Shell Canada Seeks JV Partner to Develop its Canadian Deep Basin Nikanassin Play in its Chinook Asset

Main Features

a.       Shell Canada is seeking a JV partner to develop its Nikanassin Play in its Chinook Asset and has engaged TD securities as its exclusive financial advisor.

b.      Offering 25 – 50% equity in its lands to JV partner.

c.       Seeking cash with a capital component.

d.      Level of carry is a function of term and working interest acquired.

e.      Term is anticipated to be 3-5 years.

Figure 1: Map location of the Chinook Asset. Source, TD Securities.

Chinook Asset Summary

a.       Located in Deep Basin of Western Canada (See Figure 1)

b.      Average Shell working interest is ~ 90%

c.       Area covers ~ 102,000 mostly undeveloped gross acres

d.      Resource potential is large with 12 Tcf OGIP with Shell estimated recoverable resource > 4Tcf

e.      Shell has invested in infrastructure and facilities  resulting in lower operating costs (as low as $0.55/Mcf)

f.        Currently producing ~ 35 MMcf/d with plans to ramp up to 150 MMcf/d by 2015 and possibly 250 MMcf/d or higher.

Nikanassin Formation Summary

a.       Present across the deep basin with gas trapped in stratigraphic and structural settings.

b.      Thick, stacked siltstone – sandstone reservoir sequence

c.       OGIP of 60 – 80 Bcf/ Section is higher than all other area formations 

Nikanassin compared to other North American shales by TD (Broker)

Figure 2: Comparison of various parameters between the Nikanassin and other similar unconventional plays. Source, TD Securities. 

Benefits for JV partner

a.       Shell is a major player with extensive capabilities and experience in unconventional plays.

b.      Reduced drilling costs by 50%

c.       50% reduction in drilling time

d.      40% reduction in completion costs

e.      Prior investment capital has already flowed into project.

Shells Current Activity at Chinook Asset

a.       Drilled three horizontal wells in Q4-2010, all tied in and initially producing > 5 mmcf/d

b.      Completed drilling first syncline well in Q1-2011 (Figure 3) which is awaiting completion and tie-in Q2-2011

c.       Plans to drill second syncline well and four development wells in remainder of 2011

Figure 3: Subdivision of the Nikanassin play according to Shell. Source, TD Securities. 

Recent activity by other operators

Source, TD Securities. 

Analyst Comments

Derrick estimates the value of this deal to be between $25 - $100 million assuming a 50% JV based on acreage metrics from the June 2011 activity land sales published by the Canadian government.

Asian investors line up to acquire shale gas assets.. Petronas signs C$1.07 billion deal to develop Progress’ Montney shale.

Progress Energy Resources Corp has executed a binding framework agreement to create a strategic partnership with PETRONAS, to develop a portion of Progress' Montney shale assets in the Foothills of northeast British Columbia. Progress will sell 50% of its working interest in its Altares, Lily and Kahta properties (the North Montney Joint Venture) to PETRONAS for C$1.07 billion. The deal is PETRONAS’ first foray in Canada. BMO Capital Markets acted as exclusive financial advisor to Progress on this transaction. Bank of America Merrill Lynch is the exclusive financial advisor to PETRONAS on this transaction.

Under the terms of the framework agreement, PETRONAS will pay 25% of the total consideration (C$267.5 million) in cash at closing and 75% of the total consideration in the form of a capital carry whereby PETRONAS will pay 75% of Progress' share of future capital expenditures in the North Montney Joint Venture over the next five years to a total of C$802.5 million.

Source: BMO Capital Markets Website

Assets under JV

The North Montney Joint Venture comprises 149,910 working interest acres in which PETRONAS will acquire a 50% interest and Progress will be the operator. The North Montney Joint Venture lands represent approximately 20% of Progress' rights in its northeast British Columbia Foothills land holdings, which total approximately 700,000 net acres. Progress holds approximately 900,000 net acres of Montney rights over its entire British Columbia and Alberta land base, making it one of the largest Montney land rights holders. The joint venture properties include five wells with minimal production at this time. Petronas said the possible resources could be as high as 15 trillion cubic feet.

