The US Shale Oil Boom
Plunging US natural gas prices are pushing independents that have long focused on gas to buy into the shale oil boom.
To finance the switch they are selling their traditional businesses to cash-rich foreigners or international oil companies that can afford to wait for the rebound in gas prices.
The independents have also to search for shale oil acreage, which is growing increasingly expensive with the rush to use new technology and expertise to reach this long-ignored resource.
Yet companies have a strong motive to make the transition, says Raoul LeBlanc, senior director at PFC Energy, the consultancy. An mcf (thousand cubic feet) of US natural gas has historically sold for a tenth of the price of a barrel of oil, he says. But now that gap has widened and one mcf of gas is selling for one twentieth or even less of the price of a barrel of oil.
“Almost everyone went too heavily into gas, thinking it was nirvana,” says Mr LeBlanc. “Everybody is trying to make a shift now. But like the Three Stooges all trying to go through a door, they can’t all fit.”
Gary Flaharty, vice-president of investor relations at Baker Hughes, said the number of rigs focused on drilling for oil in the US had gone from 180 in May 2009, a low point, to 720 in November 2010. He expects that number to grow in 2011 as gas-directed drilling stays flat.
EOG was among the first gas-focused independents to see the potential and in 2008 began snapping up acreage in the liquids-rich portions of the Bakken shale of North Dakota and Eagle Ford shale in Texas ahead of its competitors.
The company projects that it will have gone from deriving 23 per cent of its north America revenue from liquids and 77 per cent dry gas in 2007 to 67 per cent liquids and 33 per cent dry gas by 2011.
Deals continue to be struck. Williams, a gas transport and production company, announced last month that it would pay $925m to an undisclosed seller for shale oil acreage in North Dakota’s Bakken formation.
“If they don’t have an oil or liquids footprint, they’re trying to get one,” says Jon Wolff, a managing director at Credit Suisse.
“There are countless examples.”
Yet many independents are too strapped for cash to make the transition, given low cash flows from their dry gas-producing assets.
The shale gas boom has pushed down US gas prices to the $3-$4 per million British thermal units range, from the 2008 record high of $13.69 per mBtu. Meanwhile, the rush to shale oil has pushed prices as high as $12,000 per acre in some areas, up from the $300 it was fetching just two years ago.
To fund the switch, the independents must sell dry gas acreage, Mr Wolff said, noting this is something Range Resources, PetroHawk and EOG, have all announced plans to do.
EOG said last month it would sell a portion of its Marcellus shale position to Newfield Exploration for $405m as part of efforts to unload $1bn of dry gas assets by year-end.
Mr Wolff says those still keen to buy dry gas acreage are companies that can wait for prices to rebound.
Chevron, the US’s second biggest oil and gas company, is a good example. It has just paid $4.3bn to buy Atlas Energy, which has a strong position in the Marcellus shale, a giant, dry gas field.
Those with stronger balance sheets, such as Devon Energy, are hanging on to dry gas assets while they reposition rigs in liquids-rich areas.
It plans to spend about 90 per cent of its capital expenditure on oil- and liquids-rich drilling next year. Devon expects capital expenditure for exploration and production to be between $4.5bn and $4.9bn, subject to board approval.
In Europe, shale oil is the focus of activities by Toreador Resources, Hess Corporation and Vermillion Energy in the Paris Basin of France (Read More HERE)