UPDATE 4-Nexen, Inpex in latest Canada-Asia shale marriage

Tue Nov 29, 2011 3:24pm EST

* Nexen to sell 40 pct of northeast British Columbia assets

* To sell assets to consortium led by Japan's Inpex

* Sets 2012 capex at C$2.7 bln-C$3.2 bln

* Shares jump 5 percent

By Jeffrey Jones

CALGARY, Alberta, Nov 29 (Reuters) - Nexen Inc said on Tuesday it will sell 40 percent of its British Columbia shale gas holdings to a group led by Japan's Inpex Corp for C$700 million ($680 million) in the latest Asian foray into Canada's rich unconventional resources.

Nexen shares surged 5 percent to C$15.99 on the Toronto Stock Exchange as investors digested a positive development following a string of disappointments, including this month's loss of Nexen's long-held production contract in Yemen and struggles with its Long Lake oil sands project.

The deal - to include an upfront payment for half the amount and the rest in capital spending by Inpex and partner JGC Corp - marks the close of Nexen's year-long search for a partner to develop lands that could hold as much as 38 trillion cubic feet of gas.

Inpex joins a rush of Asian-based investors that have entered partnerships to develop such reserves, including Malaysia's Petronas, Korea Gas Corp and Mitsubishi Corp , also of Japan.

Like Petronas's tie-up with Calgary-based Progress Energy Resources Corp , Nexen and Inpex will study developing a liquefied natural gas plant on the West Coast as a way to supply markets across the Pacific and avoid the North American gas market, which is glutted with burgeoning shale supplies.

"The next phase with Inpex is to study those choices and determine if we have a feasible and attractive option." Nexen Chief Executive Marvin Romanow said in an interview. "So we plan to evaluate that over the next few years."

It is a nascent industry in Canada. A trio of companies led by Apache Corp plans the country's first LNG plant at the port of Kitimat, British Columbia, as companies keep improving the technology they use to produce gas trapped in tightly stacked rock.

Inpex is no stranger to LNG, owning controlling stakes in large LNG projects in Indonesia and Australia. It is also building a regasification terminal in Japan.

"The read-throughs here are pretty self-evident; we have trouble believing that Inpex does not plan to aggressively pursue LNG export capability over time," TD Securities analyst Menno Hulshof said in a research note.

Hulshof pegged the deal value about 14 Canadian cents per thousand cubic feet of contingent resource, which puts it in the range of similar recent transactions and his expectations.

The reserves are located in British Columbia's Horn River, Cordova and Liard basins. The Horn River alone, site of brisk interest from energy companies, is estimated to contain 78 tcf, enough to fuel U.S. needs for three years, according to the National Energy Board.

LOW COMPLETION RISK

Early this year, a C$5.4 billion B.C. shale venture between Encana Corp and PetroChina collapsed amid speculation the two sides came to an impasse over valuation, control and pace of development.

Romanow said that was not a risk with Nexen's arrangement, as the deal is completed and not just being worked out, as was the case with Encana.

"These large projects require not only good agreements but good alignment on what each joint venture party wants to achieve," he said. "When you get alignment on that you get success, and that was one of the criteria that we looked for."

He used Nexen's Usan oil venture off the Nigerian coast as an example. The $10 billion Total SA-operated oil field is due to start producing in the coming months. Nexen has a 20 percent stake.

The shale deal is expected to close in the first quarter.

Meanwhile, Nexen said it plans capital spending of C$2.7 billion-C$3.2 billion, up to 19 percent higher than its 2011 budget. The budget shows the company aims to live within its projected cash flow of C$2.8 billion-C$3.3 billion. It devised its plan assuming an Brent average oil price of $110 a barrel.

Nexen forecast 2012 output of 185,000-220,000 barrels of oil equivalent a day before royalties, compared with 200,000-215,000 bpd this year.

A possible fall in production is primarily due to the exit from Yemen, where the company failed to renegotiate its contract after 18 years in the country.

However, Nexen's share of output from Usan could help compensate for the Yemen production losses. Usan is expected to begin production in the first half of 2012.

It plans to spend most its budget on Usan, its Long Lake oil sands development, Golden Eagle discovery in the North Sea and Appomattox find in the Gulf of Mexico.

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