LNG options

In addition to the above Transaction, PETRONAS and Progress will establish an LNG export joint venture to be 80% and 20% owned, respectively. The LNG Export Joint Venture will launch a feasibility study to evaluate building and operating a new LNG export facility on the West Coast of British Columbia. PETRONAS would be the operator of this facility, and PETRONAS and Progress would jointly market the LNG utilizing PETRONAS' well-established and extensive network of customers in the largest LNG markets globally.

In connection with the LNG Export Joint Venture, PETRONAS will provide a standby equity financing commitment of up to $600 million, for Progress' capital requirements arising from the North Montney and LNG Export joint ventures from which Progress can draw down at the time of a successful LNG final investment decision.

Asian investors busy in American shale business

Recently, other Asian majors such as PetroChina, Korea Gas, Mitsui, Mitsubishi and Reliance had also ventured into North American shale gas plays. Since the last quarter of 2010, Asian companies have invested around $8 billion on Montney shale. PetroChina clinched the biggest deal (C$5.4 billion) in Montney with Encana in early 2011. Notably, Talisman and Sasol finalised two joint ventures in Montney shale.

The following table shows the list of significant Montney deals sourced from Derrick Petroleum E&P Transactions Database.

Source: Derrick Petroleum E&P Transactions Database

International Companies’ affinity towards Canadian shale is aggressive!! Sasol acquires additional Montney package from Talisman for C$1.05 billion

South Africa's largest petrochemical company, Sasol signed a second agreement with Talisman Energy to acquire a 50% stake in their Cypress A shale gas asset located in the Montney basin of British Columbia, for a total consideration of C$1,050 million. Consistent with the recent Farrell Creek shale gas acquisition, announced in December 2010, this second acquisition will see Talisman Energy retain the remaining 50% interest and continue to operate the Cypress A gas asset. Assets included in the transaction cover over 57,000 acres of land and represent an estimated contingent resource of 11.2 TCF. Goldman, Sachs & Co and Jefferies & Company acted as advisors for Talisman on this transaction.

Sasol and Talisman have agreed to conduct a feasibility study on the economic viability of a facility in western Canada to convert natural gas to liquid fuels using Sasol's GTL technology. This could provide a strategic alternative to traditional North American pipeline or liquefied natural gas marketing.

International Companies’ affinity towards Canadian/US shale is aggressive!!

This second Montney JV by Sasol marks the latest investments by international interests on Canada’s shale gas bounty, as the industry explores new markets and non-traditional uses for the huge deposits. Here are the few examples..

• In February 2011, Encana Corp established a joint venture with PetroChina through the sale of 50% interest in its Cutbank Ridge business assets for C$5.4 billion. The business assets in the JV included the majority of Encana’s Montney, Cadomin and other natural gas assets on a portion of its British Columbia and Alberta lands. Read more: http://mergersandacquisitionreviewcom.blogspot.com/2011/02/chinese-juggernaut-rolls-on-north.html
• In September 2010, Penn West Energy Trust formed a 50-50 joint venture with Mitsubishi to develop Penn West's shale gas assets in the Cordova Embayment area and certain of its conventional gas assets in the Wildboy area of northeastern British Columbia. Mitsubishi’s total acquisition cost with respect to this JV was approximately C$450 million.

• In addition to these, CNOOC recently formed back-to-back JVs with Chesapeake for the Eagle Ford and Niobrara shales in the United States.

Recently, Progress Energy and Trident Resources have initiated a sale process with regards to their Montney assets. With the trend of international companies entering North American Shale, who will end up buying these packages? 

Click here to see more publications on Montney: http://docsearch.derrickpetroleum.com/research/q/montney.html