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Sumitomo teams up with Devon in $1.4bn deal

Japan’s Sumitomo Corporation has entered the North American natural gas market with a $1.4 billion partnership with Oklahoma City-based Devon Energy

Sumitomo, one of Japan’s largest trading houses, will buy 30% of Devon’s interests in approximately 650,000 net acres in the Cline and the Midland-Wolfcamp shales of the Permian basin, in Texas. Previously, Devon president John Richels suggested a 50% interest in 500,000 acres of Permian land could fetch $1.5 billion.

The move allows Devon to continue development of the shales. In April, Devon said the properties could hold 3.6 billion barrels of oil equivalent (boe), with about 85% of that being oil and natural gas liquids.

Devon remains operator and is responsible for commercially marketing all production into the North American market. The deal is expected to close in the third quarter, with an effective date of 1 January 2012.

Under terms of the agreement, Sumitomo will pay $340 million cash upon closing. A further $1.03 billion will be invested in a drilling fund to cover 70% of Devon’s capital requirements.

Sumitomo will ultimately pay 79% of overall costs to drill about 40 gross wells in 2012, at a cost of $5 million-$9 million per well. Based on the current plans, Devon said it expects the entire capital pool to be spent by mid-2014.

For Devon, the deal “strengthens future returns and improves capital efficiency”, a vital consideration given the bearish outlook for North American natural gas markets. For Sumitomo, it is precisely those battered markets it is buying into, to diversify its gas trading exposure with access to North American upstream production.

Though it will not directly market that production, it provides a valuable hedge against natural gas prices in Japan, which averaged about $16.90 per million British thermal units (Btu) for landed liquefied natural gas in June compared to the US second-quarter average of $2.25/million Btu.

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