Gastar Exploration enters $70M Marcellus JV with Atinum

Continuing trend of int'l investment in NA shale plays, Gastar calls JV 'least dilutive' way to finance shale development

Gastar Exploration Ltd. has entered into a $70 million Marcellus shale joint venture agreement with an affiliate of Seoul, South Korea-based investment firm Atinum Partners Co. Ltd. as part of the growing trend of international player involvement in unconventional resources in North America.

Atinum Marcellus I LLC will initally acquire a 21.43% interest in all of Gastar's existing Marcellus Shale assets in West Virginia and Pennsylvania, approximately 34,200 net acres, and certain producing shallow conventional wells.

Gastar's Marcellus assets are concentrated in the liquids-rich northwest corner of West Virginia in Marshall, Wetzel, and Monongalia Counties. In Pennsylvania, the company has a concentration of acreage in Bulter, and Clarion, and Clearfield Counties – also liquids-rich.

In August, J. Russell Porter, president and CEO of Gastar told OGFJ that the company was in discussions with potential Marcellus JV partners. (OGFJ, September 2010, p. 26).

The $70 million transaction value comes in the form of a $30 million cash payment by Atinum upon closing and an additional $40 million in the form of a drilling carry. Gastar will continue to serve as operator of the acreage, but upon completion of the drilling carry, Atinum will own a 50% interest in the acreage currently owned by Gastar.

The terms of the drilling carry call for Atinum to fund its ultimate 50% share of drilling, completion and infrastructure costs along with 75% of Gastar's ultimate 50% share of those same costs until the $40 million carry has been satisfied.

Drilling potential

Together, the companies are pursuing an initial three-year development program that calls for the drilling of one horizontal Marcellus Shale in 2010, at least 12 horizontal wells in 2011, and 24 horizontal wells in 2012 and 2013. Thus far, Gastar has vertically tested one Marcellus well in Wetzel County, West Virginia that came online at 1.5 million cubic feet per day and 120 barrels of condensate a day.

The company is establishing an initial area of mutual interests for potential future partnering on a 50/50 basis. Atinum has agreed to pay Gastar on an annual basis an amount equal to 10% of lease bonuses and third party leasing costs up to $20 million and 5% of the costs on activities above $20 million. Until June 30, 2011, Atinum will have the right to participate in any future leasehold acquisitions made by Gastar, outside of the initial AMI and within West Virginia or Pennsylvania, on terms identical to those governing the existing Marcellus JV.

Porter commented, "This joint venture will allow Gastar to accelerate development of our Marcellus Shale assets while maintaining a low level of leverage and a high degree of financial flexibility. This transaction also realizes a significantly higher valuation for our Marcellus Shale assets than what has been reflected in our share price and thus made a joint venture the least dilutive method to finance development."

This is the third investment by Atinum in the US energy sector in the last 12 months. The company's initial investment in the energy sector was the September 2010 purchase of the Sterling Energy plc, the US business unit of London-based Sterling Energy Inc. for $90 million.

Vinson & Elkins LLP acted as legal advisor for Gastar. BMO Capital Markets acted as financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP acted as legal advisor for Atinum.

—Mikaila Adams

Noble Energy Inc. has sanctioned the Tamar natural gas project offshore Israel. Discovered in 2009, Tamar is operated by Noble Energy and has total recoverable resources estimated at 8.4 trillion cubic feet of natural gas.

Initial development of Tamar will include five subsea wells capable of flowing 200 to 250 million cubic feet per day (Mmcf/d) of natural gas each. Production will be gathered at the field and delivered via two 16-inch flowlines to a new platform, which will be constructed adjacent to the existing Mari-B structure.

The Tamar platform will tie into the existing 30-inch pipeline that delivers natural gas to the Ashdod onshore receiving terminal, with an initial processing capacity up to 1.0 billion cubic feet of natural gas per day. The project design and connectivity to Mari-B will also provide for gas injection and withdrawal in the Mari-B reservoir. The development will allow for significant expansion as the market for natural gas grows.

Gross capital cost for Tamar is estimated at $3 billion ($1.1 billion net to Noble Energy). The majority of key project components have been awarded and development drilling is scheduled to commence by early 2011. Project installation is expected to be complete and commissioning initiated in the fourth quarter of 2012.

Noble Energy operates Tamar, offshore Israel in the Matan license, with a 36% working interest. Other interest owners are Isramco Negev 2 with 28.75%, Delek Drilling with 15.625%, Avner Oil Exploration with 15.625%, and Dor Gas Exploration with the remaining 4%.

