Deal could help Encana drill thousands of wells
A new joint venture between Encana USA and a steel maker could enable Encana to drill more than 4,000 wells in western Colorado over the next 20 years.
That’s double the company’s current statewide well count. About 3,000 of its existing wells are in the Piceance Basin.
Encana and Nucor Corp. have entered into a cost-sharing agreement for natural gas well development on 50,000 acres where Encana owns leases on a federal leasing unit straddling Garfield and Rio Blanco counties.
“This is a unique partnership that has been designed to support Nucor’s increased use of natural gas for their facilities, such as their direct reduced iron facility currently under construction in Convent, Louisiana,” Jeff Wojahn, Encana’s president of USA Operations, said in a news release.
Under the agreement, Encana would operate the joint venture drilling program and handle creation of gas gathering pipelines and other infrastructure, and Nucor will pay its share of costs plus additional interest as each well is drilled, with Nucor’s payments subject to certain caps.
The agreement is in addition to a smaller gas drilling agreement established with Nucor in 2010.
“These two agreements with one of America’s largest steel manufacturers signify a new era of long-term partnerships between the natural gas industry and industrial consumers that provide large manufacturers with economic and environmental incentive to expand operations in the United States to take advantage of abundant and secure natural gas resources,” Encana said in the release.
The deal comes as Piceance Basin energy companies are coping with low natural gas prices that have caused some of them, but not Encana, to suspend drilling.
“This agreement gives Encana the cost certainty to execute our long-term development plans while also providing Nucor with a sustainable competitive advantage in natural gas energy costs,” Wojahn said.
The agreement lets either participant suspend drilling if gas prices fall below a predetermined threshold.
It spells out a range of wells that otherwise must be drilled each year, with the companies jointly determining the actual annual number.
In its own news release, Nucor said the deal “will ensure a reliable, low cost supply of natural gas for our existing and expected future needs for more than 20 years.”
Nucor’s new iron plant will help provide iron to its steel mills and significantly increase its use of natural gas, the company said. It said it may add additional direct reduced iron capacity at the Louisiana site, further boosting gas usage.
It also consumes substantial amounts of natural gas at its U.S. steel plants, it said. Its two agreements are expected to provide enough gas to equal its use at all of its U.S. steel plants and two iron facilities.
According to a filing with the Securities and Exchange Commission, Nucor subsidiary Nucor Energy Holdings Inc. will acquire a 50 percent working interest in the wells to be drilled. It expects to invest about $542 million over the next three fiscal years and about $3.64 billion over the estimated 13- to 22-year term of the agreement.
Encana spokesman Doug Hock noted that the arrangement doesn’t provide for the delivery of the locally produced gas to Nucor’s plants. Rather, the agreement lets Nucor lock in a supply of gas at a given price.
“This is essentially a hedge for them,” he said.
If natural gas prices rise, while that will affect what Nucor pays for gas at its plants, that will be offset financially by the fact that it would be an energy investor acquiring gas at a price below market value under the Encana deal.
Hock said the benefit for Encana is that Nucor is putting up capital up-front. That enables Encana to sustain its local activity despite current low gas prices while being able to devote more of its own capital to other exploration and projects, stretching its money, he said.