Encana Corp. said Wednesday it entered a 5.4 billion-Canadian-dollar (US$5.43 billion) deal with PetroChina Co. to develop hard-to-reach natural-gas reserves, further deepening the energy ties between Canada and China.
The agreement comes as Canadian oil and gas producers are seeking customers outside North America, which is currently awash in both fuels. In particular, they are targeting Asia, where energy prices are higher and demand is growing quickly.
Calgary-based Encana, one of North America's largest gas producers, said it and PetroChina will split the costs and profits from developing so-called shale and deep gas wells in a 635,000-acre area stretched across northeastern British Columbia and northwestern Alberta. The area, called Cutbank Ridge, has proven reserves of about 1 trillion cubic feet of natural gas and current production of 255 million cubic feet a day.
Encana and PetroChina signed a memorandum of understanding last summer to jointly develop shale gas properties. Encana executives have said they are actively seeking partnerships with foreign investors to help fund the development of a huge inventory of shale gas in western Canada.
"Fundamentally we have a very large resource potential on our lands—more than we can develop on our own," said Encana spokesman Alan Boras.
In a statement on its website, PetroChina said it had been seeking for years to work with major Canadian energy companies, and expects the Encana deal "to provide a platform for entering the major market in North America."
Encana shares, which were down 1.9% Wednesday in 4 p.m. composite trading on the New York Stock Exchange, surged nearly 11% to $34.15 in the after-hours market following news of the PetroChina deal.
The company took its first steps toward teaming up with Asian energy companies last March when it signed a C$565 million development deal, called a "farm in," with Korea Gas Corp., in which the state-owned South Korean utility agreed to shoulder the cost of additional exploration on Encana's land in exchange for a cut of the production.
A similar farm-in agreement was discussed with PetroChina, Mr. Boras said, but the state-controlled Chinese energy company pushed for a direct stake in the company's natural-gas assets.
PetroChina's last major deal in Canada was the C$1.9 billion acquisition in 2009 of a 60% stake in two oil-sands projects in northeastern Alberta owned by Athabasca Oil Sands Corp.
Encana's pact with PetroChina would be one of the largest foreign deals involving a Canadian resource since Canada's federal government struck down BHP Billiton Ltd.'s $38.6 billion attempted hostile takeover of Potash Corp. of Saskatchewan last year, ruling that the world's largest potash producer was of strategic interest to Canada.
However, the type of investment involved in the Encana deal isn't considered an acquisition under Canadian regulations, and so wouldn't be subject to the same degree of scrutiny.
Encana is scheduled to report its fourth-quarter and full-year results Thursday.
In addition to natural-gas properties, the joint venture with PetroChina includes about 700 million cubic feet per day of processing capacity, about 2,100 miles of pipelines and a gas-storage facility. The closing date of the deal depends on various government and regulatory approvals.
Encana owns the licenses covering a large territory in some of the most prolific shale gas basins in both the U.S. and Canada—11.7 million acres in total. It produces 3.3 billion cubic feet of natural gas a day.
As Canada is the No. 1 oil exporter to the U.S., most Canadian energy producers depend on demand from their southern neighbor for the bulk of their revenue. However, Canada has come under criticism for pollution caused by extraction from oil sands, and U.S. lawmakers have raised questions about the safety of a proposed oil pipeline expansion.
As a result, Canada has its eye on developing energy trade with Asia. Two proposed oil-pipeline projects and one proposed liquefied-natural-gas facility would ship energy to Asia from Canada's west coast.