a type of gas that has helped the U.S. reduce its dependence on
energy imports.
According to a person familiar with the situation, Cnooc Ltd. and China
Petrochemical Corp., known as Sinopec, as well as state-controlled Saudi
Arabian Oil Co. are each in talks to buy a 30% stake in Texas-based Frac Tech
Holdings LLC, in a deal that could be worth about $2 billion.
For Sinopec the bid comes amid an aggressive expansion into natural gas. On
Tuesday its China Petroleum & Chemical Corp. unit--also known as Sinopec
--together with piped-gas distributor ENN Energy said they were willing to
spend up to $2.15 billion to acquire all outstanding shares in Hong Kong-listed
China Gas Holdings Ltd., which has an extensive gas distribution business in
China.
Late Wednesday, China Gas said the bid "fails to reflect its fundamental
value." People close to the deal say Sinopec is likely to push on
regardless.
China has long relied on its abundant supplies of coal to fuel the
energy needs
of its fast-growing economy, but Beijing's priorities are changing as an
increasingly affluent population becomes less tolerant of the pollution
that
shrouds many of the country's major cities. China is now ramping up
imports of
cleaner-burning gas, having signed long-term contracts with suppliers
from
Australia, Qatar and Indonesia, and is building a pipeline through
Myanmar intended
in part to tap offshore gas supplies, its second pipeline after one
linking it
to Turkmenistan.
But it is also hoping to exploit its own reserves. In recent years the
development of cost-effective technology to extract oil and gas from shale
rock--which has traditionally been more difficult than tapping conventional
deposits--has transformed the U.S. energy sector. Oil and gas trapped in shale
are extracted by fracturing the underground rock and then pushing water and
chemicals through the cracks to release hydrocarbons, a process called
fracking.
According to a report earlier this year by U.S. Energy Information
Administration, China's technically recoverable shale gas reserves are almost
50% greater than those of the U.S. However, commercial production is being held
back by harsh terrain where many of the deposits are located, a lack of
technology necessary to extract the gas and regulatory uncertainty. China has
yet to outline terms for production-sharing contracts between foreign and
state-owned companies.
PetroChina Co. has said it discovered shale gas in the western province of
Sichuan with the help of Royal Dutch Shell PLC. The amount of reserves hasn't
been determined.
Chinese firms have scoured the globe for energy resources, often ending up in
remote and politically marginalized areas shunned by the Western majors. Access
to the necessary technology would be a major step toward tapping resources in
their own backyard, and elsewhere.
According to the person familiar with the Frac Tech talks, the company is also
close to finalizing joint ventures with Sinopec in China, Repsol YPF SA in
Argentina, and Saudi Arabian Oil--known as Saudi Aramco--in the Middle East.
Frac Tech will take a 49% stake in each joint venture, with the foreign partner
taking the remainder. The person said the funds raised from the stake sale
would help Frac Tech's international expansion.
Frac Tech is currently 70%-owned by a consortium led by Singaporean state-owned
investment firm Temasek Holdings but also includes sovereign wealth funds Korea
Investment Corp., China Investment Corp. and the Abu Dhabi Investment Council.
The remaining 30% is held by U.S. natural gas company Chesapeake Energy Corp.
Sinopec's involvement in this flurry of gas deals speaks to the ambitions of
its chairman, Fu Chengyu, who has steered a wave of mergers and acquisitions
since he took the job in May. Formerly chairman of Cnooc, Mr. Fu is best known
outside of China for that company's bold attempt to buy U.S. oil firm Unocal
Corp. six years ago, an effort that failed in the face of political opposition
in the U.S.
Assuming Sinopec does push ahead with its bid for China Gas, it would be the
first time a Chinese state-owned firm has made a hostile offer for a Hong
Kong-based company, according to data providers Dealogic.
The bid comes after shares in China Gas fell up to 50% following the arrest of
two senior executives last December on suspicions of embezzlement. Neither has
been charged and the current status of the case couldn't be learned. Sinopec
and ENN Energy are pitching themselves as a stronger management team that can
help China Gas put the corporate governance scandal behind them.