Enbridge Inc. has agreed to become majority owner of the under-construction Cabin Gas Plant development in the Horn River Basin of British Columbia (BC) after making a C$220 million deal with Encana Corp., which operates the development with a 52% stake.
Under terms of the transaction, which Encana has pursued for months, Enbridge would become the operator and take over a 57.6% interest in the first two phases of the development, which combined are to be capable of processing 800 MMcf/d of natural gas. In addition to paying for Encana’s stake in the project, Enbridge estimated that it also would invest another C$900 million in the development. The first phase is 70% complete.
“Our investment in the Cabin Gas Plant Development is a substantial initial step in the execution of our strategy to establish a strong position in the Canadian midstream business focused on growing unconventional gas production in BC and Alberta,” said Enbridge’s Al Monaco, president of gas pipelines, green energy and international. “This strategy involves leveraging our gas midstream capabilities from our extensive U.S. operations together with the advantageous cost of capital we can bring to the infrastructure needs of this active area.”
Encana, Canada’s largest gas producer and one of the first movers in the Horn River play, has led construction of the Cabin Gas Plant, which is northeast of Fort Nelson, BC. Development has been under way for more than two years to serve producers in the emerging gas play (see Daily GPI, Jan. 12, 2009).
Encana started the regulatory approval process by filing a project description with the BC Environmental Assessment Office on behalf of the original eight-member Horn River Basin Shale Gas Producers Group, which included subsidiaries of Apache Corp., Devon Energy Corp., EOG Resources Inc., Nexen Inc., Quicksilver Resources Inc., Stone Mountain Resources, and a partnership of Imperial Oil Ltd. and its majority owner, ExxonMobil Corp. (see Daily GPI, Jan. 6, 2009).
The first phase of the Cabin development, scheduled to be in service in 3Q2012, is to have 400 MMcf/d of processing capacity. The second phase would double capacity; it already has been sanctioned by producers and received regulatory approval. The entire 800 MMcf/d of capacity has been taken by Horn River producers, Enbridge said.
The Cabin Gas development has the potential to include up to six phases with an ultimate capacity of 2.4 Bcf/d, Enbridge said.
“Phases one and two of Cabin will generate an attractive return and provide a significant and growing earnings contribution for years to come, which aligns very well with Enbridge’s reliable business model,” said Monaco. “The investment also comes with substantial growth potential from future development of phases three through six.”
The Horn River Basin is estimated to have between 400 and 550 Tcf of gas in place, making it one of the largest in North America. However, the region requires new gas infrastructure to enable producers to realize the full potential of the basin.
Enbridge and the other stakeholders in Cabin Gas also have agreed on the terms of a long-term midstream services agreement (MSA) whereby the owners have provided a long-term take-or-pay throughput commitment for their pro rata share of the first two phases of capacity. Under the MSA, owners may elect to extend the term of the agreement and request expansions of the plant.
Enbridge is to become the plant’s operator when the first phase goes into service. The other stakeholders would continue to fund the remaining 42.4% investment in the development and have the right to use their pro rata share of plant capacity. Enbridge also may acquire additional ownership interests.
The sale, expected to be completed in December, comes just days after Encana executives touted the production potential of the Horn River Shale during a conference call (see Daily GPI, Oct. 5). Encana also holds a 30% stake in KM LNG, a proposed liquefied natural gas export terminal in British Columbia. The facility could get regulatory approval early next year.
“This sale is another example of Encana redirecting midstream capital into our higher return core business of growing natural gas and liquids production,” said Encana’s Renee Zemljak, executive vice president of midstream, marketing and fundamentals. “Earlier this year we sold our Fort Lupton gathering system and processing plant, and recently we agreed to sell a portion of our Piceance midstream assets, also in Colorado” (see Daily GPI, Sept. 8; Jan. 19). “With the Cabin sale, proceeds totaling C$1.1 billion from these three midstream asset sales will strengthen our balance sheet, which will provide greater financial flexibility going into 2012.”
“When we divest of midstream assets such as this Cabin plant, we recoup the upfront infrastructure capital that is necessary to bring emerging natural gas developments such as Horn River into commercial production,” said Zemljak. “We also avoid future capital commitments that will be required to expand these infrastructure facilities by entering into competitive, long-term gathering and processing fee agreements with top-tier midstream firms. These fee agreements provide cost stability for our ongoing natural gas developments and help us efficiently deliver natural gas and liquids to market.”
The Encana executive said besides the Horn River and Colorado midstream sales, Encana continues to be “engaged in a process to divest of our Cutbank Ridge midstream assets in Canada.”
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