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WSJ 2nd UPDATE: Cnooc, Sinopec, Saudi Aramco Vying For Frac Tech Stake

Thursday, Dec 15, 2011

By Dinny McMahon and Chester Yung

Of THE WALL STREET JOURNAL

Two of China's major oil producers are bidding for a stake in a U.S. company that makes and operates equipment used to extract natural gas from shale rock, another step toward China potentially tapping its own huge reserves of a type of gas that has helped the U.S. reduce its dependence on energy imports.

According to a person familiar with the situation, Cnooc Ltd. and China Petrochemical Corp., known as Sinopec, as well as state-controlled Saudi Arabian Oil Co. are each in talks to buy a 30% stake in Texas-based Frac Tech Holdings LLC, in a deal that could be worth about $2 billion.

For Sinopec the bid comes amid an aggressive expansion into natural gas. On Tuesday its China Petroleum & Chemical Corp. unit--also known as Sinopec --together with piped-gas distributor ENN Energy said they were willing to spend up to $2.15 billion to acquire all outstanding shares in Hong Kong-listed China Gas Holdings Ltd., which has an extensive gas distribution business in China.

Late Wednesday, China Gas said the bid "fails to reflect its fundamental value." People close to the deal say Sinopec is likely to push on regardless.

China has long relied on its abundant supplies of coal to fuel the energy needs of its fast-growing economy, but Beijing's priorities are changing as an increasingly affluent population becomes less tolerant of the pollution that shrouds many of the country's major cities. China is now ramping up imports of cleaner-burning gas, having signed long-term contracts with suppliers from Australia, Qatar and Indonesia, and is building a pipeline through Myanmar intended in part to tap offshore gas supplies, its second pipeline after one linking it to Turkmenistan.

But it is also hoping to exploit its own reserves. In recent years the development of cost-effective technology to extract oil and gas from shale rock--which has traditionally been more difficult than tapping conventional deposits--has transformed the U.S. energy sector. Oil and gas trapped in shale are extracted by fracturing the underground rock and then pushing water and chemicals through the cracks to release hydrocarbons, a process called fracking.

According to a report earlier this year by U.S. Energy Information Administration, China's technically recoverable shale gas reserves are almost 50% greater than those of the U.S. However, commercial production is being held back by harsh terrain where many of the deposits are located, a lack of technology necessary to extract the gas and regulatory uncertainty. China has yet to outline terms for production-sharing contracts between foreign and state-owned companies.

PetroChina Co. has said it discovered shale gas in the western province of Sichuan with the help of Royal Dutch Shell PLC. The amount of reserves hasn't been determined.

Chinese firms have scoured the globe for energy resources, often ending up in remote and politically marginalized areas shunned by the Western majors. Access to the necessary technology would be a major step toward tapping resources in their own backyard, and elsewhere.

According to the person familiar with the Frac Tech talks, the company is also close to finalizing joint ventures with Sinopec in China, Repsol YPF SA in Argentina, and Saudi Arabian Oil--known as Saudi Aramco --in the Middle East. Frac Tech will take a 49% stake in each joint venture, with the foreign partner taking the remainder. The person said the funds raised from the stake sale would help Frac Tech's international expansion.

Frac Tech is currently 70%-owned by a consortium led by Singaporean state-owned investment firm Temasek Holdings but also includes sovereign wealth funds Korea Investment Corp., China Investment Corp. and the Abu Dhabi Investment Council. The remaining 30% is held by U.S. natural gas company Chesapeake Energy Corp.

Sinopec's involvement in this flurry of gas deals speaks to the ambitions of its chairman, Fu Chengyu, who has steered a wave of mergers and acquisitions since he took the job in May. Formerly chairman of Cnooc, Mr. Fu is best known outside of China for that company's bold attempt to buy U.S. oil firm Unocal Corp. six years ago, an effort that failed in the face of political opposition in the U.S.

Assuming Sinopec does push ahead with its bid for China Gas, it would be the first time a Chinese state-owned firm has made a hostile offer for a Hong Kong-based company, according to data providers Dealogic.

The bid comes after shares in China Gas fell up to 50% following the arrest of two senior executives last December on suspicions of embezzlement. Neither has been charged and the current status of the case couldn't be learned. Sinopec and ENN Energy are pitching themselves as a stronger management team that can help China Gas put the corporate governance scandal behind them.

-By Dinny McMahon in Beijing and Chester Yung in Hong Kong, The Wall Street Journal; denis.mcmahon@wsj.com

--Polly Hui and Alison Tudor in Hong Kong and Wayne Ma in Beijing contributed to this article.

(END) Dow Jones Newswires

15-12-11 1111GMT