Foreign investors play increasing role in US shale development

Investors from outside the United States are playing an increasingly vital role in the US tight oil and shale natural gas industry, according to the US Energy Information Administration. Joint ventures by foreign companies accounted for 20% of the $133.7 billion invested in US tight oil and shale gas plays between 2008 and 2012, says the EIA.

In early 2013, Sinochem, a Chinese company, entered into a $1.7 billion JV with Pioneer Natural Resources to acquire a stake in the Wolfcamp Shale play in West Texas. This investment highlights a renewed trend toward foreign joint ventures. Since 2008, foreign companies have entered into 21 joint ventures with US acreage holders and operators, investing more than $26 billion in tight oil and shale gas plays.

In all, there have been 73 deals between 2008 and 2012 involving foreign investors and US companies operating in shale plays. JVs by foreign companies accounted for 20% of these investments. The rest of the investments were either part of outright acquisitions—such as the Australian BHP Billiton oil company's acquisition of Petrohawk Energy Corp.—or were joint ventures among American companies (such as Hess and Noble Energy with Consol Energy) and financial institutions.

Most of the foreign investment in these joint ventures involved buying a percentage of the host company’s shale play acreages through an upfront cash payment with a commitment to cover a portion of the drilling cost. Foreign investors in joint ventures pay upfront cash and commit to cover the cost of drilling extra wells within an agreed-upon time frame, usually between 2 to 10 years.

Both US and foreign companies benefit from these deals. US operators get financial support, while foreign companies gain experience in horizontal drilling and hydraulic fracturing that may be transferable to other regions. Plus, foreign companies can operate in a stable market with a sound legal system and low political risk. In addition, exploration and development opportunities are decreasing in much of the rest of the world. While foreign companies may pay sizable initial costs through joint ventures, these deals can be considered a cost of entry to the development of hydrocarbons through the latest technology.

Most of the recent joint venture deals with foreign companies shifted from the dry natural gas plays to more liquids-rich areas such as the Eagle Ford, Utica, and Wolfcamp—a trend similar to domestic operations. All shale plays contain some liquids, but those with a higher liquid-to-gas ratio are more attractive because of the higher value of hydrocarbons that have crude oil and petroleum liquids in addition to natural gas.

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