Analysts remained cautious about the profitability of the multibillion-dollar deal.

In a statement released on Tuesday, Husky said: "These discussions are part of Husky's commitment to enhance shareholder value. There can be no assurances that any transaction will occur."

The statement came after Reuters new agency, citing unnamed Chinese sources, reported on Tuesday that PetroChina had been working on a US$4.4 billion bid for Husky's assets, which include oil and gas operations in western Canada and off the country's east coast.

But Erwin Sanft, an analyst with financial-services firm Credit Lyonnais Securities Asia (CLSA), wrote in a report that a purchase at the US$4.4 billion price would not be cheap. It would represent US$5 per barrel of oil equivalent, compared to PetroChina's current valuation of US$2.50 per barrel of oil equivalent.

Sanft said in the report:''The math doesn't look particularly attractive, but overseas acquisitions are the only way PetroChina is going to grow."

Analysts said the potential deal mirrors PetroChina's ambition to secure overseas reserves to sustain its growth given that its domestic reserves are waning.

PetroChina's oil output in 2001 fell 0.2 percent to 2.1 million barrels a day.

Another analyst said it would be possible for PetroChina to acquire Hutchison Whampoa's 35 percent stake in Husky's assets.

The unnamed analyst said he would not rule out the possibility of PetroChina borrowing funds to finalize the deal.

"PetroChina has cash in hand but it needs to spend more than US$1 billion a year in the US$5.6 billion west-east gas pipeline. I think they will borrow money if the deal goes through," said the analyst.

CLSA said PetroChina has US$2.5 billion in cash reserves. If the Chinese oil major pays US$4.4 billion for Husky assets, its net debt-to-equity ratio could rise from 19 percent to 33 percent, in line with the company's long-term gearing target of 30 to 40 percent.

Husky's stock was halted on the Toronto Stock Exchange after reports on Tuesday. The stock soared when trading resumed, closing up 13.7 percent at 17 Canadian dollars, its highest level since November.

Husky's shares had dropped by a quarter since late September, when the company disclosed that it had been in assets-acquisition talks with other suitors that failed to produce an agreement.

Analysts said Phillips Petroleum Co, the fifth-largest United States oil company, and Canadian Natural Resources Ltd were other potential buyers of a stake in Husky.

PetroChina's potential purchase has ignited fresh enthusiasm among Chinese oil companies to seek more overseas reserves.

Oil imports account for almost one-third of the Chinese mainland's total oil consumption. It is estimated that, in the coming 10 years, domestic demand for oil could rise by 4 percent annually, while production will increase by only 1.3 percent a year.

In January, subsidiaries of PetroChina's parent China National Petroleum Corporation agreed to pay US$52 million to buy a 30 percent stake in each of two oil fields in Azerbaijan.

One week later, rival China National Offshore Oil Company Limited, China's third largest, finalized a US$598 million acquisition deal for some working interests in oil assets in Indonesia from Spanish oil giant Repsol YPF.

(China Daily February 21, 2002)