An artist's rendering of the approximate position of the Kitimat LNG Terminal storage tanks, jetty and associated buildings on Haisla First Nation property at the deep sea port of Kitimat. An artist's rendering of the approximate position of the Kitimat LNG Terminal storage tanks, jetty and associated buildings on Haisla First Nation property at the deep sea port of Kitimat.
The biggest winner in the farm-in agreement between EnCana Corp. and Korea Gas involving EnCana's Montney and Horn River acreage has to be the Kitimat LNG terminal. Bit by bit, deal by deal, the West Coast LNG terminal, with the capacity to ship 750 million cubic feet of natural gas per day to points west, is reaching a critical inflection point where it will be given the signal to go full speed ahead.
As farm-in arrangements go, this one is fairly standard in that Kogas pays $565 million US over three years to earn a 50 per cent working interest in the expected production from 62,320 hectares in the Montney and Horn River plays in B.C. While the deal might strike followers of the EnCana story as curious, farm-in deals happen in the energy sector on a regular basis, particularly if the development of the assets in question is not a high priority or is on the pricey side.
Not only are farm-in deals a way to kick-start development of properties, they allow companies to allocate capital elsewhere when there are other time factors at play. This is of particular importance in EnCana's case, because of its land holdings in the shale plays south of the border. What many might not understand, or realize, is that the land system in the U.S. is in private hands; there is no equivalent of a provincial land sale.
It's all done on the basis of deals with private individuals -- and the length of time to do what needs to be done to get to the development phase is much shorter than it is in Canada. How short? The average length of time lands are leased is three years, compared with more than nine years in Canada, and if you are dealing in a remote area of the country, the time of possession is longer.
It's "drill or drop," said one industry veteran, referring to the U.S. system. For a company such as EnCana, with more than 176,000 hectares in the Haynesville in Louisiana and east Texas, it's clearly more important to accelerate the development of that region than it is to put dollars toward the Montney and Horn River plays. What's interesting is there have been a number of farm-in deals done in the U.S. in the past few months -- all involving companies with exposure to shale gas plays. Chesapeake Energy has signed four joint venture agreements involving its ownership of Barnett Shale acreage valued at more than $10 billion US -- the most recent one with Total E&P USA -- and, last month, Houstonbased Anadarko struck a joint venture agreement with Mitsui & Co. for $1.4 billion involving the development of Anadarko's shale assets in Pennsylvania.
The bottom line in all this is that the shale plays -- attractive as they are -- happen to be expensive and farm-out arrangements are one way of accelerating development, while diversifying risk and allowing companies to allocate capital more effectively among short-and long-term projects. The dollar value of the farm-in arrangements or joint ventures also underscore the fact the shale plays are, as EnCana chief executive Randy Eresman said last week, a "big boys' game."
Where the optimism for the Kitimat LNG project comes from is that Kogas, in addition to having committed to taking 20 per cent of the facility's export capacity of 750 million cubic feet per day, now has control over some of the production that will flow into the facility. The fact it's a South Korean company that has surfaced as a player in the natural gas side of Canada's energy sector isn't that big a surprise. The country imports all of its energy and, through deals done by the Korea National Oil Corp., has already secured exposure to oil from both conventional and oilsands plays.
And, if the rumour mill proves correct, Chinese buyers have also been looking for deals on the natural gas side. From a broader perspective, anything that boosts the likelihood Kitimat will, in fact, be built is positive on a number of fronts. It moves Canada, if not North America, into a position of being active in the developing global market for natural gas. The benefits are obvious: With an exit point for natural gas into Asian markets, North American natural gas producers will no longer be hostage to one market that is still heavily dependent on weather patterns -- not industrial or power users -- and be able to take advantage of higher pricing in other markets.
The shale gas revolution has inextricably changed the natural gas game in North America. Securing the ability to diversify the continent's customer base is no longer an issue of if, but when. This week's deal between EnCana and Kogas has to be seen as another step in the right direction.
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