A multibillion-dollar natural gas deal between Encana Corp. and PetroChina International Investment Co. Ltd. has foundered amid unresolved issues over how to oversee the joint venture's efforts to pull massive volumes of natural gas from the forest and muskeg of northeastern British Columbia.
Nearly a year after their partnership was announced – and four months after the $5.4-billion price tag was revealed – PetroChina and Encana said Tuesday that their deal has died.
The scuppered venture shows how Chinese firms are demanding greater control over their Canadian energy investments. That has proven to be an especially important consideration with the pools of so-called "shale gas" that formed the heart of the deal. Chinese authorities have estimated China is home to some 900 trillion cubic feet of shale gas – a surpassingly vast resource – and has looked to foreign investments as a way to secure the technological expertise to tap it.
At the same time, growing global demand for Canada's natural gas has helped advance a series of projects to export the energy to Asian countries, where it can fetch higher prices. That has raised landholders' expectations of the value of B.C. gas resources and complicated sales negotiations.
Still, the inability to secure the deal, which was deliberately announced as part of Chinese president Hu Jintao's visit to Canada last year, serves as a setback for PetroChina and Encana, which is now working to secure other joint ventures.
It is the second major Chinese deal to fail this year, after China Minmetals Corp. abandoned its $6.3-billion takeover of Equinox Minerals Ltd. when it was outbid by Barrick Gold Corp.
The problems with the Encana deal appear to be rooted in a struggle for control, which may point to future problems with resource investments from Chinese companies. Until this point, they've largely been content taking a passive investment stance.
Encana itself offered little detail on what went wrong. "The parties were unable to achieve substantial alignment with respect to key elements of the proposed transaction, including the joint operating agreement," Encana said in a statement.
But a source close to PetroChina said the two sides struggled to agree on "how to run" the joint venture after an initial two-year period where Encana would lead development of the 50-50 partnership. The deal would have given PetroChina ownership over 255 million cubic feet of natural gas production per day, one trillion cubic feet of proved reserves, and 635,000 acres of land in Alberta and British Columbia.
One of the main issues was "how to jointly operate those gas fields," the source said.
When Encana announced the $5.4-billion deal in February, payment and operating details were still up for negotiation.
Previous joint ventures with Chinese firms have avoided some of those issues in several ways. For one, they have provided an out, as with the Athabasca Oil Sands Corp. deal with PetroChina, which includes a put-call option that allows either side to force PetroChina to buy out Athabasca at a set price. The Athabasca deal is also unique in that it involves two assets in which PetroChina has 60-per-cent ownership but Athabasca retains operating control.
What's clear is that the dissolution of the PetroChina deal is unlikely to leave either company unscathed. CIBC analyst Andrew Potter said Encana, whose shares fell nearly 2 per cent Tuesday, has "a lot" of egg on its face for twice announcing a deal that eventually crumbled.
"There was already enough frustration with investors about them flip-flopping on their strategy," he said, referring to a bold plan to double growth in five years that Encana backed away from in April. "The joint venture was a pretty key element of getting people past that. Then to see this blow up on them, it's unfortunate."
For China, the failure of what would have been its biggest North American investment "is a huge loss of face," said Michal Meidan, an Asia analyst with risk management firm Eurasia Group. "To announce such a deal is pretty big and the Chinese are big on announcements."
In Calgary, speculation has also surfaced that PetroChina may be more interested in partnering with Royal Dutch Shell PLC, which has a major position in northeastern British Columbia and is working with Mitsubishi Corp. and Korea Gas Corp. to plan a liquefied natural gas export terminal on the coast. Earlier this week, PetroChina parent China National Petroleum Corp. said it had agreed to co-operate with Shell on gas projects around the world.
Still, the failed deal raises deeper questions about Canada's ability to negotiate contracts with foreign parties. Those who have negotiated joint ventures say that agreeing to price is typically less difficult than sorting out governance issues. Culture plays a part: Canadian companies often give substantial authority to geologists and other professionals in determining how to develop new resources. Foreign companies – both European and Asian – often demand more high-level executive control, and the differences can prove difficult.
Still, few expect the botched deal to derail Chinese spending plans in Canada. PetroChina, for example, has established a permanent Calgary office. Only 10 days ago, it sent representatives to an investment workshop in the city.
"I'm not a pessimist about Chinese investment. This is going to be an important part of our country's history over time. There are going to be successes and failures. We have to get used to that fact," said Gordon Houlden, a former diplomat who now serves as director of the University of Alberta's China Institute.
"But they're not going to go away. This is just a setback in a very long story."