Encana Corp. is gaining more control over its capital spending in Colorado’s Piceance Basin after agreeing to sell a 49% stake in its southern operations to steelmaker and long-time partner Nucor Corp., a spokesman told NGI’s Shale Dailyon Tuesday.
Charlotte, NC-based Nucor, the No. 1 steelmaker in the United States, has been working with Calgary-based Encana since 2010 to reduce the cost of the natural gas it uses in its operations. Under one of several transactions announced Tuesday Nucor said it bought a minority stake in the southern portion of Encana’s Piceance leasehold, which covers about 54,000 net acres.
“The agreement removes both parties’ obligations related to the joint venture and gives us more control over our capital decisions in the Piceance, enabling us to continue to direct our overall investment to the highest margin opportunities across our portfolio,” Encana spokesman Jay Averill said. “Overall, Nucor is not receiving any of Encana’s proved developed producing reserves or wellhead production as part of the transaction. Our production and operations remain the same.”
The partners, which did not disclose any financial details, also agreed to terminate two carry and earning (C&E) drilling agreements that they entered into in 2010 and 2012 (see Shale Daily, Dec. 17, 2012). The long-term venture has allowed Nucor to earn a 50% working interest in gas wells in the Piceance, with Nucor paying its share of well costs plus a portion attributed to Encana’s interest.
As part of its contractual obligations, Nucor in July 2013 agreed to spend $700 million-plus over two years in the Piceance (see Shale Daily, July 22, 2013. However, by late 2013, the partners had suspended their drilling plans because of weak gas prices (see Shale Daily, Dec. 18, 2013). Nucor’s contract has a threshold gas price in it under which it was not obligated to continue to drill.
Under the new contract structure announced Tuesday, Nucor would hold 49% of Encana’s leasehold interest in some mineral leases to all depths in the southern Piceance, compared to the limited contractual commitments to participate in drilled wells that the company had under the original C&E agreements. The ownership structure also provides Nucor with full discretion to participate in all future drilling capital investment.
By canceling the C&E drilling agreements, Nucor eliminated all future carry capital and all contingent liabilities associated with the contracts. The revisions should result in lower unit cost for any future drilling, while Nucor retains all existing producing gas wells it currently owns.
To support its operating wells and potential future well developments on the leasehold, Nucor also entered into long-term agreements directly with existing third-party gathering and processing service providers.
“These transactions give both companies capital flexibility,” Nucor CEO John Ferriola said. “In addition, they preserve Nucor’s long-term access to low cost gas resources in support of Nucor’s raw material strategy. We think this transaction is a win-win for both companies.
In another transaction, Nucor is selling Encana its 50% equity in Hunter Ridge Energy Services LLC (HRES), a gas gathering and water service provider that they had formed as equal partners.
Acquiring HRES “simplifies our business in the Piceance,” Averill said. “Encana ownership of 100% of HRES allows us to better integrate this water and gas gathering infrastructure with other Encana infrastructure in the Piceance Basin.”
Encana is holding an investor day in New York City on Wednesday, where it is expected to provide more clarity about its onshore operations, which today are focused on the Permian Basin and the Eagle Ford Shale in the Lower 48, and in the Montney and Duvernay formations in Canada.
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