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Shale firms weigh up international M&A opportunities

As North America’s unconventional sector matures, deals will emerge elsewhere

As the North American shale-gas market matures, mergers and acquisitions (M&A) opportunities there are becoming more limited, prompting producers to look further afield. But with exploration still in its infancy in the rest of the world, caution remains the watchword.

Argentina, China, India, Ukraine, the UK, Australia and South Africa are part of a growing list of possible targets for firms looking to diversify their shale-gas portfolios. But the nascent state of development in many of these markets means North America will remain the centre of attention for many.

While the heady days of multi-billion dollar acquisitions of acreage and ventures may largely be over, there is no shortage of investment across the North American shale-gas market. But that investment is largely being ploughed into developing existing holdings, as producers set about getting gas to market as quickly as possible.

“There aren’t any new plays opening up comparable to the Eagle Ford, Marcellus and Bakken, where there is a lot of activity,” says Jim Dillavou, a partner at Deloitte & Touche in Houston. “That said, people did a lot of deals and acquired a lot of acreage, which they are now busy developing. That really seems to be the focus of their attention.”

M&A is more focused on tidying up portfolios. So, for example, a company that has decided to concentrate on the Marcellus shale might sell off its assets in the Eagle Ford to a firm building acreage there.

Despite a decrease in mega-deals in recent months, smaller scale transactions can still generate considerable cash flow. According to PWC, a firm of accountants, 17 M&A deals took place in the US shale gas and oil sector in the third quarter 2013.

The transactions were worth more than $5 billion and accounted for around a third of all deal value in the wider hydrocarbons sector. The Eagle Ford ($1.7bn) and Bakken ($1.8bn) led the field.

Shale revolution

Investment driver

Asian investment has been a major driver for North American shale sector M&A in recent years. The trend for Chinese state-owned firms to take chunky investments in US and Canadian assets continued into the early part of this year, as they sought to learn more about technology that could be applied in China’s shale sector and gain a position in North American reserves that could yield lucrative trade in liquefied natural gas (LNG).

In February, China’s Cnooc completed its $15.1bn acquisition of Canada’s Nexen, giving it access to extensive North American shale-gas reserves, as well as Canadian oil sands and conventional deposits in the Gulf of Mexico and the North Sea. In July, Sinopec and Chesapeake Energy completed a deal under which the Chinese firm took a 50% stake in Oklahoma’s Mississippi Lime acreage for around $1bn – the Mississippi Lime is often classified as a conventional play, but one where shale drilling techniques reap benefits.   

Heavy investment by Chinese firms and other foreign players, such as BHP Billiton, may follow a similar pattern to that of domestic firms. While they will be alert to fresh opportunities, much of their investment is likely to be tied up in developing existing acreage.

One opportunity that could open up right on the doorstep of US producers is Mexico’s shale acreage, in particular the extension of Eagle Ford across the border from Texas in the Burgos Basin. Mexico has the world’s sixth largest shale reserves, according to the US Energy Information Administration (EIA) – technically recoverable resources of 545 trillion cubic feet (cf) – but investment conditions are markedly different on the Mexican side of the Rio Grande, precluding a US-style shale boom.

The Mexican government and all-pervasive state oil company Pemex have yet to decide whether to open up shale acreage for exploration. Initially, efforts to develop conventional oil reserves in the Gulf of Mexico are likelier.

While oil could find home in lucrative export markets, Mexican shale gas would be unlikely to command a high price in a US market already inundated with domestic supplies.

That would leave Mexico with little choice but to invest heavily in domestic pipelines, power plants and gas-fed petrochemicals plants or in costly LNG export infrastructure. That much of Mexico’s shale gas is found in the arid north of the country with limited access to the water guzzled copiously by hydraulic fracturing is another drawback, as is Pemex’s inexperience in shale-gas drilling.

If foreign investment is to be sought, then plans to open up the country’s notoriously insular energy sector will need to come good. In August, Mexican president Enrique Peña Nieto proposed introducing energy-sector reform that would allow foreign participation for the first time in decades. “Development will take place over a much longer timeframe than in the US. A lot of people are hopeful, but I don’t think anyone’s holding their breath,” Dillavou says.

It may yet turn out that, in the short term, Mexico will invest more heavily in the US shale sector than its own. Earlier this year, Pemex chief executive Emilio Lozoya said the company would set up a firm to invest in exploration and production in US shale gas and deep-water oil assets, as part of efforts to compensate for falling production at home.

Argentina rebuilds bridges

Argentina presents more immediate prospects for drillers, with the government there keen to open up its shale recoverable reserves, the world’s second largest, of 802 trillion cf, according to the EIA.

