Seeking gas gathering capacity for its joint venture exploration and production operations in the Marcellus Shale, Ontario-based Epsilon Energy Ltd. said it has entered an agreement with its partners Chesapeake Energy Corp. and Statoil USA Onshore Properties Inc. to construct a new gathering system.

Epsilon said the agreement governs both current and future gathering systems for the project, in which Epsilon holds a 35% interest. Chesapeake and Statoil hold the remaining 65% interest. To better align Epsilon's interest in the overall project area than originally anticipated in the farm-out agreement with Chesapeake and Statoil, the company said it has sold an additional 15% interest in the existing gathering system beyond the 50% interest as contemplated in the farm-out.

Epsilon said it will receive proceeds of C$6.5 million from the sale. Currently under construction, the new gathering system will have an ultimate capacity of 400 MMcf/d and will service both the three-party farm-out area as well as have additional off-take capacity for off-system gas.

"The planned gathering system is a critical component for the development of this project and represents a major step forward for future takeaway capacity," Epsilon said.

In January 2010 Epsilon agreed to bring Chesapeake on board to help develop the Canadian operator's Highway 706 natural gas prospect in the Marcellus Shale (see Daily GPI, Jan. 20, 2010).

The Highway 706 JV project covers about 11,500 net acres in Susquehanna County, PA, with 10 MMcf/d of natural gas production and related compression at the time and pipeline and tap site facilities. Epsilon management said then that the leasehold position may support 120-150 additional drilling locations (60-75 net).