Nucor, Encana end drilling deals, enter into lease agreement
A major steelmaker and the oil and gas producer Encana have ended deals compelling them to jointly develop thousands of natural gas wells in western Colorado’s Piceance Basin when gas prices are high enough.
In their place, Nucor has bought a 49 percent oil and gas lease interest from Encana on about 54,000 acres in the Piceance, with Encana retaining a 51 percent controlling interest in that acreage.
The companies both said ending their joint venture gives them more flexibility in decisions about where to make capital investments. In the short term, at least, that could mean a delay in any resumption of drilling by Encana locally. Under the joint venture with Nucor, Encana would have been obligated to drill once natural gas prices rose to a predetermined level.
“We wanted to have the flexibility to really direct our capital where we felt we would have the highest (profit) margins,” Encana spokesman Doug Hock said.
For now, anyway, that means spending money in what Encana considers its four core areas — two basins in Texas and two in Canada that are more liquids-rich than the Piceance, which primarily produces natural gas.
As for Nucor, the new transactions with Encana “preserve Nucor’s long-term access to low cost gas resources in support of Nucor’s raw material strategy. We think this … is a win-win for both companies,” John Ferriola, Nucor’s chairman, chief executive officer and president, said in a news release.
Encana and Nucor have ended a drilling agreement reached in 2010 and a larger one that came two years later. They involved sharing in the upfront cost of drilling wells in exchange for Nucor gaining a working interest in the wells that are drilled.
The 2012 agreement held the potential for Encana to drill more than 4,000 wells over 20 years on some 50,000 acres of federal leases stretching from Garfield County into Rio Blanco County. Nucor said at the time that it expected to invest $542 million over the following three years and about $3.64 billion over the estimated 13- to 22-year term of the agreement.
Nucor, based in North Carolina, is a heavy consumer of natural gas and got involved with Encana as a hedge against the possibility of rising natural gas prices. The joint venture wasn’t designed to ship the gas produced to its factories, but rather was intended to ensure that if gas prices go up, Nucor also is invested on the gas supply side.
Encana and Nucor eventually suspended drilling under the joint venture under terms allowing for that if prices fell too low. By late 2013 Encana decided to stop drilling altogether in the Piceance, and it hasn’t drilled locally since. A Nucor official later told The Daily Sentinel that as many as 300 wells probably had been drilled under the joint venture before work was suspended. Nucor said Tuesday it is keeping all producing wells it owns.
Hock said Nucor’s new lease ownership covers the same acreage that was involved in the 2012 agreement. Encana, as majority owner, would decide if and when to drill on the acreage, and Hock said Nucor would have a 49 percent ownership of proceeds from any drilling.
Nucor said in its release that the new ownership structure “provides Nucor full discretion on its participation in all future drilling capital investment.”
Nucor also sold its half-interest in Hunter Ridge Energy Services LLC to Encana. Hunter Ridge was formed by the two companies to provide gas gathering and water services.
Nucor didn’t disclose in its news release the dollar amounts involved in the lease and Hunter Ridge transactions.