Steel manufacturer Nucor Corp. of Charlotte, NC, and Encana Oil & Gas (USA) Inc. agreed to a joint natural gas drilling program for the Piceance basin in Colorado in efforts to ensure Nucor a long-term, reliable gas supply while helping Encana with development costs, the companies said.
The agreement will enable Encana to drill up to 4,000 new wells over 20 years—doubling the company's well count in Colorado, Encana spokesman Doug Hock in Denver told OGJ.
Terms call for Nucor to pay its share of drilling costs plus an additional amount of carried interest as each well is drilled, subject to a cap on carry paid for each well and a cap on total carried interest. Either party may suspend drilling if gas prices fall below a predetermined threshold.
A document filed with the US Securities and Exchange Commission showed Nucor expects to invest $542 million over 3 years and $3.64 billion over the agreement's estimated 13-22 years.
Encana will be the operator and will provide expertise to drill, complete, and operate the wells. The joint venture establishes a 50-50 Mesaverde drilling program for gas wells on 50,000 acres of Encana's Big Jimmy Federal Unit in both Garfield and Rio Blanco counties.
"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," said Jeff Wojahn, president of Encana (USA) operations.
"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," Wojahn said of a plant in Convent, La.
This latest agreement is in addition to a similar but smaller 2010 onshore gas drilling agreement between Nucor and Encana.
"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.
NuCor believes it will be better able to manage its exposure to gas price volatility and overall energy demand for its manufacturing operations in the US and Canada.
Encana of Calgary is a large participant in several resource plays in Canada and the US. The Piceance basin Williams Fork tight sand and the North Louisiana Haynesville shale are two of the company's large US ventures.
In the Piceance basin, Encana owns 869,000 net acres bounded roughly by Rangely, Grand Junction, Rifle, and Meeker, Colo. More than 70% of the lands are undeveloped (OGJ Online, Jan. 17, 2011).
