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Encana to Accelerate Development Through Partnerships

The pace of development at Encana Corp. was hampered in 2010 by low natural gas prices, but farm-ins, partnerships and joint ventures (JV) similar to the $5.4 billion transaction with an affiliate of PetroChina International Ltd. will help the company double its production growth over the next five years, CEO Randy Eresman said Thursday.

Encana, which is one of the leading unconventional gas producers in North America, produced 15% more gas in the final three months of last year than it did in 2009, the CEO told financial analysts during a conference call. Eresman spent the first part of the call discussing the PetroChina JV, which will give the producer some running room in Cutbank Ridge, which straddles the British Columbia and Alberta boundary (see Daily GPI, Feb. 10).

The cooperation agreement, which has been in the works for nine months, will allow Encana to double production there in the coming five years, Eresman said.

"The value of the company and the value of natural gas plays, relative to historical views, is something we think the market has under appreciated," said the CEO. "It is clear to us that the greatest value proposition is to bring forward the value of certain of these assets to develop...We want to increase production per share over the next five years..."

Encana also has set a target to produce a total of up to 2 Bcf/year in the next five years "and this agreement goes a long way toward meeting that target."

The Calgary producer acquired its sizeable position in Cutbank Ridge in 2003 at a price of about $700/acre, Eresman explained. "We took an early-mover approach that enabled us to study the basin long before others...Eight years after our initial entry, we believe this deal further validates that philosophy..."

Included in the joint venture are Encana's gas-rich Montney Shale leasehold, as well as acreage in the emerging Cardium formation, which is liquids-heavy.

"Since we first entered into the Montney approximately eight years ago, we have seen a steady progression of improving cost structures by leveraging technology and continually optimizing all facets of the development process," Eresman said. "The 2010 average supply cost for the Montney program was approximately $3/Mcf, making it one of the most economic plays in our portfolio. Despite this current measure of success, we expect to lower our future supply cost in the play even further. Our evolution of the development and economics associated with the Montney provides an excellent analog for what we expect to achieve in other plays throughout our portfolio."

Encana is giving up half of its current production to PetroChina in Cutbank Ridge, which is currently about 500 MMcf/d. However, independent assessments put the play's resource recovery at about 2 Tcfe, and "that's just the tip of the iceberg of what we ultimately expect to develop," said the CEO. "We have extensive lands in British Columbia and Alberta, and we expect to develop a significant volume of natural gas with PetroChina. Each of us will contribute equally to the capital requirements..." with Encana for up to five years operating and marketing the production.

After a slow production start to 2010, when it began to restart wells that had been shuttered in late 2009, Encana began pouring it on, and by the final three months of the year it was producing 3.23 Bcf/d, well ahead of 2.69 Bcf/d at the end of 2009. Encana drilled 760 wells drilled in the final three months of 2010, more than double the 295 drilled in 4Q2009. Year/year the company replaced more than 250% of its proved reserves, adding close to 3.1 Tcfe. Total proved reserves, all onshore, jumped 12% to 14.3 Tcfe.

But it wasn't easy, Eresman and his executive team told analysts. Exacerbated by low natural gas prices, attention turned to cutting costs, selling noncore assets here and there, and buying prospective liquids-rich acreage in select basins. The company also continued to ink farm-outs and partnership agreements on its unconventional acreage, something it expects to do more of in 2011.

In addition to gaining capital through partnerships, Encana continues to focus on efficiencies and reducing cost structures throughout its portfolio. For instance, in the Montney drilling, completion and tie-in costs for each hydraulic fracture stage in 2010 were down more than 20% from 2009 to about $500,000; the average number of fracture intervals completed per well increased to 13 from nine. In the Horn River Basin drilling, completion and tie-in costs fell about 40% to $680,000 per completed fracture interval and the number of fractures rose to 20-29 from 14 in 2009.

Encana, which was one of the creators of the "manufacturing" approach to gas production, has enabled it to drill several horizontal wells with multiple fractures from a single pad location. By applying this model in the Horn River Basin, supply costs fell to an average of about $4.45/Mcf in 2010. In the Haynesville Shale, where Encana exited the year with 10 operated rigs drilling on multi-pads, the company's targeted total well costs are about $9-9.5 million per well.

But efficiencies can't always make up for low gas prices. The company is shifting some -- but not much -- of its gassy focus to liquids production, Eresman said. Last year the company increased its oily holdings in the Rockies, adding acreage in the Piceance and Denver-Julesburg (DJ) basins in Colorado. The new areas cover more than 600,000 net acres in the Piceance and 40,000 net acres in the DJ Basin. Five wells have been drilled to date and another three are planned for the first half of the year.

In addition, Graham let slip that Encana has established a "large land position in the Duvernay Shale in Alberta, a play that has demonstrated significant liquids potential." That emerging leasehold will be evaluated this year, he said.

One of the few disappointments production-wise last year was in the Bossier Shale of East Texas, said Graham. Last year gas output totaled 348 MMcfe/d, versus a forecast production of 355 MMcfe/d as volumes dropped off in the second half of the year.

"Recent test results from the Bossier Sands have not met expectations and as a result Encana is reducing activity levels in this area, focusing more development on the Mid-Bossier shale and new potential opportunities in other parts of the play," said Graham.

Completion equipment shortages in the United States and weather-related issues in Canada trimmed Encana's plans to develop its unconventional resources last year, said executives. In the Haynesville Shale, a lack of services has led to "four or five months of inventory" for uncompleted wells, said Graham.

In Canada, there's a small backlog of wells waiting on completion, said Jeff Wojahn, who helms the Canada Division. Only 50-70 wells are not completed, but it's more related to wet weather in Alberta, he said. The Canada unit's volumes jumped 6% in 2010 on the back of successful drilling programs at Cutbank Ridge and Bighorn, which were up about 28% and 37% respectively.

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