In a surprising move EnCana and PetroChina have agreed to end negotiations to create a joint venture alliance on EnCana's Cutbank Ridge unconventional gas acreage in Canada. The companies stated that this decision was taken because "... the parties were unable to achieve substantial alignment with respect to key elements of the proposed transaction, including the joint operating agreement."
EnCana now plans to (1) seek multiple JV alliances that will develop portions of the acreage and (2) possible disposition of midstream and processing assets separately. Why did this JV breakdown? The short answer is that PetroChina was paying too much given gas price conditions and the realities of gas-weighted plays in Canada at this time.
Our model of the deal clearly indicated that the realized price of gas to make the deal economic from PetroChina's perspective has to be well above $6/mcf at the price they were paying to acquire the position.
If the gas is sold into the North American market it will be discounted significantly relative to Henry Hub. It should be noted that EnCana specifically mentioned in its press release announcing the cancellation that it expects that future gas prices will "return to a long-term level of about $6 per thousand cubic feet". The long-term may be too far into the future even if PetroChina agrees with EnCana about its outlook.
If the gas is exported via LNG as in the Kitimat case the realized price will be higher and likely linked to oil. However, the capital cost to bring the gas to market will also be considerably higher and this additional cost will absorb a significant part of the price premium. Moreover, it will take a number of years before LNG exports can occur and the delays in production only further erode the economics from PetroChina's point of view.