Chevron Corp. has struck a deal to sell part of its Alberta's Duvernay play to a unit of state-run Kuwait Petroleum Corp. for $1.5-billion (U.S.), ending a two-year deal drought in a region said to rival some of the biggest U.S. shale zones.
Chevron Canada Ltd. said Monday it would sell 30 per cent of its holdings in the Alberta formation to KUFPEC Canada Inc., a wholly owned subsidiary of Kuwait Foreign Petroleum Exploration Co. The transaction will see the companies partner on a 330,000-acre tract of land about 200 kilometres northwest of Edmonton. KUFPEC will also pay a portion of Chevron's future capital costs, the San Ramon, Calif.-based company said in a statement. It's KUFPEC's first investment in North America.
Analysts said the deal is the richest yet in a zone that has drawn favourable comparisons to prolific shale plays responsible for the dramatic resurgence in U.S. oil production. Some of the world's largest energy companies, including Exxon Mobil Corp. and Royal Dutch Shell PLC, have flocked to the Duvernay in recent years, spending nearly $3-billion (Canadian) since 2009 to amass drilling rights despite uncertain commercial prospects.
Drilling in the shale play has progressed at a slower clip compared to rival jurisdictions such as the Eagle Ford and Permian in Texas or North Dakota's Bakken. Companies have sought partners to offset high development costs in the Alberta play, but a series of would-be joint ventures has fizzled, stalling development plans for smaller independents with large Duvernay holdings such as Talisman Energy Inc. and Athabasca Oil Corp. Shares of Talisman and Athabasca both gained on the deal.
"This is the first material transaction in the Duvernay for two years," said Adam Waterous, co-head of global equity and advisory at Scotiabank, which advised KUFPEC. "There's been a huge number of failed deals."
Calgary-based Talisman has yet to strike a deal for its Duvernay lands since chief exeuctive Hal Kvisle officially outlined his restructuring plan in March, 2013. Potential buyers from Asia and Europe mulled bidding on the company's north Dunveray lands, Mr. Kvisle said last year, but a transaction never materialized. Athabasca has also failed to cinch a deal, including a reported tie-up involving Kuwait Petroleum in 2012.
KUFPEC was drawn to Alberta by "the very specific nature of the rocks that Chevron has" and the opportunity the acquire technical know-how in tricky geology, Mr. Waterous said. The state-run company is paying handsomely for a slice of the shale resource, prospective for potentially big yields of condensate (ultra-light oil), natural gas liquids such as propane and butane, and oil.
The $1.5-billion (U.S.) price tag works out to $15,152 per acre – a new high for the play, according to numbers crunched by FirstEnergy Capital Corp. analyst Michael Dunn. The previous high was Chevron's purchase last year of 67,900 acres from Alta Energy for the equivalent of roughly $14,700 an acre. In 2012, China National Petroleum Corp. paid the equivalent of $9,800 per acre for a 49.9-per-cent slice of Encana Corp.'s Duvernay acreage.
KUFPEC's Alberta foray represents new "capital in the door in a play that probably still needs some R&D work to be economic," said Robert Fitzmartyn, managing director of institutional research at FirstEnergy Captial.
The deal also marks the return of state-owned enterprises to Alberta's energy patch, following changes to the Investment Canada Act introduced after CNOOC Ltd.'s $15.1-billion (Canadian) acquisition of Nexen Inc. that effectively barred such firms from buying controlling interests in the oil sands. Analysts and bankers subsequently blamed the changes for a precipitous drop in deal-making.
Chevron said it expects to retain 70 per cent of its Duvernay lands under the deal, which is expected to close in November. The U.S. company said it has so far drilled 16 wells in a northern region of the play called Kaybob, with initial results showing production rates of up to 7.5 million cubic feet of natural gas and 1,300 barrels of condensate a day.
Chevron is seeking a partner for its Kitimat LNG project on Canada west coast, after Apache Corp. pulled out of the project earlier this year.
With a file from Carrie Tait