Quicksilver Resources Inc., which last month locked in a natural gas midstream partner, now is ready to commit to a joint venture (JV) to help fund upstream development of a 130,000 net acre leasehold in the Horn River Basin, executives said Thursday.
The Fort Worth, TX-based independent has inked a deal with Kohlberg Kravis Roberts & Co. (KKR) to provide midstream services to producers operating in British Columbia’s (BC) northeastern basin (see Daily GPI, Dec. 28, 2011). Quicksilver, which would operate the facilities, has dedicated current and future production to the partnership, and contributed an existing 20-mile, 20-inch diameter gathering line and compression facilities. In addition, it contributed 10-year contracts for gas deliveries. KKR paid $125 million to Quicksilver in exchange for a half-stake.
With a plan in place to ensure takeaway capacity, securing an upstream partner is the logical next step, CEO Glenn Darden said during a conference call Thursday. “We’re continuing to follow the unconventional resource path that we started in Michigan 20 years ago. In every case, we’ve used the same strategy,” which is to become an early-entry player into an emerging basin.
Quicksilver was one of the first movers into the basin in 2008 when it acquired 18 exploration licenses cover 127,000 net acres. Today the independent has close to 130,000 net acres with 20 licenses in which it has 100% working interest. All of the licenses are to convert to 10-year leases in 2012.
The Horn River’s resource potential has been estimated at more than 10 Tcf of natural gas. Initial tests by Quicksilver “and industry have essentially derisked the basin for natural gas,” said the CEO. The company’s Horn River leasehold is wedged between companies well known for their gas drilling prowess: Devon Energy Corp. (153,000 net acres), EOG Resources Inc. (140,000 net acres), Nexen Inc. (123,000 net acres), and Apache Corp.and Encana Corp., which are jointly exploring close to 300,000 net acres.
With big-name producers come big-time development, and it likely won’t be long before companies step up their upstream plans. Canadian pipeliner Enbridge Inc. now is majority stakeholder in the Cabin Gas Plant development, which is east of Fort Nelson, BC (see Daily GPI, Nov. 7, 2011). Phase 1 of the plant, which is slated to be in service late this year, would have 400 MMcf/d of processing capacity; phase 2, expected in late 2014, would double capacity.
But Quicksilver has more than the Horn River midstream project and upstream development play in its portfolio. In addition to longstanding Barnett Shale developments, three other big projects are under way: Horseshoe Canyon, which is in its 12th year of development; Thunderhead, an early-stages oil project in the Niobrara formation/Lower Mancos Shale; and the Wolfpack, which cut across various fields in West Texas and is in the earliest stages.
“We have more projects than we can afford,” Darden said. Bringing aboard a JV partner is the best way to move an expensive and long-term prospective development forward. Quicksilver’s 2012 budget is to be “finalized shortly,” said Darden. The capital expenditures are slated to be “similar to the previous two years. If capital expenditures exceed cash flow, we will bring in outside [partners] to fund projects.”
Current gas prices won’t attract some suitors to the Horn River but those with an eye to the long-term may find the basin a compelling draw, said Chairman Toby Darden, Glenn Darden’s brother. “The challenge for the Horn River is that it’s in a remote area and it offered limited takeaway options,” he said. “From the outset, we knew we had to establish a midstream solution [and] a transportation solution for gas to be produced from this basin.”
The company undertook the assignment in two steps: TransCanada Corp. extended its mainline 70 miles, “all the way up to the acreage, which gives us access to AECO at the lowest possible price,” said Toby Darden (see Daily GPI, Jan. 28, 2011). In response Quicksilver two months later created a Horn River midstream unit (see Daily GPI, April 15, 2011).
“Combine that with the KKR JV, and we have a large business opportunity by itself, with the lowest-cost delivery for gas out of the Horn River to AECO and ultimately [BC’s] west coast, where ultimately there will be export opportunities, we believe.
“The KKR JV was a critical piece of that…and it greatly assists us in the early development phase of that project…Significant opportunities are there along the extension of the mainline of TransCanada for third-party gathering and treating. The first gas-to-treating is expected to be at a rate of 100 MMcf/d in 2014.”
According to the chairman, AECO’s gas price of C$1.56/Mcf falls to C76 cents “through the KKR option, with a savings of C80 cents/Mcf with upstream development. In this price environment, it can’t help but be noticed as a significant savings.”
With infrastructure funding in place “this makes it a very attractive upstream opportunity for a JV partner,” said Glenn Darden. “We are going to be judicious about this [in developing the upstream],” but Quicksilver plans to have an JV in place before the end of the year and “possibly” within the first six months.
Several companies are pushing LNG export projects around Kitimat, BC, and Quicksilver isn’t involved monetarily in any of them. However, Toby Darden said, “what we realized from the beginning…is that ultimately [British Columbia] is going to be an export market…but that is several years away.
“We focused early on efforts on getting gas into the most liquid system we could, which was TransCanada, which also will service the West Coast when LNG projects are finalized and developed…For now we’ve been working more on issues for producers directly in the short run. We do see an export market as a good long-term part of our portfolio for marketing. We decided we better put a shorter term plan in place as well, so we’re not just waiting on that to occur.”
One of the “motivations for bringing on a partner is to assist us in the marketing side of things,” said Glenn Darden. Although neither brother hinted at what companies may be talking with Quicksilver, Toby Darden said “a number of longer-term LNG players” are researching the Horn River Basin as a long-term play.
Glenn Darden said the company previously has had “discussions” about bringing aboard an upstream partner but “we never had a formal process. Over the last 12 months it’s become pretty clear that we wanted to get midstream taken care of before we looked at upstream. We have that very nicely put to bed with KKR…
“Gas prices are low but [the basin] will have a large supply of gas that will come out over many, many years,” said the CEO. “And more astute players will look at this [partnership] as longer than the next 12 months.”
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