Ever since 2005, when its offer to buy Unocal was withdrawn following cries of political rage, Cnooc Ltd. (NYSE: CEO) and other Chinese oil companies kept a low profile on acquisitions, particularly in North America. Then in October 2010, Cnooc paid $1.1 billion for a third interest in leases owned by Chesapeake Energy Corp. (NYSE: CHK) in the Eagle Ford play in south Texas.
That deal sailed through regulatory approvals and Cnooc must have figured that this approach was much better than an outright takeover because the company has once again completed a deal with Chesapeake that will give Cnooc a one-third interest in a shale gas play called the Niobrara, located where the states of Wyoming, Colorado, Nebraska, and Kansas meet. The Chinese have discovered that not being greedy pays off.
In this latest deal, Cnooc will pay Chesapeake $570 million for its share of Chesapeake’s 800,000-acre leasehold in the Niobrara, and has agreed to pay up to another $697 million to fund drilling and other costs in the area. That is similar to the deal in the Eagle Ford play, where Cnooc agreed to pay up to $1.1 billion in drilling costs.
Chesapeake expects to have 20 rigs working the Niobrara by the end of 2012, and 40 rigs on the Eagle Ford by the same time. Currently the company has 5 rigs on the Niobrara and 10 on the Eagle Ford. There’s no way the company could reach those higher targets without help.
Cnooc also paid $3.1 billion for a 50% stake in a joint venture with Argentina’s Bridas Energy Holdings’ Pan American Energy joint venture with BP plc (NYSE: BP). BP sold its 60% stake in Pan American to Bridas for $7.1 billion in November. Cnooc paid an additional $2.5 billion for the BP stake.
The deals with Chesapeake do not involve any exports of either natural gas or liquids from the US to China. The investments by Cnooc are essentially hedges against rising prices and falling supply.
The other thing that Cnooc gains is technology to develop its own shale gas fields in China. Here’s what Chesapeake’s CEO said in the announcement, “Moreover, this project will advance the efforts of both the U.S. and China to reduce greenhouse gas emissions and accelerate commercial opportunities for the development of shale gas resources in China, furthering the objectives of the U.S. – China Shale Gas Resource Initiative announced by the White House on November 17, 2009.”
Transferring technology to China to develop its shale gas fields is in the US’s best interests. First, if enough gas can be developed, China will burn less coal, which the whole planet will appreciate. Second, US companies like Chesapeake will earn money from working in China. Other possible beneficiaries include the oil field services companies like Schlumberger Ltd. (NYSE: SLB), Halliburton Co. (NYSE: HAL), and Baker Hughes Inc. (NYSE: BHI).
Chesapeake shares are up more than 4% in early trading, and have set a new 52-week high of near $28.50. That’s good news for a stock that traded near $67/share in July 2008.
Paul Ausick
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