Japan’s Mitsubishi Corp. is investing $2.9 billion to acquire a 40% stake in Encana Corp.’s Cutbank Ridge leasehold in British Columbia, the companies said Friday. The deal is set to close this month.

The partnership would cover about 409,000 net acres of undeveloped Montney formation land, plus additional development potential in the Cadomin and Doig geological formations. Encana, with a 60% interest, would manage and operate the partnership. The transaction doesn’t include any of Encana’s current Cutbank Ridge production, estimated at about 600 MMcf/d, nor does it include processing plants, gathering systems or Alberta leasehold.

The land included in the partnership has proved undeveloped reserves of about 900 Bcfe, with estimated natural gas initially in place of about 130 Tcf, according to Encana.

“This agreement brings a world-class partner to a world-class energy asset,” said Encana CEO Randy Eresman. “Cutbank Ridge ranks among the most prolific and lowest-cost resource plays in North America…

“Despite an increased capital spending profile on these natural gas assets resulting from this transaction, Encana plans to more than offset the near-term impact on North American natural gas production oversupply by capital spending reductions elsewhere in its natural gas portfolio.”

Encana on Friday said it would curtail up to 600 MMcf/d in North America through capital spending cuts and by shutting in production. The company already has taken action to “slow down or curtail” output from existing wells equal to 250 MMcf/d, said Eresman. Capital spending in 2012 has been cut by 37% from 2011 levels to $2.9 billion to “minimize investment in dry natural gas, maintain operational flexibility and accelerate investment in prospective oil and liquids-rich natural gas plays, which over time will create commodity and cash flow diversification.”

Securing a partnership for the Cutbank Ridge play has been a work in progress for more than a year. PetroChina Co. last year agreed to pay Encana $5.4 billion to acquire a half-stake in the properties, but the deal fell apart last June (see Shale Daily, June 22, 2011). The star-crossed partners were unable to agree on key elements of the proposed transaction, including a joint operating agreement.

“We are excited to join Encana — a first-rate unconventional producer that has pioneered low-cost, continuous improvement and technical innovation across its premium portfolio of North American resource plays,” said Mitsubishi’s Jun Yanai, who is CEO of the company’s energy business group.

“Encana’s operational merit, execution excellence and high performance culture are an ideal match with our business approach. We add value by leveraging organizational strength and global networks as we seek to contribute to the enrichment of society through business firmly rooted in principles of fairness and integrity. Mitsubishi looks forward to tapping new natural gas supplies for the long-term development and eventual delivery to world markets. Through this development, we aim to contribute to economic growth and job creation in Canada.”

Mitsubishi agreed to pay $1.45 billion on closing and would invest $1.45 billion in addition to its 40% of the partnership’s future capital investment for the commitment period, which is expected to be about five years. Over the commitment period Encana’s capital funding would be reduced by about 30%. The transaction already has received an advanced ruling certificate from Canada’s Competition Bureau.

“Encana plans to conserve most of the additional financial flexibility provided by this and previously announced transactions during this prolonged period of low natural gas prices,” said Eresman. “Our 2012 investment plan targets a balance between our cash flow less dividends and our expected capital investment before acquisition and divestiture activity.

“Our capital spending is focused on expanding the exploration and development of oil and liquids-rich natural gas production while minimizing dry natural gas investments. This planned level of capital spending will create enhanced financial flexibility and liquidity while we target higher financial returns and maintaining our investment grade credit ratings.”