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Exclusive: In rare China sale, Sinopec seeks partner for Canada shale

A Sinopec sign displayed at its gas station is seen behind a Chinese New Year lantern installation in Hong Kong February 5, 2013. REUTERS/Bo
A Sinopec sign displayed at its gas station is seen behind a Chinese New Year lantern installation in Hong Kong February 5, 2013. REUTERS/Bo

By Chen Aizhu

BEIJING (Reuters) - Sinopec Group wants to sell half of its two biggest shale gas acreages in Canada to spread costs and accelerate their development, as the Chinese energy company focuses increasingly on return of investment, an executive said.

A sale of an overseas asset would be a rare move for one of China's state-owned energy companies, which have spent hundreds of billions of dollars investing in hydrocarbon resources from North America to Australia to secure China's energy needs.

"We are not only buyers, but also actively seek joint venture partners to optimize assets," said Feng Zhiqiang, newly appointed chairman of North America operations of Sinopec International Petroleum Exploration and Production Corp, Sinopec Group's main acquisition vehicle.

"There is no such thing that a state-owned company's job is only to obtain resources. Scale is important, profitable scale is more so," Feng told Reuters in an interview.

Sinopec Group, the parent of top Asian refiner Sinopec Corp, is looking for an equal equity partner for Montney and Duvernay, two shale gas plays totaling about 500,000 acres (2,023 sq. km) in Western Canada. They are part of Daylight Energy that Sinopec acquired in 2011 for more than $2 billion and later expanded.

A sale could be viewed positively in Canada where a landmark $15.1 billion acquisition of domestic company Nexen by state-owned Chinese oil firm CNOOC Ltd earlier this year generated intense political debate and a policy backlash.

Feng declined to give a price tag for the stakes in the acreages but said their combined recoverable reserves were in the range of tens of trillion cubic feet.

Thanks to successful exploration and a low purchase price, Sinopec has boosted the value of Montney "many times over", but the drilling required to monetize the unconventional resource was too heavy for Sinopec to handle alone, said Feng. Sinopec wants to remain the operator.

STEPPING UP EXPANSION

Sinopec, which supplies nearly half of the Chinese oil market, has so far spent $10 billion in Canada, around 14 percent of its total overseas investments.

It pumps an oil equivalent of 3.5 million tonnes (1 tonne= 1.102 metric tons) a year, or 70,000 barrels per day, from its two main acquisitions there - heavy oil producer Syncrude and shale gas-focused Daylight Energy.

That is a fraction of the nearly 5 million barrels a day Sinopec buys from the international market to supply refineries in China.

As a result of very high development costs and weak gas prices following the U.S. shale boom, Sinopec's Syncrude operations have so far generated returns below expectations, and Daylight is still seeing negative cash flows, said Feng.

Despite that, Sinopec wants to accelerate expansion over the next few years in Canada, potentially a major and stable supplier to China, which overtook the United States last month as the world's top net oil importer. Canada holds the world's third-largest oil reserves after Saudi Arabia and Venezuela.

Sinopec also hopes to be a sizeable gas player in Canada building on the Daylight business, targeting annual capacity of 10 million tonnes of liquefied natural gas by around 2020 to help feed China's rapidly growing demand for the cleaner fuel.

"There are few other pairs of countries like Canada and China that best complement each other," said Feng.

But regulatory hurdles and lack of key infrastructure may hinder the growth of the Canadian energy sector, said Feng.

In the wake of CNOOC's Nexen purchase, the Canadian government has raised the bar for future acquisitions by state-owned enterprises of its vast oil sands reserves, limiting them to minority stake holders.

Provincial authorities of British Columbia are holding up due to environmental concerns approval of the $5.8 billion, Enbridge Inc-owned Northern Gateway pipeline, a main artery to the country's west coast and key to boost Canadian oil exports to Asia. Sinopec owns 5 percent of the proposed pipeline.

Changing market conditions have brought Sinopec many takeover targets, but it will be picky and aim for "fair price" deals, said Feng.

"Many companies are chasing us as a lot of oil sands and gas companies are in financial difficulties. But most of them still have very high expectations and believe that Chinese or Asian companies are ready to pay significant premiums," he said.

(Editing by Muralikumar Anantharaman)

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