Sinopec, Total pour $4.5 billion into U.S. shale

Tue Jan 3, 2012 3:58pm EST

View of French oil giant Total  headquarters in the financial district of la Defense near Paris March 8, 2010. REUTERS/Charles Platiau

View of French oil giant Total headquarters in the financial district of la Defense near Paris March 8, 2010.

Credit: Reuters/Charles Platiau

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(Reuters) - China's Sinopec (600028.SS) and France's Total SA (TOTF.PA) made major purchases into the U.S. energy sector on Tuesday, pouring $4.5 billion into deals to buy into booming production from shale rock formations.

The ventures showed that the global appetite for U.S. energy assets remained strong, with foreign oil and gas producers eager to invest in several of the mostly undeveloped fields that are believed to hold billions of cubic feet of natural gas and liquids.

Sinopec's Sinopec International Petroleum Exploration & Production Corp made its first foray into U.S. shale with a $2.2 billion investment to create a joint venture with Devon Energy Corp (DVN.N).

That gives Sinopec a one-third interest in five fields, while Total's $2.3 billion deal with Chesapeake Energy (CHK.N) is its second joint shale venture with the U.S. company.

Those deals sent the shares of Devon and Chesapeake higher and could be among the first in another busy year in the market for energy assets following the estimated $473 billion in transactions completed in 2011, according to Thomson Reuters data compiled through mid-December.

Chinese companies have been among the most aggressive, targeting assets around the globe, as well as in North America, where offshore oil company CNOOC Ltd (0883.HK) formed a partnership with Canada's Nexen Inc NXY.TO and bought a $2 billion stake in oil sands property Opti Canada Ltd.

That followed PetroChina's (601857.SS) $1.7 billion investment in Chesapeake's shale properties.

Those partnerships and investments have drawn little controversy in the United States, a marked change from the political backlash that CNOOC's proposed full takeover of Unocal

triggered in 2005, which ultimately scuttled the deal.

PetroChina announced earlier on Tuesday it would buy the portion of the Mackay River oil sands project it did not own from Canadian partner Athabasca Oil Sands Corp (ATH.TO), making it the first large-scale development in the region to be wholly owned by a Chinese state-owned enterprise.

HAIL THE SHALE

U.S. oil and gas producers have been in a frenzied land-grab in recent years to buy up rights that allow them to tap into the lucrative fields under development in Texas, Pennsylvania, Ohio and other states.

That has left many looking for deep-pocketed partners to form joint ventures to help pay for the expensive hydraulic fracturing technology that allows them to crack the brittle shale rocks and extract the natural gas and other products.

"It looks like the preferred transaction structure for a lot of these players, whether they are European or Asian, who are behind the curve on this technology. The more exposure they get, the better," said Mark Hanson, oil and gas analyst at Morningstar Inc.

Chesapeake had said in November it was close to a deal to bring in a partner to help it develop the Utica field in Ohio, where the company is ramping up drilling in fields it says are rich in liquids as well as natural gas.

With U.S. benchmark natural gas prices slumping below $3 per million British thermal units, their lowest levels in more than two years, energy producers are focused on wells that contain high amounts of liquids such as propane, butane and ethane, whose price are linked to crude oil.

That helped Chesapeake strike the Utica deal for nearly $15,000 per acre, analysts said, a high price for the field where only about a dozen wells have so far been drilled. That price is well above the $7,000 to $9,000 completed recently in the neighboring Marcellus Shale, but below the peaks near $20,000 seen in Texas' Eagle Ford field.

"They got Total to pony up pretty good money. They definitely know how to squeeze their JV partners," Hanson said.

For Devon, the deal was unexpected, since the company does not have the heavy debt load of Chesapeake.

"Devon isn't in dire need of the proceeds," analysts at Sanford Bernstein wrote in a note to investors, but the move will pad its balance sheet and perhaps allow it to expand into new areas.

FRACK FEARS

Total's deal with Chesapeake, which also includes smaller group Enervest, comes as officials in Ohio grow increasingly concerned about several small earthquakes that have occurred near the sites of some disposal wells.

The state said on Sunday it had suspended operations at five wells used to dispose of the hazardous fracking fluids used by energy companies just one day after a 4.0 quake.

Those earthquakes, which have also been recorded near disposal sites in Arkansas and around wells in Oklahoma and Texas, come as environmental groups are pressuring federal and state regulators to tighten rules around the use of those fracking fluids.

For many of the foreign companies, the investments are also designed bring technical knowledge on how to use the fracking technology in shale and other fields around the globe that are believe to hold huge energy reserves.

Statoil (STL.OL) last October paid $4.4 billion for Brigham Exploration to boost its unconventional energy resources in the United States, one of its key growth areas, while India's Reliance (RELI.NS) is also looking to invest more in the U.S. shale gas industry.

Devon's deal calls for Sinopec to invest in 1.2 million acres in Devon's positions in the Tuscaloosa Marine Shale in Alabama and Mississippi, the Niobrara in Colorado, the Mississippian, the Utica Shale in Ohio and the Michigan Basin.

Sinopec has been on an acquisition hunt over the past year, buying a stake in Chevron Corp's (CVX.N) deepwater Indonesian project in October, an Australian LNG joint venture, a deal to buy into a Brazilian oil services group, and the $2.1 billion acquisition of Canada's Daylight Energy Ltd. DAYdbc.TO.

Shares in Devon were up 6.9 percent to $66.28 in late afternoon trade, while Chesapeake's shares climbed 5.8 percent to $23.59 per share, both outperforming their energy sector peers.

(Reporting By Matt Daily and Mike Erman in New York, Anna Driver in Houston, Swetha Gopinath in Bangalore and James Regan and Caroline Jacobs in Paris.; Editing by Tim Dobbyn)

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Comments (3)
Andy_Anderson wrote:
Brilliant move on China’s part – invest some money in fracking in the US, we get some oil for the next couple of decades, and then by the time China has renewable energy figured out we’ve got earthquakes, polluted water, AND an energy crisis!

Jan 03, 2012 1:06pm EST  --  Report as abuse
neahkahnie wrote:
It’s interesting that NO American money was invested with two American companies. No bank money (they’ve got gobs of it), no hedge money, just the Chinese and the French. Same happened to our industries over 100 years ago in the last quarter of the 19th Century. The French own part of our water supply (Veolia) and now they own part of our oil along with the Chinese.

Jan 03, 2012 1:07pm EST  --  Report as abuse
China is buying one third of the natural gas in five US gas fields; China is buying some oil sands in Canada and has options to buy more; China has bought Canada’s Daylight Energy; and China is buying oil from Mexico. The US banks have $500 billion in EU bonds, and their investment customers were advised to buy an uncertain amount of EU bonds. US hedge funds have sold bets to investors against the EU in amounts that the funds probably cannot cover. When the collapse comes, it is reassuring to know that China will be able to use the North American energy resources that Americans will be too poor to afford. We don’t want anything in the western hemisphere to be wasted.

Jan 03, 2012 4:18pm EST  --  Report as abuse
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