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Wednesday, February 23, 2011

Natural Gas Market Activity Bodes Well for Western Canadian Commercial Real Estate

Calgary’s commercial real estate market continues to emerge from the lows witnessed 2009, spurred on by an increase of development and investment in Western Canada’s energy market. As the commercial real estate market in Calgary is directly correlated to energy investment in Western Canada, confidence in Western Canada’s energy market begets confidence in the Calgary real estate market.

Although the some of the largest recent investments into Western Canada’s energy sector have been geared towards the oil sands (Athabasca Oil Sands Corp.’s $1.35B IPO, Sinopec Corp.’s $4.65B investment into Syncrude Canada Ltd, or CPP’s announcement of a $250M investment into Calgary-based Laricina Energy), the single largest investment recently announced has involved our natural gas industry and was PetroChina announcing that they are going to acquire a 50 percent Interest in Encana’s Cutbank Ridge Business Assets for C$5.4 Billion. The assets cover 1.3 million acres of land, approximately 700 mmcf/day processing capacity, and 3,400 km of pipelines.

I find this an interesting announcement because PetroChina, a subsidiary of state-owned China National Petroleum Corporation (CNPC), will likely have incentives to develop the Cutbank Ridge lands that will run parallel with their interest in gaining exposure to long term North American shale gas plays. One such incentive is China’s own vast shale gas formations which they are looking to unlock with expertise they gain abroad. Another incentive is China’s current reliance on coal powered energy, which they are looking to dramatically reduce.

I think that in an era where expiry driven natural gas drilling has created a glut in the market and skewed typical supply and demand economics against drilling companies, a group such as PetroChina who is drilling/developing energy plays with long term socioeconomic motives will work to balance this skew.

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