China’s CNOOC Tests US with Chesapeake Shale Deal

Reuters reports:

China’s top offshore oil producer, 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.

The New York Times blog looks at the significance of the deal:

Cnooc, one of the big three Chinese state-run oil companies, announced Sunday that it had agreed to buy a third of Chesapeake’s oil and gas assets in a south Texas shale deposit for $1.1 billion. Cnooc will also pay for an additional $1.1 billion in drilling costs through 2012. It is the largest Chinese purchase of American energy assets and the latest in a string of energy deals by Beijing around the world.

Like the other deals, China’s investment in the Texas oil patch is not necessarily about securing oil and natural gas for its own people. The energy market is fungible, meaning that it is capable of mutual substitution. So any oil recovered would probably go to the American market as it would be expensive to ship it all the way back to China. Furthermore, any natural gas found could not reach China because of the lack of liquefaction plants in the United States needed to ship it across the Pacific Ocean.

It is clear that the energy will ultimately flow to the American market, so why is China making the investment? Part of the reason is that it is simply a way to recycle its stockpile of hundreds of billions of dollars into an asset class other than United States Treasury securities. But the main reason for this particular deal seems to be the transfer of lucrative shale drilling technology that China has been seeking in its bid to exploit its own shale reserves.

October 11, 2010, 3:21 PM
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