BMI View: Nexen has capped a difficult year by securing two significant deals related to Canadian shale gas and US deepwater Gulf of Mexico - and in the process has given investors cause to cheer. In our view, the shale gas deal boosts prospects for a further expansion of the proposed Kitimat LNG project.
Canada's Nexen announced on November 29 2011 that it had struck a deal to form a joint venture (JV) focused on its British Columbia (BC) shale gas business. Japanese firms Inpex and JGC have agreed to pay CAD700mn (US$680mn) for a 40% stake in Nexen's properties in the Horn River, Cordova and Liard Basins.
Nexen will retain a 60% operating interest in the assets, and the transaction is expected to close in Q112. The company added that once the JV agreement is closed, the partnership intends to proceed with appraising and developing the assets - 'depending on economic conditions'. The JV properties contain 113-424bn cubic metres (bcm) of recoverable contingent gas resources in Horn River and Cordova, with an additional 141-651bcm of prospective resources in Liard. The properties cover 1,216sq km and current shale gas output of 1.4mn cubic metres per day (Mcm/d) is expected to rise to 34Mcm/d by an unspecified future date, Inpex said.
Nexen highlighted that it would, in conjunction with its new Japanese partners, investigate the feasibility of liquefied natural gas (LNG) exports. This is undoubtedly the core objective of the JV. One option is for the JV to liquefy its gas at the proposed Kitimat LNG terminal on BC's Pacific coast. The consortium behind Kitimat (led by Apache) won an LNG export licence from Canada's National Energy Board (NEB) in October 2011 - to ship up to 10mn tonnes per annum (tpa). Preliminary LNG sales agreements are in place with state-run Korea Gas (2mn tpa) and Spain's Gas Natural (1.6mn tpa).
We think it likely that the Nexen-Inpex JV will choose to take advantage of Kitimat to monetise its own shale gas. Given that Kitimat's backers are already pushing for two 5mn tpa trains, gas from the Nexen-Inpex JV's properties could support a third train at the project, unless the JV chooses to proceed with its own rival LNG export project - a more expensive and time-consuming endeavour.
Nexen has had a difficult year. The company's Buzzard platform in the UK North Sea suffered technical problems, and subsequent repairs in the summer months led to reduced flow rates of around 80,000 barrels of oil equivalent per day (boe/d), compared with full capacity of over 200,000boe/d. Furthermore, labour unrest and broader political violence in Yemen forced Nexen to abandon its Masila (Block 14) contract. The field produced around 225,000b/d at its peak, with output net to Nexen of 24,000-28,000b/d in 2011. Nexen said on November 22 that it was 'evaluating alternatives' for its other Yemeni asset, Block 51, which produces 6,000-8,000b/d net to Nexen.
Against that backdrop, investors were cheered by news of the shale gas JV: Nexen's Toronto shares rose nearly 4.5% on November 29. This was likely to be repeated when trading commenced on November 30, the day Nexen announced a partnership with state-run China National Offshore Oil Corporation (CNC) for deepwater exploration in the US Gulf of Mexico (GoM). This latter region is a key growth area for Nexen, which received a GoM drilling permit (Kakuna) in June 2011, signalling its return to GoM drilling after the Macondo oil spill. Further upside to volumes will come from the Usan project in Nigeria, which is expected to add 14,000-28,000 net boe/d upon start-up in 2012.
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