Norsk Hydro ASA Hydro has entered into an agreement with independent Canadian oil and gas company EnCana Corporation to acquire all of the issued shares of an EnCana subsidiary for a cash consideration of 350 million US dollar on a debt-free basis. The EnCana subsidiary holds a 50 percent interest in the promising Chinook discovery in the Campos basin in Brazil.
"The Chinook asset represents a unique opportunity to secure long-term resources with significant upside potential in a region with considerable proven oil resources and exploration potential," says Hydro Executive Vice President Tore Torvund, head of Hydro’s oil and gas business.
"The acquisition marks another important step in expanding Hydro’s international oil and gas business and will allow us to leverage key Hydro competencies."
Brazil is one of the world’s most attractive offshore oil provinces with significant undeveloped discoveries and yet-to-find potential. The Chinook discovery is located 75 kilometers offshore Brazil in water depths of about 100 meters.
The field has been appraised by four wells and is expected to contain up to 2 billion barrels of heavy oil. The appraisal well 3-ENC-3 was successfully production tested in the third quarter of 2005.
The recovery rate for similar heavy-oil fields has normally been low, in the range of 10-15 percent. Hydro’s experience from other fields shows that there is significant additional value to be extracted from this type of asset.
Application of multilateral wells, long-reaching horizontal wells and sophisticated reservoir management techniques, offer considerable potential in terms of reducing the overall development costs, increasing the recoverable resources and ultimately improving the economics.
Hydro will be working with its partner to submit a development plan and get Chinook on production as soon as practical. Production is expected to continue beyond 2025.
The development cost for the Chinook field is currently estimated at approximately 5 US dollar per barrel. The operating cost is currently estimated at approximately 2 US dollar per barrel.
The acquisition fits well with Hydro’s growth strategy, providing undeveloped proven resources with identified upside potential. When valuing the assets, Hydro has applied oil prices in the mid-30s, before adjusting for an expected heavy oil discount of 30-40 percent.
The US independent oil and gas company Kerr McGee holds the remaining 50 percent working interest in the Chinook field (BM-C7 concession). Hydro believes the two companies have significant complementary skills that will make the Chinook development highly profitable for both parties.
The closing of this transaction is expected in the first quarter of 2006 and is subject to regulatory approval.