Fortune Oil said it would sell its natural gas business to China Gas for $400m.
Fortune Oil held an 18.4 per cent stake in China Gas as of 16 November, primarily through a joint venture formed last year with one of the company's founders.
China Gas, which sells liquefied petroleum gas and piped gas to residential and commercial users in China, will pay Fortune Oil $200m in cash on completion of the deal and a further $200m as deferred consideration.
Fortune Oil said it could elect to receive the deferred consideration in China Gas shares. A higher stake in China Gas could also potentially give it a say in the management of the company.
China is moving to double the share of gas in its overall energy supply to more than 8 per cent by 2015, when consumption is forecast to reach 260 billion cubic metres (bcm).
"The company intends to be a long-term shareholder in China Gas so as to benefit from the potential growth in this sector in China over the medium term," Fortune Oil said.
The deal is part of an asset restructuring at China Gas, sources with knowledge of the deal said. They declined to be identified as they were not authorised to speak to the media.
Net proceeds from the deal would be used to reduce debt, Fortune Oil said in a statement.
Revenue from Fortune Oil's natural gas business was £59m for the year ended 31 December 2011.