After securing a natural gas midstream partnership in the Horn River Basin with Kohlberg Kravis Roberts & Co. (KKR), Quicksilver Resources Inc. now is pursuing a partnership to develop its upstream leasehold, executives said Thursday.
Quicksilver and KKR last said they would collaborate to develop midstream services to cater to producers operating in British Columbia's northeastern basin (see Shale Daily, Dec. 28, 2011). Quicksilver plans to operate the facilities and has dedicated current and future production to the partnership. The Fort Worth, TX-based producer also contributed an existing 20-mile, 20-inch diameter gathering line and compression facilities, as well as 10-year contracts for gas deliveries. KKR paid $125 million to Quicksilver in exchange for a half-stake.
"We're continuing to follow the unconventional resource path that we started in Michigan 20 years ago," CEO Glenn Darden said during a conference call Thursday to discuss the midstream joint venture (JV) and future upstream prospects. "In every case, we've used the same strategy," which is to become an early-entry player into an emerging basin.
Quicksilver was one of the first movers into the basin in 2008 when it acquired 18 exploration licenses cover 127,000 net acres. Today Quicksilver has close to 130,000 net acres with 20 licenses in which it has 100% working interest. All of the licenses are to convert to 10-year leases in 2012.
The Horn River's resource potential has been estimated at more than 10 Tcf of natural gas. Initial tests by Quicksilver "and industry have essentially derisked the basin for natural gas," said the CEO. Quicksilver's Horn River leasehold is wedged between companies well known for their gas drilling prowess: Devon Energy Corp. (153,000 net acres), EOG Resources Inc. (140,000 net acres), Nexen Inc. (123,000 net acres), and Apache Corp.and Encana Corp., which are jointly exploring close to 300,000 net acres.
Quicksilver's acquisitive nature has resulted in funding dilemmas. In addition to the emerging Horn River upstream plans and longstanding Barnett Shale developments, three other big developments are under way within its portfolio: Horseshoe Canyon, which is in its 12th year of development; Thunderhead, an early-stages oil project in the Niobrara formation/Lower Mancos Shale; and the Wolfpack, which cut across various fields in West Texas and is in the earliest stages.
"We have more projects than we can afford," Darden said. Bringing aboard a venture partner is the best way to move an expensive and long-term prospective development forward.
Current gas prices won't attract some suitors to the Horn River but those with an eye to the long-term may find the basin a compelling draw, said Chairman Toby Darden, Glenn Darden's brother. "The challenge for the Horn River is that it's in a remote area and it offered limited takeaway options," he said. "From the outset, we knew we had to establish a midstream solution [and] a transportation solution for gas to be produced from this basin."
The company undertook the assignment in two steps: TransCanada Corp. extended its mainline 70 miles, "all the way up to the acreage, which gives us access to AECO at the lowest possible price," said Toby Darden (see Shale Daily, Jan. 31, 2011). "Combine that with the KKR JV, and we have a large business opportunity by itself, with the lowest-cost delivery for gas out of the Horn River to AECO and ultimately [BC's] west coast, where ultimately there will be export opportunities, we believe.
"The KKR JV was a critical piece of that...and it greatly assists us in the early development phase of that project...Significant opportunities are there along the extension of the mainline of TransCanada for third-party gathering and treating. The first gas-to-treating is expected to be at a rate of 100 MMcf/d in 2014."
According to the chairman, AECO's gas price of C$1.56/Mcf falls to C76 cents "through the KKR option, with a savings of C80 cents/Mcf with upstream development. In this price environment, it can't help but be noticed as a significant savings."
With infrastructure funding in place "this makes it a very attractive upstream opportunity for a JV partner," said Glenn Darden. "We are going to be judicious about this [in developing the upstream]," but Quicksilver plans to have an JV in place before the end of the year and "possibly" within the first six months.
Several companies are pushing LNG export projects around Kitimat, BC, and Quicksilver isn't involved monetarily in any of them. However, Toby Darden said, "what we realized from the beginning...is that ultimately [British Columbia] is going to be an export market...but that is several years away.
"We focused early on efforts on getting gas into the most liquid system we could, which was TransCanada, which also will service the West Coast when LNG projects are finalized and developed...For now we've been working more on issues for producers directly in the short run. We do see an export market as a good long-term part of our portfolio for marketing. We decided we better put a shorter term plan in place as well, so we're not just waiting on that to occur."
One of the "motivations for bringing on a partner is to assist us in the marketing side of things," said Glenn Darden. Although neither brother hinted at what companies may be talking with Quicksilver, Toby Darden said "a number of longer-term LNG players" are researching the Horn River Basin as a long-term play.