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Shale Boom Prompts GE Oil & Gas Acquisition

Growing producer demand for well services to support development of North American shale natural gas plays is a main driver behind GE's planned acquisition of the well support division of John Wood Group plc for $2.8 billion, the company said.

GE Oil & Gas said Sunday it would buy the Wood Group unit, which is composed of three businesses: electric submersible pumps, pressure control (surface wellhead and flow control systems) and logging services (wireline logging).

Wood Group's pressure control platform will complement GE's wellhead and flow control offerings, as well as increase capabilities in the unconventional oil and gas segment, GE said. Wood Group's surface products and services will enhance GE's oil and gas solutions, building on acquisitions such as Nuovo Pignone, Vetco Gray (see Daily GPI, Jan. 9, 2007), Hydril and Wellstream.

The acquisition will help GE meet demand for technology leadership in shale gas exploration, the company said. The shale gas industry is growing quickly and is expected to invest more than $40-60 billion per year in the next six years in North America alone, GE noted. Worldwide, shale gas exploration is also driving demand for better well monitoring and control to optimize the use of materials and target the sweet spots in the rock. Better well control helps producers lower costs and become more efficient.

"Enhanced oil recovery and unconventional hydrocarbon resource development are energy industry mega trends with huge growth potential," said GE Energy CEO John Krenicki. "The well [John Wood] support division and Wellstream acquisitions, when combined with Vetco Gray and Hydril, position GE to take full advantage of these trends. With the completion of these recent acquisitions, our drilling and production portfolio will be comprehensive and complete at scale to better serve our global customers and deliver double-digit organic growth for our investors."

Production of unconventional oil and gas is a rapidly expanding global segment, GE said. Unconventional gas production will account for 35% of the increase in global supply, while unconventional oil is expected to meet 10% of world demand by 2035, according to the "World Energy Outlook 2010," published by the International Energy Agency.

Last year Wood's well support division recorded revenues of $947 million and earnings of $166 million, which reflected growth of 16% and 55%, respectively over 2009. The division, which generated 13% average annual revenue growth over the past decade, is expected by GE to generate $1.1 billion in revenue and approximately $200 million of earnings in 2011.

"The acquisition is another major step forward for GE Oil & Gas in executing our strategy to equip and serve our global oil and gas customers with the mission-critical equipment and solutions required to address their toughest technical challenges and growth objectives," said GE Oil & Gas CEO Claudi Santiago.

The deal also positions GE as a player in enhanced oil recovery by adding electrical submersible pumps (ESP) to GE's portfolio of drilling and production solutions, the company said

Demand for products and services that enhance oil recovery is expected to grow significantly driven by an expected decline in production from existing wells (at roughly 6% annually) and the increasing complexity of developing new reserves. ESP deployment is one of the most effective methods of enhancing production and also one of the fastest growing segments in the oil and gas industry. ESPs will be paramount in helping oil producers meet the rising global demand for hydrocarbons, as maturing fields are expected to account for more than 70% of global oil production output by 2012.

The wireline logging business will also benefit from higher activity in North and South America and is showing interesting prospects for the future, GE said.

Additionally, Wood Group and GE have agreed to negotiate over the course of the next 90 days a potential commercial arrangement relating to turbo machinery servicing activities.

The deal is expected to close later this year.

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