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Sinopec Takes Stake in Canada's Unconventional Gas Patch

China's largest producer, Sinopec International Petroleum Exploration and Production Corp., is grabbing access to Canada's unconventional plays in northeastern British Columbia and the Deep Basin of Alberta through a C$2.2 billion cash deal with Calgary's Daylight Energy Ltd.

Sinopec's offer on Sunday of C$10.08/share in cash is 70% higher than Daylight's average price in the last 20 trading days.

Daylight assets primarily are in the Deep Basin of Alberta and northeastern British Columbia, where it has 69 oil and gas fields. In the second quarter the independent produced 140 MMcf of natural gas and 13,400 b/d of light oil and natural gas liquids. For the first half of this year output averaged 38,000 boe/d, and in 2010, Daylight produced 41,161 boe/d. The upstream player was listed on the Toronto Stock Exchange in 2004.

The all-cash offer by Sinopec "recognizes the highly attractive asset portfolio and exceptional team that we have assembled," said Daylight CEO Anthony Lambert. "The efforts and accomplishments of this team will be built upon through increased investment in the business and acceleration of our development and exploration opportunities."

Most of China's producers, including Sinopec, have been focused on buying into Canada's oilsands and oil-related projects. In 2010 Sinopec and China National Offshore Oil Corp. (CNOOC) were among the biggest national oil company spenders in the world, outspending the majors for the first time, according to Wood Mackenzie (see Shale Daily, Jan. 27).

In 2010 Sinopec paid C$4.65 billion for a 9% stake in oilsands producer Syncrude Canada Ltd. Sinopec also is a financial backer of Enbridge Inc.'s Northern Gateway pipeline, which is to ship crude oil from Alberta to the Pacific Rim. In July CNOOC made a C$2.1 billion deal to buy bankrupt OPTI Canada Inc. PetroChina International Ltd. earlier this year moved to acquire a stake in Encana Corp.'s gassy Cutbank Ridge assets in northeast British Columbia and northwest Alberta but that deal ultimately fell through (see Shale Daily, June 22).

The purchase of Daylight's assets by Sinopec could be in response to potential liquefied natural gas (LNG) exports to thirsty markets in Asia. Sinopec already has a binding sales agreement in place to receive 4.3 million metric tons a year of LNG from the under-construction Australia Pacific LNG project.

Two LNG export terminals are on the drawing board for Kitimat, BC, that would carry gas supplies from the Horn River Basin and other gas plays in the region to the Pacific Rim. Canadian subsidiaries of Apache Corp., EOG Resources Inc. and Encana Corp. expect to make a final decision about whether to move forward with the KM LNG facility early in 2012 (see Shale Daily, Oct. 6). KM LNG already has received government approvals to export up to 1.4 Bcf/d at full capacity. A competing Kitimat export proposal, BC LNG Export Co-Operative LLC, also is working its way through regulatory approvals and lining up customers.

"The LNG gap between Asian supply sources and demand increases from less than 1 Bcf/d in 2010 to about 24 Bcf/d in 2020," said Encana's David Thorn last week. He is vice president of marketing. The Kitimat project would help expand Encana's gas markets, he said.

Sinopec's offer of C$10.08/share is a 43.6% premium over Daylight's 60-day weighted average trading price on the Toronto Stock Exchange, which Friday closed at C$4.59. The transaction is subject to court and regulatory approvals, as well as approval by two-thirds of Daylight shareholders. Daylight's board of directors, which together with company officers represent about 6.7 million common shares, already has unanimously approved the arrangement.

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