* Chesapeake sells Arkansas shale gas assets to cut debt
* BHP shares up 3 pct on shale deal
* Deal to be funded from cash reserves
* First BHP purchase since failed Potash bid
* BHP confident no competition issues with deal (Adds Chesapeake background)
By Michael Smith and Sonali Paul
SYDNEY/MELBOURNE, Feb 22 BHP Billiton is buying shale gas assets from Chesapeake Energy Corp for $4.75 billion, pitting itself for the first time against oil giants and China in the battle for the fast-growing energy source in North America.
The deal marks the top global miner's first attempt at picking up assets since failing on three mega-deals over the past three years and sets it further apart from its mining peers with a big bet on the world's biggest gas market.
"BHP have had (three) multi-billion deals which have tipped over, so the market should be pleased that this is one that is going to go through and it is a change of direction in terms of looking at their petroleum division," said Ric Ronge, portfolio manager at Pengana Capital.
BHP said it was buying Chesapeake's holdings in Arkansas' Fayetteville shale natural gas field, put up for sale by the No.2 U.S. gas producer just two weeks ago to help trim a heavy debt load.
Chesapeake's move at the time sparked talk it was bowing to pressure from billionaire Carl Icahn, a 6 percent stakeholder.
Following a shale gas asset buying spree and in the face of persistently low natural gas prices, the company has said it wants to back away from gas and look for oil instead.
Shale gas is gas extracted from shale rock, using a technology called hydraulic fracturing or "fracking". Critics say the process contaminates ground and surface water with chemicals that can cause cancer, birth defects and other illnesses.
The deal pits BHP head-to-head against China in a race for global energy assets, following state-owned PetroChina's C$5.4 billion ($5.5 billion) agreement to buy shale gas stakes from Canada's largest gas producer, Encana Corp earlier this month.
China's CNOOC earlier bought about $2.4 billion worth of shale stakes from Chesapeake, while Indian energy companies including Reliance Industries have also been investing heavily in the burgeoning sector.
BHP shares jumped more than 3 percent in Sydney trade on news of the deal, which the company will fund from its substantial cash reserves of $16.1 billion. Australia's broader market was down 0.4 percent .
Energy firms have invested billions of dollars to develop shale gas in the United States in recent years, flooding the U.S. natural gas market with gas supplies and weighing down prices despite a bounce in other commodity prices in the past year.
But BHP Petroleum chief Michael Yeager was bullish that U.S. gas prices would improve as demand for cleaner energy grows, and said even at current levels, the company would make healthy earnings margins on shale gas.
"We're delighted to inform you today of a very, very substantive piece of business that we feel is a huge and very, very positive addition to our petroleum company within BHP Billiton Corporation," Yeager told reporters, adding the deal would be cash and earnings accretive from day one.
BHP said it was paying $1.77 per thousand cubic feet of gas (Mcf) of proved reserves. ExxonMobil bought Petrohawk Energy's Fayetteville shale assets in December valuing its reserves at $1.92 per Mcf.
NO REGULATORY HURDLE
BHP's acquisitions strategy has shifted focus to its petroleum division after regulatory and political obstacles dashed its $39 billion takeover bid for fertilizer maker Potash Corp , a full takeover of Rio Tinto and an iron ore joint venture with Rio Tinto.
"It is probably the only division BHP has where they are not going to run into regulatory or anti-trust issues with an acquisition of size," said Ronge, whose resources fund owns BHP shares.
Last week BHP said it planned to spend around $80 billion into expansions over the next five years to cash in on booming commodity prices.
Chesapeake's Fayetteville shale assets include about 487,000 acres of leasehold and producing natural gas properties in Arkansas in the United States, one of the world's 30 largest gas fields.
Chesapeake said the deal with BHP Billiton Petroleum included existing net production of about 415 million cubic feet of natural gas equivalent per day and about 420 miles of pipeline.
BHP aims to triple daily production from the new asset as the field is developed, and plans to spend $800 million to $1 billion a year over 10 years to develop the field, Yeager said.
Yeager was confident BHP would not run into any competition or environmental issues with the purchase, noting it was in a rural area in a state that is very pro-business.
Chesapeake was advised by Jefferies & Company on the deal, which is expected to close in the first half of 2011. ($1 = 0.983 Canadian Dollars) (Additional reporting by Rebekah Kebede in PERTH; Editing by Balazs Koranyi and Lincoln Feast)