Sinopec Joins Devon In Five Emerging Plays, Becomes Second Chinese E&P Onshore U.S.
To purchase 33% interest in five emerging plays in Devon’s 1.2-million-net-acre positions in Tuscaloosa Marine shale, Niobrara, Mississippian, Ohio Utica shale and the Michigan Basin.
Marking the second Chinese energy company to invest in U.S. onshore resource plays, Sinopec International Petroleum Exploration & Production Corp. will take a 33% interest in five emerging plays as part of a joint-venture agreement with Devon Energy Corp., Oklahoma City, Oklahoma, (NYSE: DVN) for an investment of $2.2 billion.
Sinopec will participate in Devon’s 1.2-million-net-acre positions in the Tuscaloosa Marine shale, Niobrara, Mississippian, Ohio Utica shale and the Michigan Basin. The companies have recently added acreage in the Ohio Utica shale, increasing their joint position in the play to 235,000 net acres.
SIPC will make a $900-million cash payment upon closing including drilling costs and acreage acquisition costs incurred since the effective date, and $1.6 billion paid in the form of a drilling carry. The drilling carry will fund 70% of Devon’s capital requirements, which results in Sinopec paying 80% of the overall development costs during the carry period.
“This arrangement improves Devon’s capital efficiency by recovering our land and drilling costs to date and by significantly reducing our future capital commitments,” says Devon president and chief executive John Richels. “We can accelerate the derisking and commercialization of these five plays without diverting capital from our core development projects. This transaction also provides us further flexibility to seek exposure to additional new play types with less risk.”
Chinese national oil company CNOOC Ltd. (NYSE: CEO) was the first onshore U.S. entrant by a Chinese energy company in 2010, taking positions in the Eagle Ford and Niobrara shales from Oklahoma City-based Chesapeake Energy Corp. (NYSE: CHK). Those forays and numerous other global resource investments were led by CNOOC chairman Fu Chengyu, who subsequently left CNOOC and is now chairman of Sinopec.
Based on the current work plan, Devon expects the entire $1.6-billion carry to be realized by year-end 2014. Through 2012, the companies expect to drill approximately 125 gross wells in the five plays.
Dave Hager, Devon executive vice president of exploration and production, says, “While we are still in the early stages of derisking these plays, the tremendous response by industry to our data room process clearly underscores the attractiveness of this opportunity. We believe our strong acreage positions in these plays, our reputation as a quality operator and the uniqueness of the opportunity for exposure to five different plays in a single venture make this a compelling value proposition.”
Devon will serve as operator and will have ultimate responsibility for the allocation of capital. It plans to market all production from these plays into the North American market.
Closing is expected first-quarter 2012.