However, Argentina is another country where political considerations could hold back development (see Argentina article). The expropriation in 2012 of Spanish group Repsol’s 51% stake in YPF, as the government sought to gain greater control of the country’s natural resources, unsettled investors. The state energy firm was privatized in 1993, with Repsol taking its stake in 1999. 

Since the asset-grab, the government has been building bridges with international firms, raising the prospect of wider M&A opportunities in the shale sector. In July, YPF finalised its first international agreement since renationalisation, with Chevron, to develop shale-oil and -gas reserves in the Vaca Muerta play in Nequén province. Under the deal, Chevron is to make a $1.24bn investment initially, possibly raising that to $15bn if exploration yields results.

The investment could represent a political risk for Chevron, but no more than the risks routinely met by oil and gas firms in some of the more unsettled regions of the world, analysts say. Argentina will be reluctant to antagonise production partners as it seeks to bolster domestic gas reserves.

Argentina will be hoping that the Chevron agreement will pave the way for other deals to bring investment into Vaca Muerta. One already said to be in the pipeline, but yet to be finalised, involves a tie-up with a group including China’s Cnooc.  

As the holder of the world’s largest technically recoverable shale-gas reserves (1,115 trillion cf), China is also on the radar of international shale drillers. Several are already working with big Chinese firms keen to implement lessons learned from their US operations.

ConocoPhillips was a trailblazer. It signed a deal with PetroChina in 2012 to jointly explore 500,000 acres in the Sechuan Basin, in the southwest of China.

However, Shell is the foreign company with the biggest toehold in the Chinese shale sector, having signed a deal with CNPC in March to explore the 4,000 sq kms Fushin shale-gas blocks, also in the Sechuan – an area where foreign firms are already operating to extract conventional oil and gas. Shell is also exploring with Sinopec in central China. Similar deals with other international players are likely to follow.

“There should be a natural progression, especially if, in another two or three years, the government doesn’t see enough drilling activity. Then I think they will start to become worried and consider further measures to open up, allowing more players, including international players, into the upstream,” says Xizhou Zhou, director of China Energy?at IHS.

However, rules in place that limit foreign participation in China’s domestic energy industry and a lack of clarity over regulatory issues concerning gas sales into the Chinese domestic market are potential brakes on opening up.

In particular, rules governing third party access to China’s gas pipeline network will need to be cleared up and changed, Zhou says. With around 80% of the country’s pipelines owned and operated by CNPC, the government may need to consider bringing independent regulation to its pipeline company. “To get a lot more players into upstream, there will need to be reassurance that, should they find the gas, there is a way for them to get it to the market,” he says.

EU shale markets could potentially provide an operating climate more akin to that found in North America, but a lack of proved commercial reserves and uncertainty over just how much it will cost to get them are clouding investor sentiment.

The UK government is trying to promote shale-gas exploration, pledging juicy tax incentives and simplified rules for investors, while hoping to capitalise on a long-established relationship with energy companies operating in the North Sea. Earlier this year, the British Geological Survey doubled its reserve estimate for deposits in northern England to around 1,300 trillion cf.  

Centrica’s acquisition in June of a 25% take in licences operated by Cuadrilla Resources in the Bowland shale of northwest England was followed in October by an agreement under which France’s GDF Suez took a 25% stake in 13 Bowland shale licences held by Dart Energy. Under the deal, GDF is paying Dart $12m in cash and funding $27m in exploration and appraisal costs.

However, the productivity of these licences is unknown. Drillers will also need to handle already vociferous protests and possible court challenges on environmental grounds, which could add to costs and delay development.

Both of these issues have caused problems elsewhere in the EU. Poland was the continent’s early frontrunner in attracting foreign firms to seek shale gas, but several, including ExxonMobil, Marathon and Talisman have since pulled out (see Poland article). Reasons for leaving include poor results, difficult geology and time-consuming bureaucracy. In countries such as Bulgaria and France, governments have responded to environmental opposition by introducing moratoriums or bans on drilling.

Elsewhere in Europe, Ukraine could be a more promising avenue for firms in a position to acquire shale acreage there. This year, both Shell and Chevron have signed shale-gas production sharing agreements with Ukraine – each estimated to need investment of at least $10 billion – as the country tries to reduce its dependency on Russia energy imports.

Australia provides another target for firms seeking to widen their shale gas portfolios. In February, Chevron agreed to pay up to $349m to take a stake in two shale prospects held by Beach Energy in the Cooper Basin. Santos, ConocoPhillips, Total, Mitsubishi Corp, Statoil and India’s Bharat Petroleum are among those that have also made investments in prospective shale projects. 

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