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Shell, Quicksilver Join Forces in Colorado's Sand Wash Basin

Quicksilver Resources Inc. has executed an agreement with the U.S. exploration arm of Royal Dutch Shell plc to establish an area of mutual interest (AMI) covering more than 850,000 acres of the Sand Wash Basin in northwestern Colorado.

Under the agreement, Quicksilver and Shell subsidiary SWEPI LP each would own a half-stake in about 330,000 acres and have the right to a 50% interest in any acquisition within the AMI. SWEPI would operate most of the lands under the AMI; Quicksilver would continue to operate wells it drilled prior to the agreement and other designated lands. No financial details were disclosed for the agreement, which is set to close before the end of the year.

"This alliance with Shell in the Sand Wash Basin is a validation of Quicksilver's efforts over the past two years to unlock significant oil reserves in the Niobrara Shale formation," said Quicksilver Chairman Toby Darden. "We will now combine our resources to push a much larger project forward."

According to the U.S. Department of Energy's Office of Fossil Energy, the Sand Wash Basin's dominant tight formations are the Lewis and Mesaverde formations within the Niobrara formation. Sand Wash had been considered predominantly a natural gas play a decade ago, but new hydraulic fracturing (fracking) technology is allowing drillers into a highly prized liquids play.

The Shell agreement is "in addition to -- and independent of -- the two joint ventures we referred to on our recent earnings conference call," Darden said.

During a conference call in August to discuss the company's second quarter performance, Darden referenced a couple of partnership ventures that he said were in the works (see NGI, Aug. 13). The Fort Worth, TX-based producer has faced financial issues recently as it attempts to transform itself from being natural gas-weighted. Quicksilver reported almost $1 billion in asset impairments in the second quarter because of low natural gas prices.

Quicksilver management got some financial breathing room on another front last week after reporting that the Horn River Basin project in British Columbia with Nova Gas Transmission Ltd. (NGTL), a subsidiary of TransCanada Pipelines Ltd., agreed to delay the targeted in service date of the Komie North pipeline and meter station facilities to Aug. 1, 2015 from May 1, 2015. Quicksilver management indicated in August that it was looking for partners and better gas prices before expanding development in the dry gas play.

According to TransCanada, the 62-mile-long Komie North section of the proposed 36-inch diameter Horn River Mainline would be about 47 miles northeast of Fort Nelson, BC. NGTL's spend profile and Quicksilver's obligations to provide related financial assurances in the forms of letters of credit also were delayed. "As a direct result, NGTL released C$39 million of letters of credit that were previously posted to the project as of July 1," and Quicksilver's next scheduled letter of credit placement is April 1, 2014.

Quicksilver had said in late August it had begun cleanup activities in the Horn River Basin on an eight-well pad, and each well was capable of production. Wells were completed with laterals of 5,400-8,600 feet with 16-26 fracking stages in each well, averaging 23 stages.

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