Encana, PetroChina shale gas deal collapses

A  $5.4 billion deal between Canadian exploration giant Encana, one of the partners in the KM LNG project, and PetroChina collapsed Tuesday, sending shocks through both the financial markets and the energy exploration and production sector.

International analysts are already saying that China may be pulling back in its strategy to get a foothold in key resource areas and perhaps the Canadian energy sector was too optimistic.  Perhaps.

If the analysts are correct,  that means that some of the grand plans to export natural gas, at least to China, may still go ahead, but won’t immediately  turn British Columbia back into the fabled Golden  Mountain that brought the labourers from China more than a century ago to build the railways. Nor does this mean a major threat, at this point, to plans to export gas through Kitimat as there are plenty of buyers in Japan, Taiwan, South Korea and Malaysia looking at northeast BC shale gas.

    The Wall Street Journal Heard on the Street blog says

E&P executives across North America should also be nervous. While some speculate Canadian-resource nationalism has spread from potash to energy, there is little evidence of this, given other similar deals haven’t been blocked. The alternative explanation is that foreign buyers of North American gas assets may actually care about such quaint notions as return on investment.

That isn’t good news for an E&P sector that consistently lives beyond its means.

London’s Financial Times says

Although China has gained a reputation for buying up resources around the world at any cost, a string of recent failed deals suggests the country’s resources companies are starting to drive harder bargains and are becoming more selective. In April, China’s Minmetals withdrew a $6.5bn offer for Equinox, an Australian-Canadian copper miner, rather than raise its bid after a higher offer emerged from Barrick Gold.

Chinese oil companies have also recently walked away from, or missed out on, prized oil and gas assets in Brazil …

The failure of the Encana-PetroChina deal is a surprise to the industry because Chinese companies have recently been investing aggressively in shale gas assets to gain the expertise needed to develop China’s own reserves.

Reuters reported from Edmonton that it was Encana who walked away from the deal:

Encana, Canada’s No. 1 natural gas producer, said the two companies could not find common ground, despite a year of negotiations, and walked away from a deal that would have seen PetroChina take a one-half stake in Encana’s massive Cutbank Ridge field in northern British Columbia.

“We just reached the point where we determined we just couldn’t go forward” said Alan Boras, a spokesman for Encana.

The deal would have been the largest in a string of investments by Asian companies in North America’s prolific shale gas discoveries, while Encana investors were counting on the cash to shore up a balance sheet battered by more than two years of weak natural gas prices…

The CBC report had analysts disagreeing on Encana’s role:

John Stephenson, portfolio manager with First Asset Investment Management in Toronto, called the scuttled deal “a complete and utter failure.”

“I think they just couldn’t agree on anything and I think they were premature maybe in announcing this before they had an operating agreement in place,” he said….

But Lanny Pendill, an energy analyst with Edward Jones in St. Louis, commended Encana for its discipline….Its willingness to walk away from a deal after a year of work shows “if push comes to shove, they’re going to make the decision that’s in the best interest of Encana and Encana shareholders.

The Globe and Mail says Encana has plenty of assets in shale gas, especially the Horn River developments which were often mentioned as the main source for shale based natural gas that could be shipped through Kitimat:

With the PetroChina joint venture out of the picture, Encana still has lots of potential. For starters, back in April, the company said it was looking to start discussions on joint venture proposals for its Horn River and Greater Sierra assets. On the heels of Tuesday’s announcement, Encana said that the prospects for these projects are looking up, and raised its 2011 expected proceeds from them to between $1-billion and $2-billion, up from $500-million and $1-billion

Encana news release (on Encana site)

Encana news release 0621-petrochina-jv-negoiations-end.pdf

Is energy player Nexen Kitimat’s next “gentleman caller?”

Another big energy company is looking for a way to get its shale gas from northeastern British Columbia to the lucrative markets of East Asia.

At Monday’s Canadian Petroleum Producer’s investor conference in Calgary, Nexen announced it was looking for a joint venture partner to export the shale gas through a west coast port to Asia.

Nexen wants to find a partner with expertise in producing and selling liquefied natural gas, said Marvin Romanow, chief executive officer. The Calgary-based company last month opened the books on its shale-gas resources for review by interested parties.
“We looked for folks with good contacts in LNG,” Romanow said

Canadian Press reported:

 

Nexen Inc. (TSX:NXY) is on the hunt for a partner to help develop its vast holdings in the Horn River Basin. LNG expertise would be attractive in a partner, but Nexen is open to a variety of marketing strategies for its gas, chief executive Marvin Romanow said.
“I think you want to think about treating your market access as a portfolio, not as a single killer strategy.”

So it is likely that Nexen and its prospective partners, whether from Asia or North America, will be next in line of “gentleman callers” making their way to Kitimat to check out Douglas Channel. 

