The Encana Edge
Jim Letourneau, P.Geol.
Encana’s decision to divest itself of non-core assets is starting to pay dividends. While one could argue that there are better geological opportunities outside of North America, many of those come with large unquantifiable risks associated with them. Within North America the remaining opportunities of "size" are predominantly in unconventional resource plays. In a peaceful world where there was lots of cooperation between countries on energy matters that strategy might put Encana into the vulnerable position of being the highest cost producer.
*Gives head a shake* I need to remind myself that the world isn't in "love and share" mode.
Encana's Ecuadorian properties were operated by Occidental Petroleum and produced 78,000 barrels of oil a day. They sold these properties for $1.42 billion to Andes Petroleum, a Chinese consortium. The deal closed in March 2006. Fast forward to May and we see that Ecuador has seized Occidental's assets and kicked them out of the country. Talk about dodging a bullet!!! Encana says it is on the hook for a maximum of $284 million. It looks like a very shrewd sale in retrospect. Encana's strategy is going to pay some very big dividends as a parade of US multinationals gets kicked out of greedy resource-rich countries.
It will be interesting to see who ultimately gains control of these assets. Will relations between China and Ecuador take presidence over US-Ecuador relations? Ecuador has had 7 presidents since 1988 and the US has been seen as backing some of the less popular ones. China doesn't have a history of political interference in South America and they're certainly willing to pay up for resources. Having been jilted by the US Congress in their attempt to take over Unocal it is clear that the gloves are off between the US and China over oil.
Jim Letourneau, P.Geol.
May 26th, 2006
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