Chesapeake Energy Corp. late Sunday scored a sixth U.S. onshore joint exploration agreement and its second with China's CNOOC Ltd. (China National Offshore Oil Corp.) in a transaction valued at more than $1.26 billion.
Under the agreement subsidiary CNOOC International Ltd. would pay $570 million to purchase a one-third interest in Chesapeake's 800,000 net acres in the Denver-Julesburg (DJ) and Powder River basins of northeast Colorado and southeast Wyoming. In addition, the Chinese producer agreed to fund two-thirds of Chesapeake's share of drilling and completion costs until an additional $697 million has been paid, which is expected by year's end 2014.
The partners expect to complete the transaction by the end of March.
"This transaction will provide the capital necessary to accelerate drilling of this large domestic oil and natural gas resource," said Chesapeake CEO Aubrey McClendon. "Moreover, this project will advance the efforts of both the U.S. and China to reduce greenhouse gas emissions and accelerate commercial opportunities for the development of shale gas resources in China, furthering the objectives of the U.S.-China Shale Gas Resource Initiative announced by the White House on Nov. 17, 2009."
As operator, Chesapeake would be in charge of all of the leasing, drilling, completion, operations and marketing activities for the project. The Oklahoma City-based producer is running five operated rigs in the basins with 16 producing wells that have reached initial production rates of up to 1,000 b/d of oil and 3.0 MMcf/d of gas.
With the additional capital investment from CNOOC, Chesapeake expects to be running 10 rigs by the end of this year and 20 rigs by the end of 2012. The partners said over the next "several decades" they plan to develop net unrisked unproved resource potential up to 5.0 billion boe, after deducting an assumed average royalty burden of 20%.
The Chinese oil and gas giant would have the option to acquire an additional one-third stake in any acreage acquired in the partnership area by Chesapeake and would have the option to participate with Chesapeake for a one-third interest in midstream infrastructure related to production generated from the Rockies properties.
Last October CNOOC paid $1.08 billion in cash to buy a one-third interest in Chesapeake's Eagle Ford Shale properties (see Daily GPI, Oct. 12, 2010). It also agreed to fund 75% of Chesapeake's share of drilling and completion costs for up to another $1.08 billion.
"This second transaction with Chesapeake represents another success in our overseas development," CNOOC Ltd. CEO Yang Hua. "I am confident the project will not only strengthen our solid resource and production base in overseas but create value to the shareholders in the long term."
Chesapeake was advised by Jefferies & Co. Inc.; CNOOC's adviser was Tudor, Pickering, Holt & Co. Securities Inc.
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