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Japanese Utilities Buy into BC Shale Project

Three of Japan's largest utilities have joined Mitsubishi Corp. to collaborate in Penn West Exploration's shale gas project in northeastern British Columbia (BC) to gain knowledge about unconventional gas, as well as to secure an interest in future liquefied natural gas (LNG) exports.

A Mitsubishi subsidiary last August committed about C$850 million to buy a half interest in Penn West Exploration's shale gas assets in the BC Cordova Embayment area (see Daily GPI, Aug. 25, 2010). The agreement with the former Penn West Energy Trust also gave Mitsubishi an interest in some conventional gas assets in the Wildboy area.

On Monday Mitsubishi said its portion of the joint venture now will become a public/private sector initiative to include listed utilities Chubu Electric Power Co. Inc., Tokyo Gas Co. Ltd. and Osaka Gas Co. Ltd., as well as state-funded Japan Oil, Gas and Metals National Corp. (JOGMEC).

"This is the first time Japanese utilities and gas companies have been involved in shale gas development," Mitsubishi noted.

The Japan Bank for International Cooperation (JBIC) and The Bank of Tokyo-Mitsubishi UFJ agreed to lend C$1 billion to the consortium, JBIC stated.

About 22.5% of Mitsubishi's shares in the Penn West joint venture were transferred to Chubu, Tokyo Gas and Osaka Gas, with each of the utilities receiving an equal 7.5%. JOGMEC also gained a 7.5% share through an investment in Shale Gas Investment BV, which was established by Mitsubishi.

"Through the formation of the consortium, all the companies expect to obtain beneficial knowledge about shale gas developments," Mitsubishi officials said. "The consortium plans to [study] exporting the shale gas to Japan as LNG, which will contribute to diversify energy import and to secure stable energy supply to Japan."

Development of the Cordova Embayment reserves is under way. Penn West wants to raise daily production to about 500 MMcf/d by 2014, which Mitsubishi noted would be around 3.5 million tons/year of LNG equivalent.

Based on independent third-party evaluations, Mitsubishi officials said the Penn West project may hold 5-8 Tcf of gas reserves.

During a press conference in Tokyo, a Tokyo Gas official told reporters Monday that "nothing has been decided" on importing the shale gas as LNG. However, he said if LNG exports were to move forward, costs would be diminished because there already is an existing pipeline from Cordoba to the Pacific Coast.

A proposal is under way to construct an LNG export terminal on the central BC coast. Construction of the Kitimat LNG terminal could begin next year, with exports as soon as 2015. Subsidiaries of Apache Corp. (40%), EOG Resources Inc. (30%) and Encana Corp. (30%) own the project (see Daily GPI, March 21).

In related news Chubu Electric officials said they agreed to shutter the Hamaoka nuclear power plant until it is fortified to withstand an earthquake and tsunami like the one that flooded Tokyo Electric Power's Fukushima Dai-Ichi plant in March. Hamaoka's three working generators have a combined output of 3,617 MW and represent 11% of Chubu's generating capacity, the utility said.

Shuttering the generators is expected to require Chubu, which already planned to buy 8.2 million tons of LNG through March 2012, to purchase an additional 4 million tons of LNG, the company said.

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