Texas Land (and Oil and Gas) Grab: What China's CNOOC Will Get for Its $2.16B

Last Updated Oct 12, 2010 5:37 PM EDT

China's state-owned oil company, CNOOC (CEO) has agreed to invest as much as $2.16 billion in Chesapeake Energy's (CHK) Eagle Ford Shale oil and gas project in Texas. But the deal doesn't signal a renewed attempt by China to buy up a U.S. energy company like its failed bid in 2005 to buy Unocal. Nor is it the beginning of some Chinese blitzkrieg of U.S. shale assets. China just wants something more valuable: our technology. And in this case, it may not be such a bad idea.

CNOOC will pay $1.08 billion in cash for a 33.3 percent undivided interest in Chesapeake's 600,000 net oil and natural gas leasehold acres in the Eagle Ford project, according to a release outlining the deal. CNOOC has agreed to fund Chesapeake's share of drilling and completion costs until an additional $1.08 billion has been paid, which is expected to occur by the end of 2012.

The benefit to Chesapeake is obvious enough, since the U.S. oil and gas producer has embarked on several similar joint venture deals in the past. For instance, French-based Total (TOT) bought in January a 25 percent interest in Chesapeake's Barnett shale assets for $800 million in cash at closing and planned to pay an another $1.45 billion by funding 60 percent of the company's share of drilling and completion expenditures. Sound familiar? It should. CNOOC is the fifth similarly structured deal that Chesapeake has entered into in past two years. The company also has struck joint venture deals with BP, Plains Exploration & Production (PXP) and Statoil (STL).

Chesapeake will get the cash needs to boost its drilling operations. In this case, Chesapeake expects to increase drilling activity from the 10 rigs it's currently operating to 40 by the end of 2012. The company anticipates the project will reach peak production of up to 500,000 barrels of oil equivalent per day in the next decade.

So back to CNOOC. The offshore oil and gas company would very much like to learn more about horizontal drilling and hydraulic fracturing, two methods created and widely used in the U.S. to access hard-to-reach -- and once impossible-to-reach -- unconventional oil and gas. Chesapeake is one of the companies that has perfected unconventional drilling. And knowing how to employ these methods makes drilling for unconventional gas and oil more economical.

As Amy Myers Jaffe of Rice University's Baker Institute for Public Policy noted, China is dependent on U.S. companies such as Exxon (XOM), Chevron (CVX) and Shell (RDS) to drill for shale there.

China needs boost its energy supplies. Leaving the country two options: homegrown resources or buying LNG (liquefied natural gas) and other fossil fuels from nearby areas. It's not going to get those resources from Chesapeake's Eagle Ford shale project. The cost alone of converting natural gas to into LNG and shipping it from the U.S. to China makes that a non-starter.

A conventional, more protectionist approach would be to guard the technology. Why would we want to hurt Exxon or Chevron's business? Because a China that uses more natural gas will hopefully use less coal, its primary resource for energy.

Photo from Flickr user peruisay, CC 2.0
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