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Horn River Shale a Priority, Says Nexen CEO

Developing Nexen Inc.'s massive shale gas position in northeastern British Columbia (BC) is on the to-do list for 2011, CEO Marvin Romanow said this week.

Speaking with analysts and investors in Calgary, the CEO laid out the company's plans for the coming year. Shale development has a higher priority in 2011 than looking for acquisitions, Romanow said.

"When we look around the acquisition world today, we tend to see a lot of very mature assets on their last legs in mature basins," and adding new properties would dilute the company's strong asset base, he told investors.

Nexen is looking for partners to help develop its existing BC leasehold and possibly to help deliver liquefied natural gas (LNG) from the emerging shale play to markets outside North America, Romanow said.

"We've been in China, Korea and recently in Japan," Romanow said. "And those discussions, I'm optimistic, will allow us and perhaps other players in that basin to monetize that asset through a much higher-valued option" than through new acquisitions.

Nexen has about 300,000 net acres in the play, similar to another big leaseholder there, ExxonMobil Corp., which also was an early entrant. ExxonMobil already has completed two horizontal well tests and is planning to drill five wells in the Horn River Basin in 2010 and 2011.

"We were there early," Romanow said of Nexen's BC land base. "I think there's an opportunity to extract some value out of that."

Exporting LNG from the BC basin already is a goal of subsidiaries of Apache Corp. and EOG Resources Inc., which partnered earlier this year to develop the long planned Kitimat LNG export terminal at Bish Cove, BC. Kitimat would carry gas supplies to Asian markets (see Daily GPI, May 19), and it now is said to have a better chance of succeeding than similar proposals along the West Coast (see Daily GPI, Oct. 15).

According to research published earlier this year by Calgary-based Peters & Co., the Horn River shale formation has the potential to reach 5 Bcf/d within 10 years (see Daily GPI, July 19). Under the BC government's royalty regime for gas producers, the break-even price for new Horn River production is about US$4.86/Mcf, even though it is an emerging play, analysts said. At US$5.50/Mcf, current wells are forecast to hit a 20% rate of return.

Nexen more than doubled its position in the Horn River Basin to 300,000 acres-plus from 128,000 in a BC provincial land sale earlier this year (see Daily GPI, July 16). The company in 2008 estimated that its then 90,000-acre leasehold in the Dilly Creek acreage held 3-6 Tcf of recoverable contingent resources, assuming a 20% recovery rate (see Daily GPI, April 24, 2008). The acquisition this year added to Nexen's 38,000 net acres in the promising Cordova play.

"We now have substantial acreage of over 300,000 acres in the Horn River, Cordova and Liard basins in northeast British Columbia, which we own with a 100% working interest," Romanow said. "We estimate that our Dilly Creek lands in the Horn River and our Cordova acreage contain between 4 Tcf and 15 Tcf of contingent resource, and our Liard acreage contains between 5 Tcf and 23 Tcf of unrisked prospective resource.

"Our best estimates for contingent and prospective resources are 8 Tcf and 13 Tcf, respectively..."

Capital spending for the Horn River play in the coming year is to focus "on the continued successful execution of our drilling and completion programs," said the CEO. "We plan to finish drilling our nine-well pad this winter with frack [hydraulic fracturing] and completion activities planned for next summer. We are progressing plans to commence drilling an 18-well pad in the second half of 2011.

"First shale gas production from the nine-well pad is expected in the fourth quarter of 2011 with production from the 18-well pad expected in late 2012."

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