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Sinopec deal boosts Mississippi Lime shale play

The Chinese state-run company makes a $1.02 billion deal with Chesapeake Energy in the southern US

Sinopec's $1.02 billion deal with Chesapeake Energy to enter the Mississippian Lime tight oil play in the southern US has energised interest in a region that some say will prove more prolific than the Bakken shale in North Dakota.

Chinese state-run Sinopec has agreed to buy a 50% interest in 850,000 acres of Chesapeake’s existing oil and gas leases in Oklahoma. The acreage is producing around 34,000 barrels of oil equivalent per day and held 140 million barrels of oil equivalent of net proved reserves as of 31 December 2012. Sinopec will fund the purchase with cash, 93% of which is due upon closing in the second quarter of this year.

It is the second major deal by a Chinese state oil company in the US so far in 2013, coming on the heels of Sinochem’s $1.7bn partnership with Pioneer Natural Resources in the Wolfcamp Shale in Texas on 30 January.

Led by new output from the Mississippian Lime shale, Oklahoma’s oil production hit a 25-year high of 268,000 barrels a day (b/d) in November 2012, up 35% from 175,000 b/d in 2007, according to the Energy Information Administration (EIA). If that rate of growth is sustained, the state could be producing 500,000 b/d by 2020, which could make it the third-largest producing state after Texas and North Dakota.

The Mississippi Lime shale is shallower and softer than the Bakken shale, the most prolific play developed to date, which makes it easier to hydraulically fracture. Land is also cheaper. Sinopec paid about $2,400/acre compared to upwards of $25,000/acre for recent deals in the Bakken.

Chesapeake will remain the operator of the project, and will continue to conduct all leasing, drilling and marketing for the joint venture. It is the first major transaction for the company since it reshuffled its board of directors and saw the departure of its chairman and founder, Aubrey McClendon, on 29 January.

The company posted a full-year net loss of $940m in 2012, as a $2.02bn write down on the value of its natural gas assets hit its bottom line.

Chesapeake’s production in 2012 was up 16%, to 3.89bn cubic feet equivalent per day, but operating cash flow fell nearly 25% to $4.07bn from $5.31bn in 2011 – the result of a 56% drop in realised natural gas prices. After accounting for hedging losses, Chesapeake’s gas fetched $2.07 per thousand cubic feet (cf) in 2012 from $4.77/’000cf the prior year.

The company sold $12bn worth of assets in 2012 and aims to shed $4bn more in 2013 to make up a projected shortfall between revenue and spending.

On a conference call with analysts, chief executive Steven Dixon said the sales will “fund our capital investment programme, reduce our financial leverage, and focus our operational efforts on our best plays to enhance returns on capital.”

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