To use a theatrical and old movie analogy for a moment, Kitimat,  with its isolated location and the devastating closure by West Fraser of the Eurocan plant, up until this spring, the town was seeking big money corporate saviours in the same way as Tennessee Williams’ stricken, lonely Laura pined for a “gentleman caller” in The Glass Menagerie
Now with the world wide gold rush in shale gas production aimed at the Asian market, Kitimat seems to be taking on a new movie role, the nice, plain, intelligent next-door girl that all the boys ignored until she suddenly comes in to an unexpected inheritance. Now all the boys are calling on her and so  are fancy guys from out of town. 386-Nexenshale_June2011.jpg
 Nexen is a Calgary-based energy company, first known as Canadian Occidental Petroleum. It began with operations in the Alberta oil patch and later in the Gulf of Mexico.
In 1991, the company made a major oil discovery in Yemen and that financed later expansion into the Alberta oil sands,  deep water drilling the Gulf of Mexico and exploration in northeastern British Columbia shale oil.
At the  Calgary conference, Nexen said it wasn’t currently drilling any new wells in Yemen and was slowing maintenance of wells while it waits renewal of its contract with the government. Given the current unrest in Yemen, it may be a while before a new government is formed that can sign a new 50/50 contract with Nexen.
On shale gas, Nexen says on its website:

While we weren’t looking at shale gas five years ago, today we have captured significant resource potential-enough to double our current proved reserves-in the heart of one of North America’s best shale gas plays. We are improving productivity and driving down costs as we improve equipment utilization, drill longer wells and initiate more fracs per well.
Shale gas can be brought on quickly, fuels our short-term growth and complements the larger projects in our portfolio.

Webcasts from the CAPP conference

PDF of Nexen’s Powerpoint presentation. (On the Nexen investor page, lower right)

Canadian oil boom may bring many more tankers to Northwest waters: Seattle Times

Seattle Times

Canadian oil boom may bring many more tankers to Northwest waters

[F]ights over Canada’s oil sands could have an impact much closer to home. One company is hoping to boost oil-sands shipments to Asia through Northwest waters — plans that would quadruple tanker traffic through Vancouver, B.C., and dramatically increase the amount of oil traveling through the Strait of Juan de Fuca.

Some of the tankers the company hopes to accommodate could carry four times more crude than the Exxon Valdez, the supertanker that spilled 11 million gallons of crude into Prince William Sound….

“That’s definitely a lot more crude carriers,” said Chip Booth, a manager with the Washington state Department of Ecology’s spills program. “It certainly represents a bit of a higher risk.”

But it’s far too soon to say how much more.

PNG ratings give hint what of financial markets think of Kitimat

The outlook for Pacific Northern Gas issued by Canada’s Dominion Bond Rating Service on Friday not only gives an indication of the financial health of the company, it also gives a window into what the financial markets think of the prospects for Kitimat and the region,

DBRS gave Pacific Northern Gas “Secured Debentures and Cumulative Redeemable Preferred Share ratings… BBB (low) and Pfd-3 (low), respectively, both with Stable trends,” DBRS said a news release dated June 10, 2011.

DBRS says that like all utilities, PNG has a stable financial outlook, but “it still has a higher level of business risk when compared with other DBRS-rated utilities.”

The DBRS report goes on to say:

Economic conditions in PNG’s Western system remain weak, but are showing signs of improvement, albeit at a slow pace. Signs of economic improvement in the region include Rio Tinto Ltd.’s (Rio Tinto) announcement of an additional $300 million investment on preconstruction activities for the US$2.5 billion proposed modernization of its aluminum smelter in Kitimat, B.C.; the proposed Phase 2 of a new container handling facility at the Port of Prince Rupert; and continued modest growth in the oil and gas sector in the Northeast system area.

The closure of the West Fraser Kitimat [Eurocan] paper mill in 2010 resulted in some loss of customers in the region, which was offset by the increase in customers in the Northeast system service area. Despite the challenges in the Western system area, PNG has been able to maintain a stable customer base.

In the longer term, the competitiveness of natural gas as a fuel and heating source still remains a key focus for PNG, especially in the Western service area; however, residential and commercial electricity rates are expected to rise in the near term according to BC Hydro’s Service Plan. The proposed electricity price increase and current low gas price environment are expected to keep PNG’s delivered natural gas rates competitive with electricity rates in PNG’s Western system.

DBRS also liked the fact that much of the money paid by the KM LNG partners for the Pacific Trail Pipeline was supposed to go PNG shareholders:

In March 2011, PNG completed the sale of its 50% stake in Pacific Trail Pipelines Limited Partnership (PTP) for a gross consideration of $30 million. The Company has declared special dividends of approximately $22 million, which represents all of the initial payment. A final cash payment of $20 million will be paid if the purchasers make a decision to proceed with the construction of the Kitimat LNG export facility in British Columbia.

There is no guarantee that the final payment will be made.

Going forward, if the net proceeds from the second payment are retained and reinvested in the Company, this could have a longer-term positive impact on PNG’s creditworthiness. However, the extent of any credit impact will depend entirely on the amounts to be retained and how they are reinvested.

