Houston-based Contango Oil & Gas Co., which up to now has trained its sights on Gulf Coast locations, on Monday joined with some financial partners to ante up to $380 million in a key Encana Corp. resource play, the Jonah field, one of the largest natural gas fields in the United States and the third largest oilfield in Wyoming.
Natural gas-heavy Encana, which has seen its market value fall by more than half in the last year, said last week it was looking for financiers to invest in some of its North American oil and liquids-rich opportunities — something the announcement Monday likely would not solve (see Daily GPI, April 3).
Encana spokeswoman Carol Howes confirmed the news, but told NGI that indeed, the investment was “a relatively smaller announcement for us.”
Last year Encana drilled about 71 net wells in the Jonah field. However, normal field decline and low natural gas prices led to a pullback in drilling. Around 497 MMcfe/d was produced by Encana from the leasehold in 2011, which was down from 2010, when output was about 559 MMcfe/d. Encana curtailed some of its gas production earlier this year; the drilling rig count in the Jonah field in 2011 is expected to “range from one to four rigs,” U.S. division exploration chief Jeff Wojahn said in February (see Daily GPI, Feb. 21).
“The hydrocarbons produced from the Jonah field consist of high Btu gas (1,150 Btu/Mcf) and 50 API [American Petroleum Institute] grade condensate,” said Contango CEO Kenneth R. Peak. “The condensate yield ranges from 10 bbl/MMcf in the upper Lance to 45 bbl/MMcf in the lower Lance formation. Under the terms of our EDA [earnings and development] agreement, virtually all of our capital is directed toward ‘turning a drillbit to the right,’ which is an extremely tax efficient way for Contango to invest.”
Contango subsidiary Contaro Co. is making the investment through an agreement to form Exaro Energy III LLC with Sageview Capital LP and Exaro II Jonah, a subsidiary of Exaro Energy II LLC and an affiliate of Jefferies Capital Partners. Under the agreement, Contaro would invest up to $82.5 million in Exaro over the next five years together with other parties for an aggregate commitment of $182.5 million. Contaro initially would own a 45% interest in Exaro, and it expects to fund about $41.3 million of its investment this month.
Exaro Energy III’s EDA with Encana is in a defined area of the Jonah field in Sublette County, WY. Encana would continue to operate the field. Once Exaro invests $380 million, it would earn a 32.5% working interest in a defined joint venture area that comprises around 5,760 gross acres.
The Encana and Exaro partnership would “benefit from the utilization of the very latest in shale gas completion technology as it is applied in these tight sandstones, that, together with an emphasis on liquids production, will drive significant value accretion for both companies,” said Peak.
Jonah, which is south of Pinedale, WY, in the Green River Basin, covers about 21,000 square miles and is estimated to hold as much as 1 Tcf of natural gas. In addition to Encana, BP plc, Ultra Petroleum Corp. and Yates Petroleum Corp. also explore in Jonah. Sublette County has other large natural gas and oilfields that include the Pinedale Anticline and the Wamsutter gas field, as well as several sour gas fields.
Encana now is working on an environmental impact study (EIS) process for a new natural gas development project in the field, the Normally Pressured Lance (NPL) in southwest Wyoming, which could get under way within the next few years. With drilling activity in the Jonah field expected to wind down between 2013 and 2016, Encana plans to shift the existing workforce and equipment to the neighboring NPL area; the EIS would have to be completed within the same time frame, it noted.
The NPL covers about 141,080 acres of land immediately south and west of Encana’s existing Jonah leasehold. Based on today’s technology, the NPL has an expected 30-year life, according to Encana, which leases on more than 70% of the area and operates more than 85% of it. Close to 75% of the gas wells have been drilled within the project area, and the NPL “has the potential to keep over 700 drilling and completions workers employed for 10 years, and another 175-plus lease/lead operators employed for 30 years.”
Contango, better known for Gulf Coast and offshore Gulf of Mexico exploration, has some onshore expertise, including in the Fayetteville Shale, where it was an early entrant (see Daily GPI, Jan. 18, 2006). It also is an investor in onshore developer Alta Energy Partners, which was formed by an affiliate of The Blackstone Group and Alta Resources LLC, whose partners include industry icon George P. Mitchell (see Daily GPI, April 13, 2011). Previously Contango had been an early investor in liquefied natural gas (LNG) exports through Freeport LNG Development LP, stakes of which it sold in 2008.
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