Oklahoma-based Chesapeake Energy and CNOOC Limited of China have entered into a partnership agreement in the Niobrara Shale-focused Denver-Julesburg (DJ) Basin in northeast Colorado and the Power River Basin in southeast Wyoming. This is the second partnership between the two companies in the past several months. The first project cooperation agreement in the Eagle Ford Shale in South Texas was announced on Nov. 15.

Under the agreement, CNOOC International Limited, a wholly-owned subsidiary of CNOOC Limited, will purchase 33.3% undivided interest in Chesapeake’s 800,000 net oil and natural gas leasehold acres in the DJ and Powder River basins. The consideration for the transaction will be $570 million in cash at closing. In addition, CNOOC has agreed to fund 66.7% of Chesapeake’s share of drilling and completion costs until an additional $697 million has been paid, which Chesapeake expects to occur by year-end 2014. The transaction is expected to close in the first quarter of 2011.

As the operator of the project, Chesapeake will conduct all leasing, drilling, completion, Operations, and marketing activities for the project. Chesapeake is currently operating 16 producing wells in the DJ and Powder River basins that have reached initial production rates of up to 1,000 barrels of oil and 3.0 million cubic feet of natural gas per day.

Over the next several decades, the companies plan to develop net unrisked unproved resource potential up to
5.0 billion barrels of oil equivalent (after deducting an assumed average royalty burden of 20%). Chesapeake is currently utilizing five operated rigs to develop its DJ and Powder River basins leasehold and with the additional capital investment from CNOOC, anticipates increasing its drilling activities to approximately 10 rigs by year-end 2011 and 20 rigs by year-end 2012.

CNOOC will have the option to acquire a 33.3% share of any additional acreage acquired by Chesapeake in the area and the option to participate with Chesapeake for a 33.3% interest in midstream infrastructure related to production generated from the assets.

Chesapeake CEO Aubrey K. McClendon commented, “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. 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. In addition,
Chesapeake’s embedded safety culture and integrated environmental protection strategies will be adopted to safeguard personnel and the surface and subsurface environment. Moreover, this project will advance the efforts of both the US and China to reduce greenhouse gas emissions and accelerate commercial opportunities for the development of shale gas resources in China, furthering the objectives of the US-China Shale Gas Resource Initiative announced by the White House on Nov. 17, 2009.”

Fu Chengyu, chairman of CNOOC Limited, stated, “It is a great pleasure to establish further cooperation with Chesapeake in shale oil and gas development. 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. We believe this project is meant to be mutually beneficial to both parties as well as for both Sino-US energy industries.”

Yang Hua, vice chairman and CEO of CNOOC Limited, said, “This second transaction with Chesapeake represents another success in our overseas development as we implement a value-driven M&A strategy. I am confident the project will not only strengthen our solid resource and production base in overseas but create value to the shareholders in the long term.”

Chesapeake’s advisor on the transaction was Jefferies & Company, Inc., and CNOOC Limited’s
advisor was Tudor, Pickering, Holt & Co. Securities, Inc.