Small but sensible

CNOOC: CNOOC had to withdraw its $18.5 billion bid for US oil producer Unocal in 2005. This time, an investment by the Chinese energy major in a Chesapeake project is unlikely to make big political waves. The deal helps CNOOC gain expertise in unconventional gas business, and has potential to grow in size. Still, big deals in North America look far off for the Chinese.

The deal is designed to be as uncontroversial as possible. With Unocal, CNOOC tried to buy an entire company. Now, it is acquiring a 33 per cent stake in one of Chesapeake's projects. The investment is paid in instalments to make it appear small. The headline size is $1.1 billion, with CNOOC contributing another $1.1 billion by the end of 2012. The price looks reasonable. CNOOC's acquisition cost is about $18 barrels of oil equivalent. That's lower than CNOOC's existing proven reserves, which the market values at $35 barrels of oil equivalent, according to Mirae Asset Securities. Natural gas has been in a bear market due to weak US demand and a flurry of new supplies.

But CNOOC could be buying at a good price, as demand for clean-burning natural gas is expected to outstrip growth in oil and coal. The deal fits CNOOC’s global ambitions. The Chinese group wants to learn how to extract gas from underground rock formations, and Chesapeake is a leading firm in that area. CNOOC also needs foreign deals to drive growth. It entered South America and the Middle East in the first half of 2010, but it needs to break into North America, where the majority of the world’s exploration and production companies are located.

The 4.5 per cent rally in CNOOC shares on the news confirms the deal’s financial merits. Still, CNOOC is barely dipping its toes in the United States.