But as the Northern Sentinel reported, the BC Utilities commission wasn’t so happy with the dividend, especially when it came to the PNG “transportation charges” it levies on consumers and businesses. The Sentinel says Pacific Northern Gas agreed to pay $500,000 toward the transportation charges to avoid a court fight with the BCUC, after the commission questioned why PNG was not passing on some of the money from the sale to lower the charges.

It should be noted that $500,000 is just six per cent of the $30 million net proceeds PNG received for the sale.

In the long term, the DBRS report says: “increase[d] utilization on its Western system, [has] the potential to increase PNG’s margins and lower the average cost of transporting gas for all customers.” “Increased utilization” likely refers to the various liquified natural gas projects that may make further use of PNG facilities.

DBRS says that PNG expansion and diversification plans could eventually lower its financial market risk profile:

“through electricity and renewable energy generation. In 2010, it acquired the 9.8 MW McNair Creek “run of river” hydroelectric generation facility in British Columbia for $17 million. It also recently formed Narrows Inlet Limited Partnership with Skookum Power Corp. to undertake an investment of up to $2.5 million to advance the Narrows Inlet Project to the start of construction. The $190 million project was awarded a 30-year energy purchase agreement with British Columbia Hydro & Power Authority (BC Hydro) in spring 2010.”

As some energy executives have come to realize, but others have ignored,  high PNG natural gas transportation charges are one main reason that the industry is mistrusted, if not hated, across the political spectrum from right to left in northwestern BC, a political constituency that goes far beyond the environmental activists.

At every public meeting on energy and pipeline issues, there are always questions about the PNG transportation charges, even at meetings on the Enbridge bitumen pipeline, which has little do with  the natural gas charges here (although Enbridge is a major consumer natural gas supplier in eastern Canada).

At the information meeting in Kitimat earlier this summer, Thomas Tatham, managing director of BCLNG  Energy Co-operative, which hopes to build the second LNG terminal near Kitimat harbour, promised that his company, using PNG lines, would absorb the transportation charges  for Kitimat consumers.

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Three pipeline builders race to reach new markets Keystone, TMX and Gateway: Alberta Oil

Alberta Oil 

Pipelines have never been so popular. For years, the steel conduits followed unseen routes. They carried rivers of crude oil beneath city and town alike, rarely drawing so much as a passing thought from those who depended on their valuable cargo. Today, proposals by Kinder Morgan Canada, Enbridge Inc. and TransCanada Corp. face fierce opposition in a bid to carry more Canadian crude oil – chiefly increased oil sands production – to new markets.

Excerpt from Alberta Oil interview with Nlorthern Gateway President John Carruthers

 

The primary markets where we would see the most value are China, Japan, South Korea and Taiwan. Now once the oil reaches tidewater it can access any market. We would see crude going periodically to different markets. But those four markets in particular have strong demand. The proximity of Canada to those markets and the fact that they can process Canadian crude is all very positive. Potentially the oil could also go to California.

CNBC interview with Pat Daniels: Enbridge Pipe Dreams?

CNBC VIdeo
 
Enbridge Pipe Dreams?

CNBC  Mad Money host  Jim Cramer377-cnbc2.jpg  interviews Enbridge’s Pat Daniels

Cramer: Enbridge is a Canadian company with a juicy 3.3% yield and a consistent track record of raising that payout. average of 11% over the last decade. They’ve given us a 15% boost this year. Enbridge is the kind ofconsistent dividend-raiser you can count on in good times and bad. they are so money!Why are you highlightinga pipeline company when oil has been getting slammed? the important thing is a company like enbridge is not hostage to oil. they’re related by long-term assets or regulated contracts.Enbridge has never once had to cut the dividend, not once. they’re more regular than metamucil…”

Daniels:  “The gateway pipeline project to the west coast would employ another 1,200 people on apermanent basis. and there would be about 63,000 man years of labor that would go into the construction of the pipeline. We call on crews from all across North America, capped, the U.S.and also from pipe suppliers right across North America. It has a huge positive impact on the economy and huge employment opportunities associated with both the construction and theoperation in our business.

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Energy sector needs to diversify its market

Calgary Herald


Energy sector needs to diversify its market

More on Enbridge Liquid Pipelines president Steve Wuori’s speech in Calgary:

Enbridge has proposed its Northern Gateway project between Edmonton and Kitimat — a $5.5 billion, two parallel pipeline project of 1,900 kilometres — which would diversify the market to include Asia and the Pacific Rim markets.

Wuori said the project would be a “game-changer” for Canada because of the unlocking of various new markets — leading to a $2-3 barrel increase in oil, a $270-billion increase in national GDP over 30 years, 63,000 person years of employment during construction, $4.3 billion in labour-related costs and income for people, and about 1,150 long-term jobs once Northern Gateway is in operation.

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