Thursday July 24, 2014

The Almighty Dollar

Encana knows the value of foreign investment
Encana Photo

One of Encana's projects in the Montney natural gas play of northeast British Columbia. Investment from Asian companies is helping Encana develop their assets in that play, as well as their coalbed methane and Duvernay shale gas assets in Alberta.

As the Canadian business world was closely watching the drama around the impending acquisitions of Canadian oil and gas companies Nexen and Progress Energy Resources, Encana was quietly going about their business – the business of securing foreign investment to help them unlock the potential of their natural gas assets in western Canada.

"Foreign investment is awfully important to the upstream oil and gas industry. It is, has been and always will be," said Richard Dunn, vice president of regulatory and government affairs with Encana's Canadian division.

Encana has demonstrated their whole-hearted belief in that idea over the past few years.

After a joint venture deal with PetroChina to develop their Cutbank Ridge assets in northeast British Columbia fell through in the summer of 2011, following a year of negotiations, Encana continued to seek partners from across the Pacific Ocean.

The Canadian natural gas giant signed a $2.9 billion agreement with Mitsubishi Corporation on Feb. 17 2012 to develop those same Cutbank Ridge assets, the Japanese company acquiring a 40 per cent interest in the project.

Encana would continue to be the operator of those assets, as well as the managing partner of that new Cutbank Ridge Partnership.

Subsequently, Japan's Toyota Tsusho Corporation announced that they would be investing $602 million in exchange for a 32.5 per cent royalty interest in natural gas production from Encana's coalbed methane project in southern Alberta.

"We have another significant [partnership] with KOGAS (Korea Gas Corporation) … up in the Horn River area," said Dunn.

"The industry is roughly $50 billion a year of capital that goes in," he added, noting that growth of the industry requires that a portion of that investment come from foreign sources.

Encana has a variety of reasons for seeking foreign investment, depending on the circumstances of the play under discussion.

For example, the KOGAS and Mitsubishi investments concern assets where there is no longer any associated exploration risk and the investment dollars can be put toward production in those fields.

In the case of Toyota Tsusho's investment in coalbed methane, the funds are simply used to keep a mature asset producing.

Previously, the majority of the investment in the Canadian industry has come from the United States and Europe, but, as shown by Encana's recent partnerships, an increasing amount of that investment is now coming from Asia.

Dunn doesn't believe that is an issue for their local stakeholders.

"I think that there's recognition that Canada has very strong … regulatory regimes that ensure effective management of upstream oil and gas activities," said Dunn. "And I think that that's certainly one area that provides an awful lot of comfort – that we all play by the same rules."

Dunn also noted that Encana has maintained the role of operator in all of their partnerships and joint ventures.

"So, they continue to see the Encana name."

"And the reality is that these investments are critical to the local economy," he said, adding that those economic benefits then extend to the province and the nation.

"This partnership with Mitsubishi that we have in the Montney, for example, is expecting to create some 14,000 ongoing jobs across Canada," he explained. "And this would be direct, indirect and induced. So, this is all the way from people working on the rigs to people in the hotels in the service industries."

Dunn added that 10,000 of those 14,000 jobs would be in B.C. alone.

"These are huge impacts on the economy. And there's an awful lot of people that are working as a result of this foreign investment."

Dunn also explained that Canada is quite attractive to foreign investors, particularly those in Asian countries that are looking at Alberta oil and B.C. natural gas as answers to their energy questions.

"What Canada offers from a competitive advantage standpoint is a stable, secure source of energy," said Dunn. "And this is strategic energy for these Asian countries. And the foreign investment is attracted in recognition of that."

That security is best achieved, according to Dunn, when those companies are able to own a stake in the upstream side of the industry, as well as the part of the industry where natural gas is liquefied and exported in the form of LNG, as an example.

"It certainly provides a level of security that other competitors to Canada may not be able to provide," he said.

"I think that people recognize why foreign investment – in particular, Asian investment – is coming," he continued. "It's in anticipation of export of that energy supply to Asia.

"Certainly, it's widely understood, for example, in Japan, with the unfortunate tsunami, that they've moved away from nuclear and moving towards natural gas as a greater source of energy supply for their electricity.

"I think the public sees that connection."

Dunn suggested that the supply and demand dynamics of the industry today are making it essential for Canada to see investment from Asia.

North America has a glut of natural gas.

"The United States does not need our natural gas resources to the extent that they did because they're developing their own," said Dunn.

"We have this wealth of resource opportunity [and] our traditional customer doesn't need us to the extent they did," he continued. "So, we're looking for alternative markets, which … most likely will be Asian markets. To that extent, we offer a stable, secure supplier. And part of that security is the ability for Asian companies to invest in the whole value chain."

However, the situations with Nexen and Progress were a different story.

While Encana was inking partnerships and joint ventures with Asian companies, Nexen and Progress were facing outright acquisition by two state-owned enterprises, China Offshore Oil Corporation (CNOOC) and Malaysia's Petronas, respectively.

That prospect raised concerns from the general public and the federal government in terms Canada realizing a net benefit from the takeovers of Nexen and Progress, which must be the case for the government to approve such acquisitions of Canadian firms by foreign companies.

The federal government did eventually approve those deals on Dec. 7, but also subsequently announced changes to the rules concerning foreign investment by state-owned enterprises. The message was that Canada would prefer investment from private companies and only tolerate minority investment from state-owned enterprises in the form of partnerships or joint ventures where the Canadian companies remain the majority stakeholder.

Shortly after that announcement, Encana unveiled a new joint venture partnership with a subsidiary of PetroChina – a state-owned enterprise – to develop their assets in the Duvernay shale gas play of western Alberta.

Dunn said the deal fits perfectly with the federal government's new policy.

"The government's still very much interested in [promoting Canada] as a good place to invest in natural resources," he said of the policy. "And [it] is a signal that this sort of a deal, this sort of a joint venture where it's a non-controlling interest, certainly, by a foreign state-owned entity, is a preferred way to go."

It is also an ideal situation for Encana.

"We have an awful lot of opportunity in the Duvernay," said Dunn. "The Duvernay is in the very early stages. It's a liquids-rich natural gas play. And, as such, early indications have been very prospective. But we need to learn a lot more about the play and we need to get our development costs down."

Dunn said that the investment by PetroChina allows Encana to "accelerate the learnings in the play and start to unlock the potential of the play."

The new partners will be spending about $4 billion over the next four years to test the Duvernay.

"To get to the point where it's economic and profitable," said Dunn.

"Certainly, there's a lot of potential there, but we're in that phase – that early life phase – of unlocking that potential."

It also puts the pieces in place for the long-term development of the resource over the next twenty years or so.

"It allows us to unlock it, but also allows access to the significant capital through our partner that will enable the development of the play," said Dunn.

That underscores the value of foreign investment in Canada's industry.

"We're long on opportunity," said Dunn.

"And short on capital to develop that opportunity."

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