Encana Corp. is curtailing North American natural gas supply by up to 600 MMcf/d this year through cuts to capital investments and by shutting in production, the Calgary-based producer said Friday. The company already has taken action to “slow down or curtail” output from existing wells equal to 250 MMcf/d, said CEO Randy Eresman.

Some of the biggest reductions to spending and gas production will be to the Haynesville Shale, where Encana has a leasehold across parts of East Texas and northwestern Louisiana. There are six rigs total now drilling for gas, but “activity will be limited” outside of commitments with partners. Spending has been cut 60% from 2011 levels. Instead of drilling, Encana plans to test longer laterals and experiment with well spacing.

Because of its decreased drilling in the Haynesville, “it may not be possible to retain all the land from expiries” in leasehold contracts, but the “impact will not be significant,” U.S. division chief Jeff Wojahn told analysts. Decisions on other areas to cut back spending and curtail output haven’t been finalized. The level of commitment in many cases be determined by Encana’s joint venture (JV) partnerships and third-party commitments.

For instance, in Wyoming’s gassy Jonah Field, the drilling rig count “could range from one to four rigs,” said Wojahn. Activity in the Piceance Basin “is driven exclusively by a JV in the Niobrara and Mancos formations…” but because of outside funding, “economics remain robust” in those plays.

“The duration of our voluntary reductions will be subject to a number of factors, including a recovery in prices, and therefore is uncertain at this time,” said Eresman. “The combined total natural gas volume reduction would remove about 600 MMcf/d off the market when royalty volumes are also taken into account.”

Canada’s largest gas producer and one of the top gas operators in North America, plans to reduce 2012 capital spending by 37% from 2011 levels to $2.9 billion. The reduction would “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,” said the CEO.

“Our reduced capital investment in dry natural gas programs is expected to lower natural gas production to about 3.1 Bcf/d a decrease of about 250 MMcf/d from 2011 levels.”

In a “difficult natural gas market and very competitive service sector,” he said Encana had managed to complete “one of our best operational years ever, hitting our targets for cash flow and production, which offset lower prices and a significant delay to the start-up of our Deep Panuke production facility offshore Nova Scotia.”

Encana’s operational success has been “overshadowed by the oversupply of natural gas, which, in turn, has resulted in a significant reduction in futures prices for North American natural gas contracts. Although a litany of factors has caused the oversupply, it is abundantly clear that a continued reduction of drilling activity will be required to restore market balance.

“For the industry as a whole, near-term natural gas prices are at levels below what it costs to add most new production, and in some places, may even be below what it costs to produce from existing wells. Although we continue to believe that the long-term future for natural gas remains promising, until we see signs of a sustainable recovery in natural gas prices, we will be reducing our pace of natural gas development and slowing down production from some of our natural gas wells to preserve value.”

The company has solved one item that has been on its to-do list for more than a year by clinching a partnership with Japan’s Mitsubishi Corp. to develop its promising Cutbank Ridge leasehold in northeastern British Columbia. Cutbank Ridge holds estimated proven undeveloped reserves of about 900 Bcfe. A previous agreement to sell a half-stake in the assets to PetroChina Co. for $5.4 billion collapsed last year (see Daily GPI, June 22, 2011).

Mitsubishi is investing $2.9 billion to gain a 40% stake in the Cutbank Ridge leasehold, which holds about 409,000 net acres of undeveloped Montney Shale gas lands in British Columbia. Encana would operate the leasehold with a 60% stake.

Mitsubishi agreed to pay $1.45 billion at closing, expected later this month, and invest $1.45 billion in addition to its 40% stake, over the commitment period, which is estimated at about five years. The deal would reduce Encana’s capital spending commitments to 30% over the period.

More partnerships are being contemplated, and Eresman mentioned Devon Energy Corp.’s partnership with China’s Sinopec Corp., announced early this year, which shares spending across five of Devon’s frontier unconventional plays in North America (see Daily GPI, Jan. 4).

“You could see Mitsubishi-like deals,” said the CEO. “We also are evaluating a Devon-like deal…as a means to advance multiple oil and liquids-rich plays in North America.”

Eresman said “in a normal price environment” for gas, the Mitsubishi transaction would have accelerated our company’s overall pace of development as a result of the increased capital spending profile on these natural gas assets. However, in this lower price environment, Encana plans to more than offset the transaction’s near-term impact on North American natural gas production oversupply by reducing spending and production across its natural gas portfolio.”

About $1.5 billion, or more than half, of Encana’s projected 2012 upstream capital spending is to be directed toward development, exploration and delineation drilling on 2.5 million acres of prospective liquids-rich plays, which include Cutbank Ridge and Bighorn, as well as several promising new plays from British Columbia to Louisiana, where it expects to drill about 40 assessment wells by mid-year.

Most of the remaining upstream capital investments, estimated at $1.2 billion, would be in dry natural gas to complete work on previously initiated drilling and to execute drilling programs with joint venture partners, Eresman said.

“These investments are either economic within the company’s price hedging arrangements or they preserve substantial value by offering attractive future growth opportunities when more favorable market conditions warrant. Drilling directed at dry natural gas prospects is expected to decline over the course of the year, and the company’s gas-directed rig count is expected to end the year substantially lower than at the start of the year,” he said.

“During this extended period of low natural gas prices, Encana plans to conserve most of the additional financial flexibility provided by our Cutbank Ridge Partnership transaction and other previously announced transactions. The planned level of capital spending will create enhanced financial flexibility and liquidity while we target higher financial returns and the maintenance of our investment grade credit ratings.”

Quarterly gas production rose 7% to 3.46 Bcf/d; it was up 5% for the year to average 3.33 Bcf/d. Liquids output in the latest quarter jumped 17% to 23,938 b/d and was up 5% for the year at 23,976 b/d. Total output was up 7% for the quarter to 3.6 MMcfe/d. Encana drilled 360 wells in 4Q2011, down by more than half (53% from the 760 wells it drilled in the final quarter of 2010. For 2011, the company drilled 32% fewer wells, 1,129 from 1,654.

Encana added to its resource base and replaced 180% of its output in 2011. The company also significantly expanded natural gas liquids (NGL) and oil growth initiatives on two fronts: by assembling a diverse portfolio of potential liquids-rich plays across North American basins, and by advancing NGL extraction plans at three Canadian gas plants. Exploration and development drilling in 2011 added proved reserves of 2.3 Tcfe of gas and liquids, which resulted in a production replacement ratio of 180%.

The gas giant, which was stung in the final three months of 2011 by a $854 million asset impairment on lower gas prices, posted a loss of $246 million in 4Q2011, compared with a loss of $469 million in the year-ago period. Operating earnings were $46 million (6 cents), versus $50 million (7 cents). Cash flow generated was $946 million ($1.32/share), versus $917 million ($1.25) in 4Q2010. For the year, Encana’s net profits were $128 million, well below 2010’s $1.17 billion.

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