International Players Vie to Invest in Marcellus Shale Projects
International investment is snowballing to the multi-billions in the Marcellus Shale, a large deposit of natural gas embedded in shale deep below the northeastern United States. This month British BG Group closed its deal for Marcellus assets with EXCO Resources for slightly less than $1 billion. Last month, India’s Reliance Industries bought a 40% interest in the Marcellus acreage of Atlas Energy, Inc., a U.S. exploration and production company. In February, the Japanese energy conglomerate Mitsui & Co. purchased a 32.5% stake in the Marcellus Shale assets of energy giant Anadarko Petroleum Corp. The value of each of these deals exceeded $1.3 billion.
According to a recent report by industry expert John-Laurent Tronche appearing in the Fort Worth Business Press, during the first three months of 2010, there were more than $2 billion of Marcellus Shale deals, including foreign investments--a record for unconventional oil and gas plays.
The Marcellus Shale is a formation of marine sedimentary rock located in much of the Appalachian Basin of eastern North America. The rock formation is named for a distinctive outcrop near Marcellus, New York. The Marcellus Shale runs across the New York’s Southern Tier and Finger Lakes regions, northern and western Pennsylvania, eastern Ohio, western Maryland, most of West Virginia and extreme western Virginia. In eastern Pennsylvania, the Marcellus bedrock lies across the Delaware River into New Jersey. Consequently, the shale is relatively close to some of the largest consumer and industrial markets for energy in the United States.
On April 21, Mumbai-based Reliance Industries Ltd. bought a 40% interest in shale gas acreage owned by Atlas Energy, Inc., based near Pittsburgh, Pennsylvania, as part of its $1.7 billion joint venture with Atlas. Reliance is the largest private sector company in India. The reported terms of the deal were $340 million in cash on closing and an additional $1.36 billion to fund part of Atlas’s drilling costs over 5 ½ years. Atlas’ announcement emphasized that Reliance’s inbound investment would result in a significant number of well-paying jobs for Pennsylvanians. Atlas reported that Reliance also obtained the right to acquire a 40% interest in new parcels plus a right of first refusal should Atlas elect to sell additional acreage in the future. Reliance is paying approximately $14,000 an acre, which is the highest price to date for Marcellus acreage. Two months earlier, on February 16, Anadarko reported that it had signed its joint-venture agreement with Mitsui E&P USA LLC, a subsidiary of Japan’s Mitsui & Co., Ltd. According to Oil and Gas Eurasia, Mitsui paid $1.4 billion for its share in the venture. Anadarko stated that Mitsui will earn a 32.5% interest in Anadarko's Marcellus Shale assets by funding nearly all of its development costs through 2013. On a per acre basis. Mitsui paid slightly less than Reliance did for its deal. According to The Wall Street Journal, an RBC Capital Markets study calculated the 2010 average price for an acre in Marcellus Shale at $5,650.The trend is continuing. In the first week of May, Dallas, Texas-based independent energy business EXCO Resources signed a Marcellus Shale joint venture for $950 million with BG Group, Plc, a natural gas company based in Reading, England. BG Group is an integrated natural gas company with operations across five continents. Under the terms of the transaction as disclosed by EXCO, BG Group acquired a 50% interest in EXCO’s Marcellus Shale assets, principally in Pennsylvania and West Virginia. The operations of the joint company will be based in Pittsburgh. Under the terms of the deal, EXCO and BG will each participate in further acreage that the other acquires in the same region. These global partners have a history. In June of 2009 BG Group has acquired an interest in EXCO’s shale gas resources in Texas and Louisiana for $1.3 billion.
The 2010 cross-border transactions added momentum to the investment that has been building since November 2008. In that month Oklahoma-based Chesapeake Energy Corp. formed a joint venture with Norway’s StatoilHydro for the exploration and development of natural gas in the Marcellus region. In that deal, Chesapeake sold a 32.5% interest in its Marcellus Shale assets for $3.375 billion and retained 67.5% working interest. Statoil paid $1.25 billion at closing and agreed to fund 75% of Chesapeake’s share of drilling and completion expenditures until its $2.125 billion obligation has been funded. Not all industry analysts are encouraging investment in U.S. shale gas. Oil and Gas Eurasia quotes Texas geologist and consultant Arthur Berman who suggests that this is yet another market bubble. Berman thinks shale gas reserves are greatly overstated, while the cost efficiency of shale gas production is questionable at best. Furthermore, the prospect of producing natural gas from the Marcellus Shale using new hydraulic fracturing, or “hydrofracking,” has raised serious environmental opposition. The principal question is whether the drilling fluids used to break through the rock in which the shale gas is housed can contaminate the drinking water aquifer. For example, today’s Capital Business Blog reported that the Tompkins County legislature (representing Ithaca, New York and surrounding communities) just passed a resolution urging the State Legislature to ban hydrofracking pending further independent study. The debate promises to become far more robust than it had been, given the environmental disaster resulting from the massive BP spill in the Gulf this month. None of the debate has focused on U.S. regulation of inbound investment in this potentially significant source of clean energy for much of the U.S. A subsequent post will analyze the role of the Committee on Foreign Investment in the United States for the Marcellus Shale transactions.
