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.”

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.

Independents with reserves heavily weighted to gas that have weak balance sheets or hedge positions are likely targets for takeover by larger players, Wood Mackenzie predicted. Large-cap and major exploration and production companies have the technical capability, financial strength and long-term view that will allow them to dominate the deal activity, according to Parker.

“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 Daily GPI, May 3, 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.

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