IHS World Markets Energy Perspective | |
Significance | China Huanqiu Contracting & Engineering Corp. (HQCEC)'s acquisition of 19.9% of total issued shares in Australia's Liquefied Natural Gas (LNG) Ltd will give access to the latter's Optimised Single Mixed Refrigerant (OSMR) technology, which promises to boost its competitiveness as an engineering contractor. |
Implications | For LNG Ltd, the deal will reduce marketing and financing risks for its Fisherman's Landing LNG project, which had been facing supply and investor uncertainties following the acquisition of LNG Ltd's partner Arrow Energy by PetroChina and Shell in 2010. |
Outlook | Looking ahead, HQCEC could exploit increased management influence through the acquisition to explore the potential for partnerships with other companies in which LNG Ltd has a stake, such as Oil Basins Ltd and Metgasco Gas Company. |
Marriage of Convenience
China Huanqiu Contracting & Engineering Corp. (HQCEC)—a wholly owned subsidiary of China National Petroleum Corp. (CNPC)—has signed a strategic framework agreement with Australian gas specialist Liquefied Natural Gas (LNG) Ltd to become the largest shareholder in the company. Under the agreement, HQCEC will subscribe for 53,250,000 shares in LNG Ltd, equivalent to 19.9% of its total value. The shares will be purchased at the lesser of two options. The first option is a rate of A$0.48 per share, a 10.6% discount on LNG Ltd's share trading price for the 180 days to 27 January 2011. The second option for the shares is 80% of the volume-weighted average market price on the Australian Stock Exchange (ASX) calculated over the last five days prior to the issuance date of the placement shares.
Unlike other acquisitions made by CNPC, HQCEC is paying a discounted rate for the stake. The pricing of the transaction reflects LNG Ltd's need to secure partners to advance its Fisherman's Landing Point LNG project, following Arrow Energy's exit from a project partner after its acquisition by Shell and PetroChina in 2010. The pricing is consistent with recent hints from CNPC officials about spending more prudently when making overseas acquisitions (see China: 23 November 2010: CNPC's Overseas Expansion to Place More Emphasis on Project Returns). However, the acquisition serves a number of objectives for HQCEC. First, it gives HQCEC proprietary rights to LNG Ltd Optimised Single Mixed Refrigerant (OSMR) LNG technology. HQCEC has already started developing proprietary LNG liquefaction technology, which it hopes to commission at the Anhui LNG project in China later in 2011. However, LNG Ltd's OSMR technology promises 30% improvements in plant efficiency, cheaper capital and operating costs than competing models, faster construction schedules, and reduced carbon dioxide emissions. Consequently, it can significantly increase the domestic and international competitiveness of HQCEC as an engineering contractor for LNG projects, particularly as the company's experience in liquefaction is still relatively limited.
Second, the agreement opens opportunities for CNPC or HQCEC to invest directly in the coalbed-methane-(CBM)-to-LNG liquefaction facility at Fisherman's Landing Point. Providing LNG Ltd submits a competitive proposal based on the OSMR technology, HQCEC has secured an agreement to be the sole engineering, procurement, and construction (EPC) contractor for the terminal project. HQCEC gains an opportunity to gain familiarity with construction and installation of OSMR technology, which could support its ability to win contracts elsewhere. HQCEC has the option to purchase production from the 3 million t/y planned facility when it launches commercial operations. The LNG purchases would help supply re-gasification terminals under development in China and boosting equity supply volumes—or those CNPC has the right to take and market by virtue of its stakes in projects—improving China's gas supply security. Third, the acquisition builds on CNPC's interest in Australia's emerging LNG export hub of Gladstone, where the company is already preparing to launch front-end engineering and design (FEED) for a new CBM-to-LNG terminal on Boatshed Point, Curtis Island (see Australia: 21 December 2010: Shell and PetroChina Invite Tenders for Planned Australian LNG Terminal Project).
For LNG Ltd, the deal with HQCEC provides funding to underpin the Fisherman's Landing project—crucial for the company's future due to its limited project portfolio. Having had its gas supply source for the project snatched away by Shell and PetroChina, the deal with HQCEC will increase confidence in the project, which probably accounts for the jump in the company's share price following the deal announcement. However, LNG Ltd will have to share management control with HQCEC. Under the agreement, three HQCEC nominees are to be appointed to LNG Ltd's board—a non-executive director, an executive director, and a co-chief executive officer. HQCEC stands to gain strong influence over company management despite only having a 19.9% stake, which could affect LNG Ltd's strategy going forward.
Outlook and Implications
Looking forward, the deal is dependent upon Australian and Chinese government approvals and from LNG Ltd shareholders. LNG Ltd's shareholders are likely to support the deal, which reduces the project's financing risks and also potentially secures a key buyer. Australia's Foreign Investment Board has not opposed acquisitions by China's NOCs in the CBM-to-LNG sector, and HQCEC has been careful to partner with an Australian company to reduce potential state opposition.
Looking forward, the acquisition might also solve some of LNG Ltd's difficulties in obtaining CBM feedstock supplies for its Fisherman's Landing project. LNG Ltd had signed a memorandum of understanding (MoU) with Metgasco Ltd (MEL) for a joint study of gas supplies to underpin the project after Arrow's exit, although uncertainties persisted related to the extent of Metgasco's proven and probable (2P) reserves, still at 381 bcf in 2010. Teaming up with CNPC could either help accelerate assessments of Metgasco's reserves or potentially open opportunities to access CBM from Arrow Energy's vast acreage position in Queensland, where the reserve booking potential remains high.
HQCEC hopes the agreement will open wider opportunities for collaboration with LNG Ltd, which has a shareholding in Oil Basins Limited—an explorer focused on the Gippsland, Carnarvon, and Canning basins—a heads of agreement (HOA) to study gas supply for the Kimberely LNG terminal project, and a minority interest in MEL. CNPC could use LNG Ltd's connections with other projects and companies to expand its foothold in Australia's emerging gas market going forward.