With an opportunity to develop liquefied natural gas (LNG) export capacity on the table, Malaysia’s national oil company last week agreed to pay C$1.07 billion to acquire a stake in British Columbia’s Montney Shale.

Under a proposed transaction Calgary-based Progress Energy Resources Corp. would sell a half interest in some of its Montney properties to Petronas (Petroliam Nasional Berhad). The proposed North Montney Joint Venture (JV) would give the Malaysian energy giant a working interest in the Atares, Lily and Kahta fields, which include five wells with “minimal production,” Progress said.

The companies also plan to launch a feasibility study to evaluate building and operating a LNG export facility on BC’s west coast. Petronas would own 80% of the LNG JV and operate the proposed facility; Progress would own the remaining stake. The companies jointly would market the LNG using Petronas’ global network of customers.

“This is a breakthrough transaction for Progress,” CEO Michael Culbert told analysts during a conference call Thursday. “As well as needed access to capital, we feel it is critically important to pursue market access options outside of North America for our natural gas supply…

“While we get strong returns on our capital investments at $4/Mcf, the most attractive markets for gas in the foreseeable future are clearly in Asia.”

Progress hasn’t attracted the headlines from its Montney holdings like some of the bigger producers, which include Encana Corp., Talisman Energy Inc. and Shell Canada Ltd. (see NGI, June 8, 2009; Aug. 4, 2008; July 21, 2008). However, the company has steadily accumulated a huge leasehold over the past 10 years. Progress now holds about 900,000 net acres in the play, which is spread across the BC and Alberta provinces.

Strapped for cash to exploit the vast resource, Progress last fall launched a bid process to see if there was any interest in helping to fund development plans. The search ended in early May and Petronas was selected as “a perfect partner for us,” said Culbert. “They have the capital we need and the expertise in the global gas markets…

“LNG is a critical part of the puzzle” to ensure the shale play is able to make money. “We wanted to align with someone that had expertise.”

Petronas has been called one of the petroleum industry’s “seven sisters,” influential nationally owned oil and gas companies from countries outside the Organisation for Economic Co-operation and Development. With interests in the oil, gas and petrochemicals industries in more than 30 countries, Petronas also is one of the world’s leading LNG companies. In addition to a Malaysian production facility, Petronas also owns LNG assets in Australia, Egypt and the United Kingdom.

Under the agreement, Petronas would acquire half of the 149,910 acres in the Montney now controlled by Progress, which would remain the operator. The JV lands represent about 20% of the rights controlled by Progress in the northeast BC Foothills, which total about 700,000 net acres.

When the transaction is completed Petronas would pay Progress 25% of the total consideration, or C$267.5 million in cash. Once the agreement is established Petronas over five years would pay C$802.5 million (75% of the consideration) in the form of a capital carry in which it would pay Progress for its share of JV capital expenditures.

Output from the BC shale play now is approaching 1 Bcf/d, he said, but with excess unconventional supplies across North America, securing alternative markets is key.

“We have enormous opportunities in the North Montney assets…and we want to take full advantage, which takes capital and growing access to global natural gas markets,” Culbert told analysts. “The equity ownership would give us maximum flexibility to participate in the entire gas chain, from the well to the burner…”

According to Culbert, all of the gas produced through the JV under a 20-year contract first would be offered for sale to North American markets. Excess supplies then could be sanctioned for LNG exports.

“Canada is poised to take a larger role on the world’s energy stage,” said Culbert. “Developing new export options for Canadian natural gas producers is a logical step in connecting our vast resources with growing Asian demand for environmentally responsible energy sources like natural gas.”

The companies would work with BC communities “as we pursue this opportunity to build a new facility that will add value to British Columbia’s natural resources while creating considerable long-term local economic benefits,” he added.

In connection with the LNG JV, Petronas agreed to provide additional standby equity financing commitment of up to C$600 million for Progress’ capital requirements arising from the two JVs. Progress would be allowed to draw on the facility “at the time of a successful LNG final investment decision.”

The current plan for the possible export facility, said Culbert, “is to initiate a feasibility study in early fall and at that time address all the items of economics, engineering, potential locations and access to those locations…”

Plans for two LNG export facilities on BC’s west coast already are under way. Partners Apache Canada Ltd., EOG Canada Ltd. and Encana Corp. have begun to clear land for their proposed LNG facility in Kitimat, which would ship up to 1.4 Bcf/d (see NGI, May 23). BC LNG Export Co-operative LLC, a venture of the Haisla Nation and LNG Partners LLC of Houston last week reported a strong response for its proposed Kitimat project, which would ship up to 250 MMcf/d (see related story).

“It’s all about first-mover advantage,” said Culbert. “Although there have been numerous announcements, not many have a shovel in the ground yet. We can move forward very rapidly.”

The Petronas transaction remains subject to definitive agreements and regulatory approval. Closing is anticipated in the third quarter.

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