Paula Dittrick
Senior Staff Writer
National oil companies, international oil companies, and others are investing in US and Canadian shale gas plays in an accelerating trend that analysts expect will continue to drive North American merger and acquisition activities throughout 2011.
In one of the most recent deals, BHP Billiton Petroleum of Australia agreed to buy all of Chesapeake Energy Corp.'s interests in the Fayetteville shale in Arkansas for $4.75 billion (OGJ Online, Feb. 22, 2011).
The acquirer acknowledged wider aspirations. J. Michael Yeager, BHP Billiton chief executive, said his company is obtaining an operated position in 487,000 net acres in the Fayetteville to "immediately make BHP Billiton a major North American shale gas producer. Longer term, the expertise we gain here will be usable elsewhere as we continue to grow our business."
Chinese oil companies and Japanese trading companies have invested millions in shale plays abroad in recent years with the most recent Asian NOC transaction coming from PetroChina Co. Ltd.
PetroChina plans to acquire half of Encana Corp.'s stake in Cutbank Ridge, a Montney resource play straddling the British Columbia and Alberta boundary, for $5.4 billion (Can.) (OGJ Online, Feb. 11, 2011).
The Encana transaction marks PetroChina's first major Canadian acquisition since 2009 when it acquired a 60% stake in northeastern Alberta's MacKay River and Dover oil sands projects for $1.9 billion from Athabasca Oil Sands Corp.
Deals accelerating
Christopher Sheehan, IHS Inc. director of energy merger and acquisition research, expects to see Chinese companies forming more partnerships and joint ventures with US and Canadian oil companies.
"PetroChina's deal with Encana is China's initial acquisition into the Canadian shale gas marketplace, and its largest Canadian upstream transaction to date, highlighting China's accelerated pursuit of North American unconventional resources to secure supply and feed growing Asian energy demand," Sheehan said.
Partnerships involving Chinese companies are "more palatable to the North American consumers and to their governments, which have resisted previous Chinese attempts to acquire entire companies" in the US and Canada, he said.
Sheehan referred to CNOOC's foiled $19.5 billion bid for Unocal Corp. in 2005, which was blocked by political opposition in the US. During 2010, the Canadian government blocked BHP Billiton's hostile takeover offer for fertilizer giant Potash Corp. of Saskatchewan.
Acting under authority of the Investment Canada Act, Industry Minister Tony Clement recently said federal authorities will consult with officials from the provinces involved to determine if the proposed PetroChina investment into Canadian natural gas assets would provide a "net benefit" to Canada.
Michael Collier, US leader of PwC's energy M&A practice, believes transactions involving US shale plays could outnumber asset deals involving the deepwater Gulf of Mexico during 2011. PwC formerly was known as PricewaterhouseCoopers LLP.
"The huge supply of shale gas in the continental US was a key driver for increased M&A activity in 2010 and will continue to fuel the industry's movement towards upstream assets," Collier said in a recent PwC report on oil and gas transactions.
"Average deal size increased 141% from $10 billion in 2009 to $24.1 billion in 2010, largely a reflection of major shale gas investments by nonUS oil companies looking to play large in the US shale," Collier said.
Wood Mackenzie Ltd. notes unconventional oil and gas asset deals helped drive 2010 activity, and that trend is expected to continue this year (OGJ Online, Jan. 26, 2011).
WoodMac's report "2010 in Review and the Outlook for 2011" showed $183 billion was spent on upstream M&A deals worldwide last year. US shale gas transactions reached $39 billion, said the independent research firm of Edinburgh.
Luke Parker, manager of WoodMac's M&A research, said NOCs gained the most attention last year as the big buyers of unconventional assets, yet he believes the IOCs also will continue to make acquisitions when assets fit their business plans.
Buyer's motivations
Toshi Yoshida, a partner in the Houston law office of Mayer Brown LLP, said independents developed the shale plays while majors and national oil companies are stepping up the pace at which they enter these plays. He spoke to an energy M&A forum hosted by Mergermarket in Houston on Feb. 2.
The type of acquisitions between international investors and independents usually involve an foreign investor buying a nonoperated stake in a project and agreeing to pay much of the drilling and development costs for a certain period, and sometimes the deals take the form of joint ventures.
IOCs typically gain holdings in shale plays through corporate acquisitions such as ExxonMobil Corp. buying XTO Inc., Yoshida said.
NOCs are interested in more than making a profit from their shale holdings, Yoshida said. They also are looking to gain expertise from US and Canadian shale players in hopes of subsequently developing shale plays in their home countries and elsewhere.
Statoil executives have indicated an interest at becoming the operator in North American shale plays in the future, Yoshida said. Separately, Statoil executives have said they are examining shale opportunities in China.
Paris-based International Energy Agency estimates China has some 26 trillion cu m of shale gas resources. Shale gas deposits are known in several European countries. Separately, Africa, Australia, and India are examining their potential shale assets. So far, US producers have the most operating expertise for developing and producing shale gas plays.
Yoshida said most foreign investors deliberately acquire nonoperated positions because they are unfamiliar with US oil and gas leases, particularly in shale projects that can involve thousands of parcels. Many foreign investors do not want the responsibility of making the operating decisions because they are learning about hydraulic fracturing and other shale gas technologies.
US and Canada operators are gaining operating efficiencies and financing by agreeing to these partnerships and joint ventures, Yoshida said.
Japanese investing
Japanese trading companies are among investors looking for shale gas plays to help secure energy supply. Yoshida foresees trading swaps involving shale gas and LNG.
Mitsubishi Corp. formed a 50-50 joint venture with Penn West Energy Trust to develop shale gas assets in the Cordova embayment area in eastern British Columbia (OGJ Online, Aug. 24, 2010).
Mitsui's subsidiary Mitsui E&P USA LLC bought part of Anadarko Petroleum Corp.'s interest in 100,000 net acres in the Marcellus shale in Pennsylvania for $1.4 billion (OGJ Online, Feb. 16, 2010).
Sumitomo Corp. subsidiary Summit Discovery Resources LLC acquired acreage in the Marcellus shale in Pennsylvania from Rex Energy Corp. (OGJ Online, Sept. 1, 2010). Previously, Sumitomo entered the Fort Worth basin Barnett shale play by acquiring interest in a project from Carrizo Oil & Gas Inc. (OGJ Online, Dec. 15, 2009).
Several dozen Marcellus transactions, most involving US buyers and sellers, preceded the Sumitomo Summit deal (see table, OGJ, Feb. 1, 2010, p. 35).
Itochu Corp. agreed to buy a 25% stake in the emerging Niobrara shale oil play in Wyoming from MDU Resources Group Inc. Itochu became the first Japanese company to participate in a US shale oil project In October 2010, MDU said its subsidiary Fidelity Exploration & Production Co. agreed to sell a stake in about 88,000 acres to Itochu.
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