The announcement that one of China's major oil companies, CNOOC Ltd. (NYSE:CEO), has partnered with America's third-largest natural gas company, Chesapeake (NYSE:CHK), to jointly develop a major U.S. shale gas field may have raised a few eyebrows. It comes at a time of rising trade tensions between Washington and Beijing, but for investors, it adds to the growing evidence that there is significant value in one of the America's greatest untapped energy resources.
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The Eagle Ford Has Landed
The deal, which involves CNOOC paying an initial $1.08 billion to acquire a one-third stake in Chesapeake's Eagle Ford shale gas field, plus an additional $1.08 to fund drilling and completion costs, follows a number of earlier investments in the Eagle Ford field by foreign operators including Norwegian oil company Statoil (NYSE:STO), Canadian producer Talisman Energy (NYSE:TLM) and India's largest company, Reliance Industries.
All this attention has helped boost the share price of other U.S. producers with sizable Eagle Ford holdings like EOG Resources (NYSE:EOG), Pioneer Natural Resources (NYSE:PXD) and SM Energy (NYSE:SM).
Gas Glut Forces Shift to NGL
While it does reflect the more aggressive stance of Chinese companies in their global hunt for new sources of supply for their energy hungry homeland, this latest move by CNOOC also underscores the attractiveness of a new business model rapidly being pursued by many of America's largest gas companies at a time of record low natural gas prices, a major shift toward the production of natural gas liquids (NGL).
Shale gas fields like Eagle Ford hold sizable quantities of natural gas liquids, which, because it can be processed into propane, ethane and butane, makes it several times more valuable than raw gas. As there is no incremental cost to extracting this "wet" gas, rates of return for companies exploiting these fields is much higher. While many such fields tend to have low permeability, meaning that extracting the gas is more difficult, American operators have perfected techniques such as directional drilling in combination with fracking to make such reserves economically viable.
It's no small technical achievement as it appears to have been instrumental in shifting the attention of some of the world's biggest energy companies onto shale gas. During the first half of 2010 over $21 billion has been spent on shale gas acquisitions, and given the recently announced deals like CNOOC/Chesapeake, it's likely that this trend will accelerate going forward.
The Bottom Line
America's once struggling gas producers have the technology and the resources to help satisfy the world's hunger for energy. Up until now, the only thing missing has been the cash to fund further exploration and development. That problem now appears to have been solved by cutting property level deals with foreigners; a solution that energy regulators in Washington are unlikely to object to. (Learn a little more about the "non" part of this nonrenewable resource. Refer to Peak Oil: Problems And Possibilities.)
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