Shale and Soul Mates

Atlas Energy exec describes joint venture

It’s pretty much the beginning of a “beautiful friendship” for Edward Cohen, Chairman of the Board and CEO of Atlas Energy, who told delegates at Shale Gas World 2010 in Warsaw, Poland that Atlas was six months into its joint venture with India’s Reliance Industries.

“We had negotiations with several dozen possible suitors,” he recalled, “and it seemed one enterprise was more compatible than who we picked, Reliance. But the entrepreneurial element was the most important. I recognized that as the guiding principal of Reliance.”

Mr. Cohen said that via the deal Atlas was also able to get the highest price per acre.

He recalled that Atlas Energy had been a traditional shale player in Michigan, going back 20 years. “In 2005 we were proud to be producing 20 million cubic feet per day. We’ve had single wells drill more per day.”

After shale gas hit the big time, the fortunes of Atlas also changed drastically.

“Five years ago we were worth less than $5 million to selling 40% of our assets to Reliance for $1.7 billion. We sold our Marcellus assets for $4.3 billion. It’s big progress in a very short period of time,” Cohen remarked.

Cohen answered the question of why a company like Atlas would enter a JV in the first place. “There are enormous capital costs, and environmental factors – satisfying them is difficult and small companies can’t afford a moratorium.”

“Our company would just go bankrupt in the meantime,” he added.

Cohen said that among the potential solutions, Atlas was comfortable with entering into a joint venture.

“The only thing I would say you ought to recognize that we’re not God and might find that you actually sold your company. All majors came in, did due diligence and Chevron came in with a very strong bid. There was a natural affinity I felt with Mr. Ambani (of Reliance). I told Chevron how disappointed I was to not work with them.”

He said that such investors were powerful companies that could handle adverse situations, like political moratoriums or environmental considerations.

“Our company could not sustain it but a company that doesn’t care what the price is, but has other tremendous areas and tens of billions of dollars might do better as they develop these reserves that are available,” explained Mr. Cohen.

“There’s an exchange of knowledge which is an element I would like to emphasize,” he said. “We have the practical experience, the knowledge – we’re great at doing, by the drill bit. When people visited us and asked us about our seismic 3D, we said ‘we’re getting around to it.’”

Skill plus local knowledge, he said, made for a great combination.

“The entire upfront payment would be taxable,” he explained of initial terms offered to Atlas, “which was for us a problem. I took what I needed to make sure our financial ship was right. Frankly, what we needed money for was the future.”

Cohen said that Reliance now owned 40% of every well drilled, but Atlas still got 60% of the revenue.

In terms of negotiation, he said: “It was our weakness that led us into the relationship. Parties were able to express their true desires. We asked for less money upfront, they wanted us to take more.

Europe's Promise

“We’re hopelessly confused as to what will happen to shale in Europe,” admitted Cohen, who said that it was a question of whether or not there was something exceptional in North America in terms of entrepreneurship, or if it was something that everyone had and could use to rise to the occasion.

He reassured the audience, “You will find Europeans rising to the entrepreneurial challenge, I believe.”

He listed what he contended were shale gas’s crucial factors: that it was abundant, inexpensive, clean and finally that it was domestic. According to Mr. Cohen, most producing companies were very eager to control their own distribution.

“Very often we confront a company that’s not willing to use our services because they want to control their own destiny,” said Cohen. “That desire to control your own destiny is of unique economic value.”

But he said that players had to have the capital to go forward, and the ingenuity to solve the problems.

Cohen mentioned the growing support for natural gas in America, from shale in particular, to help reduce climate emissions.

“It is a game changer,” he opined of shale gas. “For decades US production fell, now we have a 100 year supply. And I’ve never heard so much about the possibility of the US becoming a gas exporter.”

“We have a great capacity to consume energy, so don’t count on it,” quipped Cohen.

Now, he said it was the time for entrepreneurs to step forward and try to solve problems associated with shale gas production.

“Water for fracking is such a problem – we in Pennsylvania have the problem of ‘what do you do with the water once you frack?’ We’ve come up with a patented process where we recognize that most of the water comes back and that’s why you have to dispose of it. One solution is to reuse that water, we believe 90% of it. I’m sure others are quietly working on other solutions - that’s been the history of our industry.”

Mr. Cohen offered his final words to the audience.

“If entrepreneurial companies developing shale plays can take their ingenuity and problem solving and can combine those with huge pools of capital that the multinationals can bring, then shale gas can be as big a game changer for Poland as it has for the US.”