Korea National Oil Company Acquires Canada's Harvest Energy Trust for $3.9 Billion

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Researched by Industrial Info Resources (Sugar Land, Texas)--In a move to increase South Korea's self-sufficiency in oil and gas, state-owned Korea National Oil Company (KNOC) (Anyang, South Korea) has agreed to purchase the Canadian energy company Harvest Energy Trust (NYSE:HTE) (Calgary, Alberta) for $3.9 billion.

Under the terms of the deal, KNOC will pay $1.7 billion for Harvest Energy's issued and outstanding trust units and will assume an additional $2.2 billion of Harvest's overall debt, consisting of more than $1 billion in bank loans, $868 million in convertible debentures, and $237 million in senior notes.

As of March this year, KNOC had 230 million barrels of oil in reserves in Saskatchewan and Alberta, with a refining production capacity of about 75,000 barrels per day (BBL/d). The acquisition of Harvest Energy's assets will increase these figures to more than 380 million barrels in reserves and up to 126,000 BBL/d in production capacity.

At the end of last year, Harvest Energy's reserves were reported to be about 154 million barrels of oil or its equivalent, split between 70% crude oil and 30% gas. Last month, the company reported to investors that it was producing about 50,000 to 51,000 BBL/d. In addition, the company owns a hydrocracking refinery and associated assets in eastern Canada's Newfoundland province, as well as an upstream business in western Canada.

KNOC is reportedly looking at increasing production capacity in Canada through further investments. In 2006, KNOC bought an oil sands lease from Newmont Mining Corporation (NYSE:NEM) (Denver, Colorado) and intends to develop that operation in conjunction with Harvest Energy's assets.

South Korea, like many countries in the region, is dependent on imports to meet domestic energy requirements. The acquisition of Harvest Energy's assets is in line with the South Korean government's long-term strategy of obtaining reserves to minimize disruptions to supplies. Currently, South Korea's oil and gas reserves enable it to meet up to 6.3% of domestic demand. The latest deal will increase this figure to about 8% and will move KNOC's total production capacity closer to the government's planned figure of 300,000 BBL/d by 2012.

The latest acquisition by KNOC, although the largest ever by the company, follows other acquisitions in recent years, all aimed at boosting the country's self-sufficiency. In February this year, KNOC joined forces with the oil company Ecopetrol SA (NYSE:EC) (Bogota, Columbia) to jointly acquire Offshore International Group Incorporated (Houston, Texas) for a reported $900 million on a 50:50 basis, giving it access to a share of 100 million barrels in reserves and production capacity of 12,000 BBL/d.

Last year, KNOC joined forces with Samsung Corporation (Seoul, South Korea) to purchase the oil and gas properties of Taylor Energy Company LLC (New Orleans, Louisiana) in the Gulf of Mexico. The properties include five producing fields and a total production capacity of about 17,000 BBL/d.

However, KNOC missed out on a further acquisition in June this year when China Petroleum and Chemical Corporation (SHA:600028) (Sinopec) (Beijing, China) outbid KNOC with a bid of $7.2 billion to acquire Addax Petroleum (LSE:AXC) (Geneva, Switzerland), which has assets in Iraq and West Africa.

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