The European Stampede Continues

By Eric Fox | July 03, 2009 AAA

The list of foreign companies buying into domestic shale plays continues to grow, as the rest of the world recognizes the value of shale gas, now that the technological barrier to developing it economically has been established. The deals come at just the right time for both sides. Many of the domestic sellers were early movers into various shale plays, building large positions, and then ran into some liquidity problems during the recent credit crunch, as banks restricted credit lines.

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The foreign buyers are typically ill suited to be early movers into these areas due partly to cultural reasons. There is also the possibility that the business model of the typical U.S. oil and gas independent is not suitable to a large foreign oil company, as it requires the patience and quiet building of a large acreage position, without any guarantee of an immediate return. Now that these shale plays have become almost manufacturing in nature, they appeal more to foreign buyers.

Another reason for the European interest in North American shale may be to gain the expertise to exploit these complex reservoirs, and apply that knowledge in the future to similar shale areas in Europe. Developing its own shale will help Europe from breaking its dependence on Russian sources of natural gas.

The most recent deal involved Exco Resources (NYSE:XCO), a company with a large undeveloped acreage position in the Haynesville Shale in East Texas and North Louisiana. The company sold 50% of its 120,000 acres under net lease to BG Group, a company out of the United Kingdom, for $1.05 billion.

BG Group wasn't the only foreign company buying into North American shale plays in recent months. The trend began in earnest in the fall of 2008, when Chesapeake Energy (NYSE:CHK) found that the market was becoming skittish about its liquidity, and decided to monetize some of its acreage.

In September 2008, Chesapeake Energy signed a deal with BP Inc (NYSE:BP) and sold 25% of its acreage here for $1.9 billion. The deal included an upfront payment, and then BP would also fund a portion of the capital expenditures needed to develop the acreage.

In November, 2008, the Chesapeake Energy made a deal with StatoilHydro ASA (NYSE:STO), the giant Norwegian oil company, and sold a 32.5% interest in its Marcellus Shale acreage in the Northeastern U.S.

The European invasion continued in May 2009, with Eni SpA (NYSE:E), an Italian company, making a deal with Quicksilver Resources (NYSE:KWK), for a portion of its Barnett Shale properties.

As the vast reserves and future potential of North American shale gas gets more and more publicity, its value continues to grow, and attract outside investors looking for a new source of growth in production. (To learn more, check out our Oil And Gas Industry Primer.)

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