Mitsubishi Enters Canadian Natural Gas Market in Agreement with Penn West

August 24, 2010

In a demonstration of the recent foreign interest in Canada’s natural gas potential, Mitsubishi Corporation of Japan has signed an $850 million joint venture agreement with Canada’s Penn West Energy Trust.

The Mitsubishi deal is one of many recent transactions by Asian buyers who have been spending billions of dollars in foreign natural gas investments.

The Korea Gas Corporation of South Korea and China’s National Petroleum Corporation have been injecting capital into drilling operations conducted by the Encana Corporation within the Horn River and Montney shale gas regions in northeastern British Columbia.

Penn West is selling Mitsubishi its investment in the Wildboy and Cordova Embayment formations in northeastern British Columbia, where the natural gas is trapped within dense rock, making it more difficult to extract.

Mitsubishi agreed to put down $250 million to cement the deal, with another $600 million allocated for development of both areas, in return for a 50% investment in the operation.  The investment breaks down to approximately $50,000 per flowing barrel equivalent.

Earlier this year, Penn West also signed a partnership with China Investment Corporation which paid $1.25 billion in return for a 45% interest in a region of northern Alberta containing heavy oil.

Analysts suggest that this recent interest in foreign energy investments by Japan, China, India, and Korea are a result of a lack of high-growth risk capital investments within their own countries.

Although natural gas prices are currently at the lowest levels for 2010, at approximately $3 per thousand cubic feet, investors are still rushing to North America to pump capital into natural gas, which is seen as a relatively-clean energy source in comparison with coal and oil.

Three years ago, many Asian companies began entering into the Canadian natural gas market.  French and Indian companies have been focused on investing in regions within the United States.

British Columbia’s natural gas resources are particularly attractive due to their overwhelming size.  Mitsubishi estimates their investment in British Columbia to be able to increase from 30 million cubic feet of natural gas a day to 500 million cubic feet a day.  That projected amount is still a little less than 10% of Canada’s daily consumption.

An incentive to the Asian interest in British Columbia’s natural gas reserves is the recent announcement by EOG Resources Inc. and Apache Corporation of their plan to create a $3 billion coastal port in Western Canada to export liquefied natural gas.

Fourteen percent of Japan’s current energy consumption comes from natural gas, a percentage which is expected to rise in the future.  Japan currently imports natural gas from Indonesia, Australia, Malaysia, Qatar and Brunei.