Nexen (NYSE:NXY) has signed a joint venture to help share the costs and risks of developing the company's large shale gas reserves in Western Canada. The new partners also have considerable expertise in liquefied natural gas (LNG) operations.

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Joint Venture
Nexen recently announced an agreement with INPEX Gas British Columbia Ltd. to jointly develop shale gas assets in the Horn River, Liard and Cordova Basins in Western Canada. The company will receive $700 million for a 40% interest in these resources, and will remain the operator.

Nexen expects the deal to close in the first quarter of 2012, and will receive part of the purchase price in cash and the balance as a drilling carry. The company's joint venture partner is owned by INPEX Corporation and JGC Corporation, two Japanese companies that have extensive experience in LNG operations on the production and engineering side.

This joint venture is a logical strategic choice for Nexen as any production from the three basins will probably have to be exported to Asia, where demand for natural gas is expected to grow by 10 billion cubic feet per day from 2010 to 2020.

One project that INPEX Corporation is involved with is the Ichthys LNG Project under construction with partner Total (NYSE:TOT). The facility will process natural gas from the Browse basin in Western Australia for export to Japan and other parts of Asia. JGC Corporation is also involved with this project, and is part of a joint venture that is working on the Front End Engineering and Design services for the facility. (To know more about oil and gas industry, read: Oil And Gas Industry Primer.)

Horn River Shale
Nexen believes that the company's Horn River Shale assets have many geological and financial advantages over other shale plays in North America. The shale is thick and contains natural fractures with high silica content, resulting in a reservoir that is more responsive to hydraulic fracturing. Nexen also has a 10-year term on leases and an advantageous royalty and tax structure.

The company estimates that the three basins contain an immense amount of natural gas, with the Horn River and Cordova areas holding between 4 and 15 trillion cubic feet (Tcf) of recoverable contingent resources. The Liard basin is estimated to have between 5 and 23 Tcf of prospective resources.

2012 Capital
Nexen has budgeted between C$50 million and $75 million in net capital to develop shale gas properties in the Horn River Basin in 2012. The company is finishing up an 18 well pad in the basin, and expects to get to peak production of 155 million cubic feet of natural gas per day by the early part of 2013.

Other Operators
Several operators in Canada are already working on a LNG facility in British Columbia to export natural gas to Asia. Apache (NYSE:APA), EOG Resources (NYSE:EOG) and Encana (NYSE:ECA) are involved with the Kitimat LNG facility, and expect this project to be operational in 2015.

The Bottom Line
Nexen's joint venture sets up the company for the future development of its huge natural gas resource base in Western Canada. The path the company is following is a prudent one that will pay off in the long term. (For additional reading, check out: A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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