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Nexen Takes LNG-Savvy Partner to Develop BC Shale

Nexen Inc. has made good on a promise to find a joint venture (JV) partner by the end of this year for its extensive shale acreage in northeastern British Columbia (BC) after agreeing to sell a 40% stake for C$700 million to a consortium led by Japan's Inpex Corp.

The partnership, in which Nexen would remain the operator, would develop about 300,000 net acres of unconventional gas-weighted lands in the Horn River, Cordova and Liard basins. CEO Marvin Romanow early this year said Nexen planned to have a JV in place for the BC lands by the end of 2011 (see Shale Daily, Feb. 22).

"This joint venture represents a significant milestone in the advancement of our shale gas strategy and the premium over our invested cost shows the value we have created in a short time," said Romanow. The transaction gives Nexen "world-class partners" that have significant upstream and liquefied natural gas (LNG) expertise.

Under the agreement the consortium is to pay Nexen C$350 million in cash up front and to pay the other half as a capital carry. Closing is expected by the end of March, at which time about C$600 million would be paid to Nexen. The transaction would give Nexen 60% interest in the JV lands, with the remaining stake to be owned through Inpex Gas British Columbia Ltd., which was jointly established by Inpex (82%) and JGC Corp. (18%).

Once the JV is closed, the partners plan to begin appraisal and development on the BC acreage, "depending on economic conditions," Nexen said. Nexen now is drilling an 18-well pad that is scheduled to be completed in late 2012, which would increase gross production volumes to peak rates of about 155 MMcf/d in early 2013. The parties also plan to "investigate the feasibility of a potential downstream project including LNG exports."

"Our development plan will allow us to unlock the value of our significant shale gas resource in northeast British Columbia," said Romanow. "On a gross basis, the joint venture lands are estimated to contain 4-15 Tcf of recoverable contingent resource in the Horn River and Cordova basins and a further 5-23 Tcf of prospective resource in the Liard Basin."

According to Tudor, Pickering, Holt & Co. (TPH), the deal gives a nod to Asia as a continuing buyer of North American gas with "LNG export a key driver." The TPH team put the transaction's valuation "slightly below our $7,000/acre average Horn River Basin value" for Apache Corp., EOG Resources, Devon Energy Corp. and Quicksilver Resources Inc., which all are big BC players. Based on TPH calculations, the deal values the Nexen lands at about $5,700/acre and is "probably most positive" for EOG and Quicksilver "as both are likely monetizing all or part of their Canadian gas shales."

Inpex is conducting 71 oil and gas projects in 26 countries, which makes it Japan's largest exploration and production (E&P) company, Nexen said. "Inpex is engaged in exploration, development and production activities around the globe with production of over 400,000 boe/d" and it has "the largest oil and gas reserves and production volume of any Japanese E&P company." Inpex also "brings significant LNG expertise and market access to the partnership."

Inpex holds stakes in two LNG projects in Indonesia and Australia and it is building a regasification terminal in Japan. Inpex has a 76% working interest and operates the Ichthys LNG project offshore Australia, which is expected to deliver 8.4 million tons per year of LNG once it begins operations. Inpex also holds a 60% working interest and operates the Abadi LNG project offshore eastern Indonesia, which when completed is expected to deliver 2.5 million tons of LNG a year.

"The production volume from these two projects is equivalent to 15% or more of Japan's current LNG annual import volumes," said Nexen.

Inpex partner JGC Corp. is considered one of the world's top engineering contractors in petroleum refining and gas processing, LNG and petrochemicals.

The JV agreement has been approved by the boards of Nexen, Inpex and JGC. Still needed is Canadian regulatory approval and Inpex will require financing approval to complete the transaction, Nexen noted.

In addition to the JV agreement Nexen on Tuesday said capital spending on worldwide projects in 2012 is expected to be as high as C$3.2 billion. The Calgary E&P unveiled the outlook as part of its production, cash flow and capital investment guidance. Cash flow in the coming year is expected to be between C$2.8 billion and C$3.3 billion assuming current prices, or cash flow per share of C$5.30-6.30. Overall production before royalties is forecast to be about flat relative to production this year, with production between 185,000 and 220,000 boe before royalties. Year-to-date production is about 206,000 boe.

"Our budget reflects growing cash flow, on a price-neutral basis, from significant cash margin expansion," said Romanow. "We expect this increase in cash flow despite flat year-over-year production."

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