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Encana gets help from Japan Inks US$2.9B deal for BC shale gas with Mitsubishi, which enlarges Canadian upstream, LNG interests; partially offsets PetroChina Gary Park For Petroleum News
Encana, the largest Canadian-based natural gas producer, has gone a long way to redeeming itself after last year’s aborted US$5.4 billion deal with PetroChina by forming a joint venture with Japan’s industrial conglomerate Mitsubishi to develop shale gas holding in northeastern British Columbia.
If completed by the end of February, the US$2.9 billion deal will see Mitsubishi acquire a 40 percent stake in 409,000 acres at Cutbank Ridge, while lowering Encana’s share of capital funding commitments over the next five years to only 30 percent.
The deal will also bolster potential gas supplies for the Kitimat LNG project, while expanding Mitsubishi’s presence in the British Columbia upstream, adding to the C$850 million it committed in 2010 for a 50 percent interest to develop Penn West Exploration’s Cordova Embayment play, along with a minority stake in Royal Dutch Shell’s plan to process up to 3.6 billion cubic feet per day for LNG export.
Although worth not much more than half of the proposed PetroChina investment, the agreement with Mitsubishi actually yields about US$10 million per section of land, more than it would have received from PetroChina.
Strengthens balance sheet It also helps strengthen Encana’s balance sheet that has been pummeled by low North American gas prices, gives it a cash infusion — US$1.45 million on closure and the balance over five years — to invest in raising its gas liquids output to 80,000 bpd by 2015 from 26,000 bpd and sets it up to release value from stranded shale gas holdings.
“We see a tremendous amount of value in this transaction,” said Encana Chief Executive Officer Randy Eresman. “We expect that the production profile of the assets will align well with the expected start up of planned West Coast LNG export facilities.”
In its efforts to ride out the gas price trough, Encana has completed US$3 billion in sales and partnership deals in the past six months and is shutting in an additional 250 million cubic feet per day of dry gas production this year, removing 600 million cubic feet per day from the market.
Mitsubishi Vice President Junichi Iseda said his company has two objectives: To contribute to the development of natural gas resources in Canada and to help diversify Canada’s gas export market.
He said that LNG export studies are “still at a very early stage, but we firmly believe that once our LNG plan evolves, it will generate significant benefits and opportunities to Canada and the province of British Columbia.”
Japanese government support Since the Fukushima nuclear plant disaster, the Japanese government has been urging its resource and utility companies to invest in foreign natural gas by providing up to 50 percent financial support for new exploration and development projects.
Eresman said Encana is now negotiating other Mitsubishi-type deals for Canada and the United States and has attracted strong interest in its gas properties, helping it to rebound from the PetroChina setback which folded because of a “significant misalignment” in business arrangements between the two companies.
Encana Executive Vice President Mike McAllister said that over the next 20 years the Mitsubishi investment could act as a catalyst to create 10,000 jobs in British Columbia, with British Columbia Premier Christy Clark hailing the deal as an “incredibly important statement” in her province’s natural resources.
Analyst: ‘really good’ Kam Sandhar, an analyst with investment dealer Peters & Co., described the deal as “really good” because it allows Encana to continue spending money in the Montney basin with less capital exposure.
Bob Brackett, of Bernstein Research, said that if Mitsubishi wants to become part of LNG exports it will need backing from trillions of cubic feet of gas reserves, “so maybe that’s what they’re looking at.”
There could also be an equity opening in the Kitimat LNG partnership, currently held 60 percent by operator Apache and 40 percent each by Encana and EOG Resources.
Eresman said his company might be prepared to reduce its equity stake by an unspecified amount once there is an agreement with a “significant” buyer of the LNG.
He said a final investment decision on Kitimat is expected by mid-2012 on completion of a front-end engineering and design study and an “off-take” deal.
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