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Progress Energy, Malaysia's Petronas to Partner in British Columbia

Calgary-based Progress Energy Resources Corp. on Thursday agreed to sell a half interest in some Montney Shale properties in British Columbia to Malaysia's national oil company Petronas (Petroliam Nasional Berhad) for C$1.07 billion. Opportunities to develop liquefied natural gas (LNG) export capacity from the province also are on the table.

Under terms of the proposed North Montney Joint Venture (JV), Progress would sell Petronas a working interest in its Atares, Lily and Kahta properties. The JV properties include five wells with "minimal production," Progress said.

"This is a breakthrough transaction for Progress," said CEO Michael Culbert. In addition to its support in accelerating the shale's development, he said Progress would "benefit from Petronas' "significant global expertise including their leadership in developing infrastructure and accessing LNG markets."

Progress hasn't attracted as much attention from its Montney holdings as some of the bigger producers, which include Talisman Energy Inc. and Shell Canada Ltd., but the company has steadily accumulated a huge leasehold over the past 10 years, Culbert said during a conference call with analysts Thursday. The company now holds about 900,000 net acres in the play, which is spread across the BC and Alberta provinces.

Strapped for cash to exploit the vast resource, Progress last fall launched a bid process to see if there was any interest in helping to fund development plans. Following a bid process that ended in early May, Petronas proved to be "a perfect partner for us," said Culbert. "They have the capital we need and the expertise in the global gas markets..."

Petronas has been called one of the petroleum industry's "seven sisters," which are considered to be the most influential of the nationally owned oil and gas companies from countries outside the Organisation for Economic Co-operation and Development. With interests in the oil, gas and petrochemicals industries in more than 30 countries, Petronas also is one of the world's leading LNG companies. Apart from its Malaysian production facility, Petronas also owns LNG assets in Australia, Egypt and the United Kingdom.

Under the agreement, Petronas would acquire half of the 149,910 acres in the Montney now controlled by Progress, which would remain the operator. The JV lands represent about 20% of the rights controlled by Progress in the northeast BC Foothills, which total about 700,000 net acres.

When the transaction is completed Petronas would pay Progress 25% of the total consideration, or C$267.5 million in cash. Once the agreement is established Petronas over five years would pay C$802.5 million (75% of the consideration) in the form of a capital carry in which it would pay Progress for its share of JV capital expenditures.

Petronas and Progress also plan to establish an LNG export JV, which would launch a feasibility study to evaluate building and operating a new LNG export facility on BC's west coast. Petronas would own 80% of the LNG JV and operate the proposed facility; Progress would own the remaining stake. The companies jointly would market the LNG using Petronas' global network of customers.

"LNG is a critical part of the puzzle" to ensure the shale play is able to make money, said Culbert. "We wanted to align with someone that had expertise."

Output from the BC shale play now is approaching 1 Bcf/d, he said, but with excess unconventional supplies across North America, securing alternative markets is key.

"We have enormous opportunities in the North Montney assets...and we want to take full advantage, which takes capital and growing access to global natural gas markets," Culbert told analysts. "The equity ownership would give us maximum flexibility to participate in the entire gas chain, from the well to the burner..."

According to Culbert, all of the gas produced through the JV under a 20-year contract first would be offered for sale to North American markets. Excess supplies then could be sanctioned for LNG exports.

"The most attractive markets for gas are clearly in Asia," he added. "Canada is poised to take a larger role on the world's energy stage. Developing new export options for Canadian natural gas producers is a logical step in connecting our vast resources with growing Asian demand for environmentally responsible energy sources like natural gas."

The companies would work with BC communities "as we pursue this opportunity to build a new facility that will add value to British Columbia's natural resources while creating considerable long-term local economic benefits," Culbert said.

In connection with the LNG JV, Petronas also agreed to provide a standby equity financing commitment of up to C$600 million for Progress' capital requirements arising from the two JVs. Progress said it would be allowed to draw on the facility "at the time of a successful LNG final investment decision."

The current plan for the possible export facility, said Culbert, "is to initiate a feasibility study in early fall and at that time address all the items of economics, engineering, potential locations and access to those locations..."

Plans for two LNG export facilities on BC's west coast already are under way. Partners Apache Canada Ltd., EOG Canada Ltd. and Encana Corp. already have begun to clear land for their proposed LNG facility in Kitimat, which would ship up to 1.4 Bcf/d (see Daily GPI, May 19). BC LNG Export Co-operative LLC, a venture of the Haisla Nation and LNG Partners LLC of Houston (see Daily GPI, March 21), also is reporting strong response for its proposed Kitimat project, which would ship up to 250 MMcf/d.

"It's all about first-mover advantage," said Culbert. "Although there have been numerous announcements, not many have a shovel in the ground yet. We can move forward very rapidly."

The Petronas transaction remains subject to definitive agreements and regulatory approval. Culbert said closing is anticipated in the third quarter.

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