Encana Corp. and China National Petroleum Corp. (CNPC) late Thursday signed a memorandum of understanding (MOU), or heads of agreement, outlining a framework for the two companies to negotiate a potential joint venture investment to develop Encana’s natural gas plays in northeast British Columbia.

The JV would cover development in the Horn River, Greater Sierra’s Jean Marie formation and in Cutbank Ridge in the Montney formation.

“Given the depth of our enormous unconventional natural gas resource portfolio, we are accelerating our organic growth rate and targeting a doubling of our production per share over the next five years,” said Encana CEO Randy Eresman. “Beyond our internally funded capital investments, we have an extensive joint venture program that helps accelerate value recognition across our North American resource portfolio.

“With this potential CNPC joint venture, we would expect, upon successful completion of a transaction, to lower costs, reduce risks, increase our capital efficiencies, improve project returns, optimize production techniques and tap natural gas opportunities that would otherwise remain dormant for some time.”

Eresman said the recent “breakthrough technologies” that have opened up gas plays across the United States could be translated into Canadian tight gas and shale developments. The initiative with CNPC “has the potential to significantly benefit Canada’s economy through increased investment in our three British Columbia natural gas plays.

“New investments of this nature hold considerable promise for creating jobs and new markets, expanding resource revenues for governments and substantially enhancing the competitiveness of Canadian natural gas in North America.”

In the past three years Encana has attracted more than $4 billion of JV capital commitments in the United States and Canada, with about $900 million to be invested this year. Encana is targeting annual JV investments of between $1 billion and $2 billion, and a JV with the Chinese producer “could contribute significantly towards achieving that investment target.”

In the MOU, Encana and CNPC said they “believe the full-scale partnership and cooperation will bring a win-win situation and help to realize the business goals of each” company and they “intend to jointly and comprehensively develop the natural gas value chain business in Canada.”

Under a potential JV, Encana would act as the operator of all of the developments, including drilling and completion of the wells, building the processing facilities and pipelines, and conducting all field work.

CNPC would invest capital to earn an interest in the assets and to “gain an advanced understanding of unconventional natural gas development through an ongoing sharing of technical knowledge,” Encana said.

It may take several months to negotiate the potential JV, said Encana. If an agreement is reached, it would require approval by Encana’s board and some Canadian regulatory approvals.

Across North America, Encana has more than 7.5 million net acres of undeveloped land. Based on an independent assessment, Encana has estimated that its natural gas assets are large enough to support around 23,000 drilling locations — an 18-year inventory at the company’s current pace of development.

In northeast British Columbia, Encana’s Greater Sierra key resource play holds about 275,000 net acres of land that covers the Devonian shale formation in its Horn River play and about 1.7 million net acres covering the Jean Marie formation. The Cutbank Ridge resource play holds about 720,000 net acres of land covering the Montney formation. Combined, 1Q2010 production from these key resource plays was about 535 MMcfe/d.

“A sizeable portion of our company’s future resource potential resides on our extensive lands in northeast British Columbia, and a joint venture with CNPC would help develop natural gas from a portion of these promising economic and clean-energy opportunities,” said Eresman.

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