Royal Dutch Shell plc on Friday agreed to pay $4.7 billion to acquire subsidiaries of privately held East Resources Inc., instantly giving the supermajor, which is based in The Hague, Netherlands, a substantial foothold in the Marcellus Shale and even more acreage in the Eagle Ford Shale.

The transaction would give Shell nearly all of the assets of Pennsylvania-based East Resources, which includes interest held by private equity investor Kohlberg Kravis Roberts & Co.

East Resources is a big player in the Pennsylvania portion of the Marcellus Shale, with a footprint of nearly 1.05 million total net acres — including 650,000 that it operates. The leasehold, which also includes property in West Virginia and New York, now produces about 60 MMcfe/d (10,000 boe/d), which is predominately natural gas.

In addition, Shell acquired 250,000 net acres of East Resource’s mineral rights in the Eagle Ford play in South Texas, which would give the supermajor an undeveloped leasehold in a liquids-rich play. Shell would take over as operator and integrate the new acreage into its existing South Texas operations, where it has been active for many years.

“We are enhancing our worldwide upstream portfolio for profitable growth, through exploration and focused acquisitions, and through divestment of noncore positions,” said Shell CEO Peter Voser. “These acreage additions form part of an ongoing strategy, which also includes divestments, with an objective to grow and to upgrade the quality of Shell’s North America tight gas portfolio.”

Voser noted that East’s management team had built “an excellent organization, with high quality assets in the Marcellus, which we are pleased to have as our centerpiece as we enter the premier shale gas play in the northeast U.S. The opportunity now is to consolidate our tight gas portfolio, divest from noncore positions across North America, and to invest for profitable growth, by deploying Shell’s technology and capabilities on a large scale.”

Shell has been operating in U.S. tight gas plays since 2001. In the Pinedale Anticline in Wyoming, Shell said the use of innovative multi-well production pads and reservoir fracturing technology have led to rapid production growth, a competitive cost structure and reduced environmental footprint.

Following its success in Wyoming, Shell recently expanded its tight gas acreage positions in South Texas, in the Haynesville Shale in Texas and Louisiana, and in Western Canada, through the 2008 acquisition of Duvernay Oil Corp. (see Daily GPI, July 15, 2008).

Last year Shell’s North America tight gas output was about 140,000 boe/d (810 MMcfe/d), a two-thirds increase (62%) from 2008 levels, from a 3.7 billion boe (21 Tcfe) resources base. With a continued focus on operating efficiency, Shell estimated that its 2009 cash operating costs in North America tight gas were less than $2/Mcfe.

Before Friday’s announcement, Shell projected that its North American tight gas production could reach more than 400,000 boe/d by 2020. With the addition of East and the Eagle Ford acreage, Shell’s total North America tight gas position now is around 3.6 million acres.

East Resources, which was founded in 1983 by Terrence M. Pegula, has been one of the most active Appalachian Basin players. It would continue to operate, keeping a leasehold position in the Niobrara Shale play in the Rockies, where it has about 100,000 net acres.

East Resources employs about 300 office and field personnel in Pennsylvania, West Virginia, New York and Colorado. Its principal offices are in Warrendale, PA; Broomfield, CO; and Parkersburg, WV. Shell would continue to operate with East Resources’ workforce.

The sale to Shell is expected to close in two phases, subject to some regulatory approvals. The first phase of the sale is to be completed in mid- to late summer. The second phase of the sale, including the sale of the West Virginia business, likely would close later this year.

“The sale of the company to Shell will ensure that the capital needed to develop East’s significant Marcellus Shale holdings will be available,” said Pegula. “Shell’s entry into the region should benefit Pennsylvania, West Virginia and New York through significant new capital investment, new jobs and new business opportunities. I am very proud that this transaction has brought Shell into the Appalachian Basin.”

Shell’s international peers are pouring significant cash into North American shales. ExxonMobil Corp. has made the biggest transaction to date in its $41 billion acquisition of XTO Energy Inc., which has big-time shale acreage in every major U.S. basin (see Daily GPI, Dec. 15, 2009).

India’s Reliance Industries Ltd. last month paid an estimated $1.7 billion to enter the Marcellus Shale in a joint venture with Atlas Energy Inc. (see Daily GPI, April 12). Norway’s Statoil ASA has expanded its two-year Marcellus Shale partnership with Chesapeake Energy Corp., adding more acreage in March (see Daily GPI, March 29). And in February an affiliate of Japanese trading giant Mitsui & Co. Ltd. acquired a one-third stake in Anadarko Petroleum Corp.’s Marcellus leasehold (see Daily GPI, Feb. 17).

The international producers also have nudged their way into other U.S. shale plays, mostly as joint venture partners.

Total E&P USA Inc., a unit of France’s Total SA, joined in the party early this year by acquiring a quarter stake in Chesapeake’s Barnett Shale property (see Daily GPI, Jan. 5). BP America gained entry in the Fayetteville and Woodford shales in joint ventures also with Chesapeake (see Daily GPI, Sept. 3, 2008; July 18, 2008).

Depending on how acreage is valued outside the Marcellus acreage, energy analysts on Friday were estimating Shell’s purchase at between $4,500/acre and $7,200/acre.

Shell is buying in a prime location, said Pritchard Capital Partners analyst Ray Deacon. “The quality of the assets in Tioga and Susquehanna counties are probably the best in the Marcellus,” Deacon wrote in a note. “That’s just based on how much production they’re getting early in the life of the wells — that really improves the returns.”

The biggest question for Shell is whether it may buy more shale assets, said analysts with Tudor, Pickering, Holt & Co.

The nearly $5 billion transaction “doesn’t seem like a particularly big bite for a company of Shell’s size. So we’ll watch for add-ons (public and private). What we don’t have to ask: ‘do you believe that shale reserves will produce as expected?’ They’re spending $5 billion on the assumption that shale is for real (another ‘in your face’ for shale reserve skeptics).”

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