The U.S. shale gas patch saw $21 billion in acquisition spending during the first half of this year, and that level of activity is likely to continue over the next two years as large-cap and major producers seek their share of the clean-burning bounty, according to analysts at Wood Mackenzie.
The shale spree during the first half of the year amounted to one-third of global upstream merger and acquisition (M&A) spending during the period. More than 35 Tcf of shale gas resource changed hands at an average cost of 60 cents/Mcfe, said Luke Parker, manager of Wood Mackenzie's M&A research service.
Domestic shale gas M&A during 2008 and 2009 combined was $21.7 billion, according to Wood Mackenzie.
"M&A activity in U.S. shale gas has evolved with its emergence, play by play, as a world-scale source of secure, long-term gas supply," Parker said. "The key factor driving this has been the continued evolution and application of new technologies to unlock enormous volumes that were previously considered uncommercial."
"The market isn't overheated and there are buying opportunities in all of the key resource-holding basins, especially the Marcellus and the Haynesville, the Eagle Ford for example," Parker told NGI.
However, probably the only way to get into the Barnett Shale in North Texas is through a "good-sized corporate acquisition, and we don't see that happening," he said.
For the plays that are ripe for consolidation, there are plenty of parties at home and abroad potentially willing and able to make it happen, he said. These players include some of the majors as well as the large-cap international companies, particularly those that are either missing or are underweight in North American shale gas in their portfolios.
"I'm sure these companies are having a very good look at this sector and opportunities in this sector. And they're the companies that will drive future M&A activity," Parker said.
"We think there's a lot left to be done and there are a few things that will facilitate that, not least [is] depressed gas prices. With a depressed forward curve at the moment you could see some of these smaller players, unhedged players or at least players that are heavily weighted to gas, in some distress, needing to sell assets or choosing to sell assets to shift their focus into other plays. The ingredients are there."
Development breakeven costs have declined to a level that makes shale gas "highly competitive" with other domestic gas supply as well as liquefied natural gas (LNG) imports, he said.
"The magnitude of the U.S. shale gas resource is extraordinary," said Robert Clarke, Wood Mackenzie unconventional gas research manager. "We estimate the total resource potential of the 22 shale plays we currently analyze is approximately 650 Tcfe: equivalent to a resource life of 32 years based on total U.S. gas production in 2009. Shale gas production is set to increase from 17% in 2010 to 35% in 2020 of total U.S. gas supply."
Deal activity in the shale patch has yet to peak, Parker said, as "the drivers that make shale gas so attractive -- world scale resource, robust economics, access opportunities and limited above-ground risk -- are as strong as ever."
He predicted intra-play and sector-wide consolidation as companies restructure their portfolios according to evolving priorities. "Key among the various pressures that will influence the market, at least in the near-term, is the continued disconnect between oil and gas prices and a depressed Henry Hub futures market," Parker said.
"Consolidation across the shale gas plays has tended to follow a familiar pattern," the Wood Mackenzie report said. "Small firms enter plays early to capture substantial land positions...Once the commercial potential of a play becomes evident, these companies/positions are bought out by larger firms. This was first seen with the acquisitions of small Barnett [Shale]-focused players by larger U.S. independents in 2005 and 2006.
"Subsequent to their exit, smaller players will often move on to seek out and prove up the net big shale play. Chief Oil & Gas is a fine example of this. Having sold its Barnett interests to Devon in 2006 for US$2.2 billion [see NGI, May 8, 2006], it went on to build a substantial land position in the then-embryonic Marcellus Shale play."
The industry's rush to liquids-rich plays as a refuge from low gas prices has impacted shale activity, according to Wood Mackenzie, as companies pursuing liquids are pressured to sell noncore shale assets. "Carrizo Oil & Gas [Inc.], Chesapeake [Energy Corp.], EOG [Resources Corp.], Newfield [Exploration Co.] and SM Energy [Co.] are notable examples of companies that are selling down noncore shale gas assets whilst making a pronounced shift to target shale oil," Wood Mackenzie noted.
Despite the draw of U.S. shale plays, the market is not overheated, Parker observed. He suggested that this is because some companies are nervous about gas prices. That is not Wood Mackenzie's view, though.
"It's clear at the moment that with the forward curve where it is there are divergent views amongst companies about where the long-term gas price is headed," Parker said. "ExxonMobil [Corp.] wouldn't have bought XTO [Energy Inc.] if it thought that these low gas prices were here to stay [see NGI, June 28].
"ExxonMobil -- who's generally a good barometer -- they evidently have a more optimistic view of what the long-term gas price is going to be, and Wood Mackenzie shares that view. There may be smaller companies or other companies who don't share that view who if they are in shale gas may see this as an opportunity to get out. And if they're not in shale gas they may think that it's a place they don't want to be involved in."
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