CNOOC inks second shale deal with Chesapeake, paying $1.3B for Niobrara Shale interest

By Phaedra Friend Troy

US independent Chesapeake Energy (NYSE:CHK) has signed an agreement with CNOOC Limited (NYSE:CEO) to sell the Chinese NOC 33.3 percent undivided interest in 800,000 Niobrara Shale acres in the Devner-Julesberg (DJ) Basin and Powder River Basin of northeast Colorado and southeast Wyoming.

In the agreement, CNOOC will pay Chesapeake $570 million in cash at the closing, which is anticipated for the first quarter of 2011. Additionally, CNOOC will pay a $697 million drilling carry, to cover 66.7 percent of the drilling and completion costs through 2014.

“We are very pleased to announce our sixth industry development agreement and our second transaction with CNOOC Limited, China's largest producer of offshore oil and natural gas and one of the largest independent oil and gas companies in the world,” said Aubrey McClendon, Chesapeake’s CEO. “This transaction will provide the capital necessary to accelerate drilling of this large domestic oil and natural gas resource, resulting in a reduction of our country’s oil imports over time, the creation of thousands of high-paying jobs in the US and in the payment of very significant local, state and federal taxes."

Chesapeake will remain as operator of the project, conducting all leasing, drilling, completion, operations and marketing activities.

Right now, Chesapeake is operating 16 producing wells in the DJ and Powder River Basins, with a combined production rate of 1,000 barrels of oil and 3 million cubic feet of natural gas a day. Chesapeake is currently operating five rigs on the Niobrara Shale acreage, and with CNOOC's investment that number will be increased to 10 rigs by the end of 2011 and 20 rigs by the end of 2012.

Over the next several decades, the companies plan to develop net unrisked unproved resource potential of up to 5.0 billion barrels of oil equivalent.

“The project highlights the joint interests of energy companies in both US and China to accelerate the development of shale oil and gas, increase energy supply and reduce greenhouse gas emissions," said Fu Chengyu, chairman of CNOOC. "We believe this project is meant to be mutually beneficial to both parties as well as for both Sino-US energy industries.”

Additionally, CNOOC will have the opportunity to acquire a 33.3 percent stake in any additional acreage that Chesapeake acquires in the area, as well as the option to join Chesapeake with a 33.3 percent share in midstream infrastructure related to the Niobrara Shale production.

In November 2010, CNOOC and Chesapeake closed a $2.2 billion project cooperation agreement in the Eagle Ford Shale of South Texas

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