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Nexen forms shale gas venture with Japan's Inpex

Nexen Inc. is turning to Asia to drive development of its Horn River shale gas play, with a $700-million joint venture deal with Japan's Inpex Corp. and, perhaps more importantly, plans for a new liquefied natural gas plant on the West Coast.

The Calgary-based company announced Tuesday that is selling Inpex a 40-per-cent working interest in its properties in the Horn River Basin, near Fort Nelson, B.C., earning itself a 60-per-cent premium on capital invested in the project.

Nexen chief executive officer Marvin Romanow said the deal reflects tremendous interest in Canadian energy supplies in Japan – where natural gas competes with a troubled nuclear industry – and in Asia generally.

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"I think Japan, like other countries, is going to be needing a portfolio of energy supplies and they are going through that discussion – what proportion of that will be filled with nuclear and what proportion will be filled with LNG and other sources," he said in an interview.

In the aftermath of the meltdown at the Fukushima nuclear plant last spring, Japan is examining whether to shut existing reactors, and is revisiting its plans to expand reliance on nuclear power. Mr. Romanow said it is unlikely Japan will go nuclear-free, but said additional supplies of gas will be needed to replace reactors that are shut down.

The CEO said the sale will represents an attractive return for Nexen shareholders, especially at a time when North American market is depressed because there is a glut of gas and access to Asia still needs to be developed.

Mr. Romanow said the two parties have agree to pursue a feasibility study on building an LNG plant in British Columbia, but have not chosen a site. But he insisted that access to Asian markets – while desirable – is not necessary for the production of shale gas from northeastern B.C., given easy access to the North American pipeline network.

However, Ed Kallio, an analyst with Calgary-based Ziff Energy Group, said the LNG export option is critical to the development of the Horn River shale gas.

"We really need some premium outlets for our gas because we're facing competition all over North America in our traditional markets," Mr. Kallio said. "Without the premium outlet into Asia, [the Horn River]gas will languish, it will just sit there."

The Nexen deal is the latest to bring Asian investors into Canada's oil-and-gas sector, particularly the shale gas play in northeastern B.C., where producers are eager to build LNG capacity to tap lucrative Asian markets.

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Natural gas in Asia sells for three to four times the price in North America, where a gas glut has driven down prices to bargain-basement levels.

Royal Dutch Shell PLC is working on a plan to build an LNG facility on the B.C. coast with three Asian partners: Korea Gas Corp., China National Petroleum Co. and Japan's Mitsubishi Corp. That facility would compete with a LNG plant in Kitimat being build by a consortium of North American producers led by U.S.-based Apache Corp.

At the same time, Chinese companies have becoming increasingly aggressive in investing in oil and gas production, with the latest deal involving a $2.1-billion acquisition by China National Offshore Oil Corp. (CNOOC) of oil sands producer Opti Canada Inc.

The federal government is encouraging the diversification of Canada's energy export markets to Asia and Natural Resources Minister Joe Oliver says it is an "urgent priority" that pipelines be completed to the West Coast.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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