The company is also the operator of Mari-B with a 47.059% working interest. Delek Drilling has a 25.5% interest, Avner Oil Exploration holds 23% and Delek Investment has 4.441%.

Marathon Oil Corp. provided an update today on its Droshky development in the deepwater Gulf of Mexico, which began operations on July 15, 2010. As of this writing, production has hit roughly 45,000 net barrels of oil equivalent per day (boepd), consisting of approximately 39,000 b/d of liquid hydrocarbons and 39 million cubic feet per day of natural gas.

Marathon owns a 100% working interest in Droshky.

The Droshky development consists of four wells tied back to the third-party Bullwinkle platform. Three of the four wells are currently producing at better-than-projected levels, while production from the fourth well has been delayed due to an equipment issue. Marathon plans to re-enter the fourth well in the first quarter of 2011 to make the necessary repairs.

The company reiterated its previous Exploration and Production guidance for available for sale production in the third quarter of 2010 which remains unchanged at 385,000 to 405,000 net boepd, despite the slightly lower production from Droshky.

Marathon now expects Droshky to produce at a peak rate of approximately 45,000 net boepd – down from the original estimate of approximately 50,000 net boepd. The additional work on the fourth well is expected to add approximately $25 million to the total project cost.

Droshky is located in approximately 3,000 feet of water in Green Canyon Block 244,

about 160 miles southwest of New Orleans.

Athens Group, an independent software consulting firm to the drilling industry, has released its new Requirements and Issue Tracking Database. This latest tool is part of the company's Proven Practices Methodology. It helps reduce non-productive time (NPT) by providing a central location for logging and tracking all control systems software-related requirements and issues.

Using the Database, Athens Group was able to identify 865 issues during the engineering phase of a recent newbuild project. Nineteen of these issues were critical and involved problems with the anti-collision system, drilling emergency stop command, and BOP control system. Of the remainder, 157 issues posed considerable risk, and 689 issues posed moderate risk. Had these problems been left undiscovered until the Operations phase, resolution would have cost tens of millions USD.

In a recent industry survey conducted by Athens Group and ModuSpec entitled, "The State of NPT on High-Specification Offshore Assets: Second Annual Benchmarking Report," 100% of drilling contractors and operators identified better defined requirements as an opportunity to reduce NPT. A further 89% of respondents identified improved testing during Factory Acceptance Testing (FAT) and Commissioning as large opportunity for NPT reduction.

Chevron has expanded its international reach in deepwater with acquisitions offshore China, offshore Liberia, and in the Turkish Black Sea.

The company's Chinese subsidiary recently received final approval to acquire operating interests in three exploration blocks in the South China Sea's Pearl River Mouth Basin.

Chevron acquired a 100% interest in blocks 53-30 and 64-18, and a 59.18% interest in block 42-05, from Devon subsidiary Devon Energy China Ltd. The blocks cover an exploratory acreage of approximately 8,100 square miles. Chevron will be operator during the exploration phase under the amendment agreements to the production sharing contract with China National Offshore Oil Corporation (CNOOC).

BP will acquire the remaining interest in block 42-05.

The company was also granted approval by the Liberian government to acquire a 70% interest and operatorship in three deepwater concessions in Liberia.

The deepwater blocks, LB-11, LB-12 and LB-14 are located between 12 to 110 miles south of the capital of Monrovia and cover a combined area of 3,700 square miles. Under the agreement, Chevron's Liberian subsidiary will conduct a three-year exploratory program that is expected to begin in the fourth quarter of 2010.

"These licenses are on trend with new deepwater Cretaceous discoveries in the region and will expand our exploration portfolio in offshore West Africa which has delivered significant production from several basins," said Ali Moshiri, president, Chevron Africa and Latin America Exploration and Production.

The company also signed a joint operation agreement, through its Turkish subsidiary, with Turkey's state oil company for an exploration license in the Black Sea.

"This agreement represents a significant exploration entry into a highly prospective new basin," said George Kirkland, vice chairman, Chevron Corp.

Chevron will acquire a 50% interest in a western portion of License 3921, an 8,700 square mile block located 220 miles northwest of the capital city of Ankara. Türkiye Petrolleri Anonim Ortakl g (TPAO) holds the remaining 50% interest in the license and will be the operator of the initial exploratory well currently being drilled. If the initial well is successful, 3D seismic will be acquired and an additional exploratory well will be drilled by TPAO during 2012.

Chevron would become operator during any future development of the project.

More Oil & Gas Financial Journal Current Issue Articles
More Oil & Gas Financial Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com