Speculation was rampant Friday that Encana Corp. was close to completing a multi-billion-dollar agreement with Chinese partners to speed development of its British Columbia (BC) natural gas holdings.

Canada's largest natural gas producer and China National Petroleum Corp. (CNPC) last June signed a memorandum of understanding (MOU), or heads of agreement, that outlined a framework to negotiate a joint venture (JV) to develop Encana's holdings in the Horn River, Greater Sierra's Jean Marie formation and in the Montney Shale's Cutbank Ridge formation (see Daily GPI, June 28, 2010).

Encana, whose focus is North American unconventional gas, in the past few years has attracted more than $4 billion of JV capital commitments in the United States and Canada, with about $900 million invested in 2010. Encana CEO Randy Eresman last year said the company was 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."

The producer's Greater Sierra leasehold is spread across an estimated 275,000 net acres of land that cover the Devonian shale formation in its Horn River play; about 1.7 million net acres are within the Jean Marie formation. The Cutbank Ridge leasehold is an estimated 720,000 net acres of land within the Montney Shale. Combined production from these key resource plays last year was more than 535 MMcfe/d.

Encana management on Friday was unable to respond to market rumors but said negotiations with CNPC were "ongoing." Mike Graham, who helms Encana's Canadian Division, hinted at a prospective transaction last Tuesday when he spoke at the BMO Capital Markets 8th Annual Unconventional Resource Conference.

If Encana were to agree to bring in a JV partner to help defray costs for its BC holdings, Graham told the audience that it could be "an order of magnitude bigger" than a JV agreement with KOGAS Canada Ltd., an affiliate of South Korea's Korea Gas Corp.

KOGAS agreed to invest C$565 million over the next three years to earn a one-half stake in 154,000 net acres in Encana's Horn River and Montney shales.

The JVs, as Encana and other gas-focused producers have learned, have become a go-to source of revenue to defray service costs and to deal with low gas prices. In addition, Encana has an advantage of owning more than three million hectares of "fee lands" in Canada in which it holds subsurface rights. For those fee lands, which were granted to Canadian Pacific Railway in the 1800s, Encana pays no royalty fees to the Crown. However, Encana may charge royalties to other companies for as much as 38%.

Low gas prices have dinged Encana's investment plans. Last October the producer cut its 2010 budget by $200 million to $4.8 billion; Eresman said then gas prices were "unsustainably low" (see Daily GPI, Oct. 21, 2010). Earlier this month Jeff Wojahn, who helms Encana's U.S. Division, said the company would be tightening its spending plans even more this year (see Daily GPI, Jan. 10).

A lucrative JV apparently would be welcome.

Encana's shares were up about 3.5% on Thursday on the CNPC rumors. In a note to clients, Canaccord Genuity Research analysts noted that Encana had canceled plans to attend an energy conference that is being held in the next few days.

"Investors on both sides of the border in North America speculated that the cancellation was due to a possible announcement of the long-awaited potential JV with CNPC," said analysts. "After making no mention of the discussions in its [3Q2010] release, the company has started to briefly discuss the potential JV at recent broker conferences, leading the market to believe that the negotiations have once again gained momentum.

"Many have speculated that the potential JV could be as large as $5 billion in size, and the company has recently stated that it is looking to create a deal that is larger than the one it has with KOGAS ($1.1 billion over five years). If this is the case, the questions become over how many years and on how much acreage/resource potential? As seen with past announced JVs, these types of announcements can result in a short-lived share price jump."

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