Ontario-based Epsilon Energy Ltd. on Monday agreed to bring Chesapeake Energy Corp. on board to help develop the Canadian operator’s Highway 706 natural gas prospect in the Marcellus Shale.

Under terms of the proposed joint venture (JV), Chesapeake would earn a half-stake in the prospect by paying Epsilon C$5 million in cash upfront and carrying the first C$95 million of Epsilon’s share of costs in the prospect. The carry obligation is expected to be completed within 30 months of the scheduled closing date Feb. 1, Epsilon said. Still needed is completion of the sales agreement.

The Highway 706 JV project covers about 11,500 net acres in Susquehanna County, PA, with 10 MMcf/d of current natural gas production and related compression, pipeline and tap site facilities. Epsilon management said the leasehold position may support 120-150 additional drilling locations (60-75 net).

“This transaction will allow Epsilon to reduce its future capital expenditures and further position us to improve our exploration and development costs and returns on capital for years to come as well as develop our expertise in unconventional hydrocarbons,” said Epsilon CEO Zoran Arandjelovic.

Epsilon, founded in 2005, targets lower-risk gas and oil properties not only in the Marcellus Shale but also in other parts of North America, the Middle East and Africa. Arandjelovic said the proposed JV would allow his company to “invest in the development of its other North American properties including other Marcellus Shale assets in New York, Bakken oil assets in Saskatchewan and Utica Shale assets in Quebec.”

Chesapeake has become something of an expert in securing JVs to advance its drilling in unconventional gas shale basins. Norway’s Statoil in 2008 agreed to pay Chesapeake $3.38 billion to gain entry to the Marcellus Shale (see Daily GPI, Nov. 12, 2008). Other JVs have been completed with Total SA, BP America and Plains Exploration & Production Co. for drilling in the Barnett, Fayetteville, Woodford and Haynesville shales (see Daily GPI, Jan. 5).

Epsilon’s acreage “is located in an area of Susquehanna County where we expect average estimated ultimate reserve recoveries to be substantially greater than those found on average in the Marcellus,” said Chesapeake CEO Aubrey McClendon.

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