Sinopec buys $1b oil stake

Updated: 2013-02-26 11:47

By Joseph Boris in Washington (China Daily)

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Sinopec buys $1b oil stake

A worker at a Sinopec gas station changes a price tag in Yichang, Hubei province. A subsidiary of Sinopec Group has agreed to pay $1.02 billion for 50 percent of Chesapeake Energy Corp's stake in an Oklahoma oil and gas field. Liu Junfeng / for China Daily

A subsidiary of China Petroleum & Chemical Corp, known as Sinopec Group, has agreed to pay $1.02 billion for 50 percent of Chesapeake Energy Corp's stake in an Oklahoma oil and gas field and form a joint venture with the US company, Chesapeake announced on Monday.

The all-cash sale from Sinopec International Petroleum Exploration & Production Corp is for half of 850,000 acres (344,000 hectares) in Oklahoma's Mississippi Lime formation that Chesapeake controls. The natural gas producer has been seeking a buyer for the 425,000 acres as part of a campaign of asset sales to close a cash shortfall and reduce debt.

Under terms of the deal by Chesapeake, the US company will get 93 percent of the $1.02 billion from Sinopec once the deal closes, probably in the second quarter. Payment of the remainder will depend on certain customary title contingencies, Chesapeake said in a release.

Costs of all future exploration and development of acreage covered by the joint venture will be "shared proportionately" by the two partners, according to Chesapeake, which as project operator will conduct all leasing, drilling, completion, operations and marketing activities. No drilling carries - an arrangement in energy joint ventures in which one partner finances drilling by the other - are involved in the deal.

"We are excited to announce the execution of our Mississippi Lime joint venture with Sinopec, which moves us further along in achieving our asset-sales goals and secures and excellent partner to share the capital costs required to actively develop this very large, liquids-rich resource play," said Steven Dixon, Chesapeake's chief operating officer.

The Mississippi Lime formation is familiar ground for Sinopec. In January 2012, the Chinese producer agreed to pay $2.5 billion to Devon Energy Corp - based, like Chesapeake, in Oklahoma City - for a third of the US company's overall stake in five oil and gas fields, including the Mississippi Lime.

Chesapeake has already sold about $1.7 billion in development stakes to CNOOC Ltd, a subsidiary of China National Offshore Oil Corp, for a share of operations in the Eagle Ford and Niobrara shale gas formations in Texas and Wyoming, respectively. The Eagle Ford deal was announced in January 2011, Niobrara in October 2010.

Production from wells in the Mississippi Lime and nearby formations created about 34,000 barrels of oil equivalent, or BOE, per day in the fourth quarter, according to Chesapeake. The total acreage that Chesapeake controls through its lease has proved reserves of 140 million BOE.

The price agreed to in the Sinopec joint venture equates to $2,400 an acre, which is far less than the $7,000 to $8,000 per acre at which Chesapeake valued the asset in a July 2012 presentation to investors. Some industry analysts said the seller took too little, but others pointed to the company's need for cash and the fact that the field's output has been below expectations.

"It seems that foreign investors have been less willing over the last few years to come in and pay a large amount for unproven acreage," wrote Wells Fargo Securities analyst David Tameron.

Amir Arif, an oil and gas analyst with the Stifel Nicolaus brokerage in Washington, said: "Chesapeake got a much lighter price than many people expected. They needed to sell, and this play has been a hit-and-miss type of play". CNOOC earlier this month won approval from the Committee on Foreign Investment in the United States for its $15.1 billion purchase of Canadian oil-sands operator Nexen Inc - the biggest overseas acquisition by a Chinese entity. The Treasury Department-led committee had a say in the deal because Nexen's assets included drilling operations in the Gulf of Mexico.

Arif said he didn't think that resolution of the Nexen deal after controversy over CNOOC's role had much to do with Chesapeake's venture with another China-based oil company.

"I think the bigger test will come if you see a Chinese company taking ownership of a corporation in the sector," he said. "Operatorship by a foreign firm would show that things had really changed."

Many parts of the US are seeing the highest production of natural gas in years, due to rich deposits in shale and other unconventional sources now reachable with the technology of hydraulic fracturing, or fracking. But earnings of many producers, including Chesapeake, have been hit by overproduction of shale gas.

The Mississippi Lime formation is known as a site where fracking techniques can be used in drilling for oil, though with limited success.

That could suit oil producers in China, which has the world's largest shale reserves.

Xu Xiaojie, head of global energy research at the Institute of World Economics and Politics in Beijing and a former CNOOC executive, told China Daily in January that gaining expertise in the concurrent pumping of oil and gas from shale formations could be more cost-efficient in China.

The country, Xu said, could treat shale gas as a "bridge fuel" that helps it transition from coal and petroleum toward the ultimate goal of relying on renewable energy sources.