Don Warlick, WarlickEnergy
Entities outside the US and Canada are funding a surprisingly large share of development in unconventional oil and gas plays -- and that trend should continue.
Typically these are IOCs (international oil companies), state-backed investment groups or other foreign-based entities investing not only for financial gain but also to acquire technical knowledge about unconventional oil and natural gas development that can be applied in undeveloped shales in their own countries. In return US and Canadian energy companies receive funding to develop important shale plays and establish new reserves.
These investments are significant -- in a recent analysis by PricewaterhouseCoopers, 191 M&A deals worth $187 billion were announced in 2011. That was an increase over 2010 which had 196 deals worth $139 billion. The average deal in 2011 was $979 million (up more than 38%, on average over 2010).
Who is making these investments? Companies based in France, China, Japan, Spain, South Korea, Norway and Australia are among recent investors making financial commitments. Some examples:
- France's Total SA announced plans in early 2012 to invest $2.3 billion in Chesapeake Energy’s Utica assets as part of a JV to explore Ohio's Utica shale formations, taking a 25% stake. Under the terms of the deal Total paid $610 million to Chesapeake and $290 million to US-based EnerVest, the other partner in the venture. Chesapeake will receive an additional $1.42 billion contribution to drilling and well completion costs by the end of 2014. In early 2010 Total took part in a joint venture with Chesapeake in the Barnett Shale.
China has 1,275 TCF of technically recoverable shale gas so Chinese companies are actively working to acquire shale expertise. In January 2012, Devon Energy agreed to sell one-third of its interest in five plays (including the Tuscaloosa Marine shale in Alabama and Mississippi and the Niobrara in Colorado) to Sinopec (China Petrochemical Corp.) for $2.2 billion. Sinopec will reimburse Devon for drilling costs, paying 80% of the overall development costs during the carry period.
- Also in January 2012 Japan's Marubeni Corp. subsidiary Marubeni Eagle Ford Ltd. agreed to buy a 35% stake in Hunt Oil Co.'s holdings in South Texas. Marubeni will pay drilling expenses for several hundred wells in future years. Marubeni and Hunt plan to jointly acquire additional Eagle Ford acreage beyond the currently held 52,000 acres.
- In late 2011 Oklahoma City-based SandRidge Energy Inc. entered a $1 billion deal with Spain's Repsol, who agreed to pay SandRidge $250 million and to finance $750 million in drilling expenses over 3 years for a nonoperated stake in two areas in the Mississippian requiring horizontal drilling and multistage fracturing. The venture involves a 25% non-operated working interest in the Extension Mississippian play and a 16% non-operated working interest in the Original Mississippian play.
- Earlier in 2011 in a separate deal involving Sandridge, South Korea's Atinum Partners Co. Ltd. acquired a nonoperated working interest in SandRidge's Mississippian fields for $500 million, agreeing to a drilling carry obligation to pay 13.2% of SandRidge's share of drilling and completion cost for wells up to $250 million during a 3-year period.
- Japan's Itochu Corp. was part of an investor group led by KKR that acquired Tulsa-based Samson Investment Co. for $7.2 billion in November, 2011. Samson operates in the Bakken, Bossier, Cana Woodford, Cotton Valley, Granite Wash, Green River, Haynesville, Powder River and Green River areas. Itochu previously purchased a 25% stake in the Niobrara shale oil play in Wyoming from MDU Resources Group.
- Statoil ASA from Norway acquired Brigham Exploration Co. for $4.4 billion in late 2011, enabling entry into the Bakken and Three Forks plays in the Williston basin in North Dakota and Montana. Statoil entered the US shale gas industry in 2008 when it acquired a stake in Marcellus shale gas acreage from Chesapeake Energy and then in the Eagle Ford in a deal with SM Energy and Talisman. Statoil produces dry gas from the Marcellus, dry gas and liquids from the Eagle Ford, and now liquids from the Bakken.
- In mid-2011 a subsidiary of Mitsui & Co. Ltd. acquired a 12.5% working interest in Denver-based SM Energy Co.'s nonoperated Eagle Ford shale position. Mitsui agreed to carry 90% of SM Energy's drilling and completion costs up to a $680 million cap.
- BHP Billiton announced an agreement in July 2011 to acquire Petrohawk Energy Corp. for $12.1 billion, giving BHP operated positions in the Eagle Ford and Haynesville shale resource plays, and also in the Permian Basin.
- In February 2011, Australia's BHP Billiton Petroleum agreed to buy all of Chesapeake Energy Corp.'s interests in the Fayetteville shale in Arkansas for $4.75 billion. BHP chief executive J. Michael Yeager mentioned that the expertise gained in the Fayetteville would be useful in future developments in Australia and elsewhere.
- OIL (Oil India Ltd.) is working to acquire shale assets not only in the US but also in Australia, pursuing a strategy of JV partnerships. Two other Indian companies, Reliance Industries Ltd. and Gas Authority of India Ltd., already have US shale gas acreage.
In summary, these transactions are good examples of sizable deals that have taken place and continue to occur today – and more deals will be coming. When one considers the big picture of just how to support and drive energy exploitation in the US and Canada, it’s quite evident that foreign investment provides a huge source of funds to keep drilling going forward and to enhance development in current and early-stage shale plays across North America.
About the author
Don Warlick is president of WarlickEnergy in Houston, a Houston-based energy intelligence firm. The company publishes a series of special reports on each of the leading US unconventional shales and also provides market research services addressing North American and International oil & gas markets.