International players join in

Marcellus Poised for Even More Attention

Dan Billman
Dan Billman

Trends come, trends go.

This holds true for the oil and gas industry as elsewhere.

For a number of years, both large and small independents have reigned supreme in domestic onshore land plays after the Big Guys pretty much exited these areas to chase more economically attractive targets. These included big deepwater finds on the international scene and the Gulf of Mexico in particular.

Then a funny thing happened.

Onshore once again became alluring, owing principally to some fairly amazing production – and predicted future potential – from the many relatively new shale gas plays.

Major companies and others began announcing land acquisition deals even before the now-infamous spill in the deepwater Gulf in April.

This catastrophic event has the potential to spur increased interest in land drilling especially considering the six-month-minimum moratorium for drilling in water deeper than 500 feet.

Even oil and gas folks far removed from offshore are watching and opining as to how the unfolding saga may alter industry activity.

“If the moratorium continues for any significant period of time, this by nature forces companies to relook at where they’re looking for reserves,” said AAPG member Dan Billman, a veteran geological consultant in the Appalachian Basin. “Some operators may well consider placing more emphasis on onshore, less risky reserves.”

A few months prior to the GOM debacle, ExxonMobil hit the front pages with its announcement to snap up XTO Energy, which is known for its appealing portfolio of domestic shale gas, tight gas, coalbed methane and shale oil.

The $41 billion all-stock deal indicates the industry giant has confidence in the future for domestic natural gas despite the current oversupply and anemic demand.

Primed for Take-Off

As might be expected, the Appalachian Basin’s Marcellus Shale play, with its estimated reserve potential of as much as 500 Tcf and its proximity to the gas-guzzling northeastern markets, is attracting some new/former landlubbers as well as enticing current players to increase their holdings.

A study recently released by Pennsylvania State University energy and mineral engineering department stated that the Marcellus, when fully developed, has the potential to be the second largest natural gas field in the world, superseded only by the South Pars/Asalouyeh field shared between Iran and Qatar.

The study, “Economic Impacts of Pennsylvania Marcellus Shale Natural Gas Play: An Update,” was funded by the Marcellus Shale Gas Coalition.

“Converted to BTUs, the natural gas found in the Marcellus could be equivalent to the energy content of 87 billion barrels of oil,” said Timothy Considine, professor of energy economics, school of energy resources at the University of Wyoming, and co-author of the study. “This would be enough to meet the demand of the entire world for nearly three years.”

Some economic findings revealed in the report might spur states fortunate enough to harbor shale plays to do essentially whatever it takes to encourage drilling and development given the omnipresent need to beef up state government coffers.

“In Pennsylvania, the development of these historic resources, while still in its infant stages, is credited with the creation of thousands of jobs and billions in annual revenue for the state,” Considine said. “Over the next two years, this growth is expected to increase rapidly.”

Longtime industry bigwig Royal Dutch Shell, which has been involved in tight gas activity in the United States since 2001, recently announced it has acquired a major presence in the Marcellus via its purchase of Warrendale, Pennsylvania-based East Resources.

Shell agreed to ante up $4.7 billion for the deal.

According to Shell, East owns 1.05 million net acres, principally in the Appalachian Basin. East is one of the largest Marcellus shale holders, boasting 650,000 highly contiguous net acres primarily in Pennsylvania.

This Marcellus acreage is almost 100 percent operated with high average working interest and access to pipeline infrastructure.

East also lays claim to more than 100,000 net acres in the Rockies in the fledgling Niobrara shale play, which also is a hot attraction these days.

International Playground?

The Marcellus is taking on a decided international bent that actually began early-on.

For example, Statoil joined forces with domestic big Marcellus player and natural gas devotee Chesapeake Energy back in 2008 when it purchased nearly a third of Chesapeake’s holdings in the play. Statoil reportedly has experienced good production performance and recently added 59,000 net acres to its current 600,000 net acre holdings per terms of the 2008 joint venture agreement.

Recently, Mitsui E&P, a unit of Mitsui & Co Ltd., agreed to fork over a cool $1.4 billion for a 32.5 percent stake in Anadarko’s Marcellus shale holdings, located principally in north-central Pennsylvania.

Further contributing to the international status of the Marcellus play, Mumbai’s Reliance Industries has acquired a 40 percent interest in Atlas Energy’s core Marcellus shale acreage position. The tab was reported to be $1.7 billion.

U.K.-headquartered BG Group has joined the Marcellus action via a joint venture with Dallas-based EXCO Resources, which has operations principally in Appalachia as well as Texas and Louisiana.

Investment interest from overseas continues.

“Recently, I started doing due diligence for an international investor,” Billman said. “It will be a new venture for them – and there likely will be more of that to come.

“Right now, if you come in wanting to lease properties, most of the leasing is done,” Billman noted. “So the way to come in is to invest through joint ventures, partnerships or other arrangements in private and public companies that have established plays.

“There are some companies here now that still may be looking for partners,” Billman emphasized.

Of course, if you have the really big bucks and ferret out a really sweet opportunity, you can follow the ExxonMobil and Shell model, i.e., buy the whole company.

If the current interest and investment activity escalates and the Appalachian turf gets too crowded, don’t fret.

You have options.

Consider the raft of other domestic shale plays dotting the landscape, including the attraction of the moment: oil shale plays, i.e., the Bakken in North Dakota, and shale gas plays rich in liquids, such as the Eagle Ford in Texas.

A caveat: Shale plays carry their own kind of risk, owing in large part to the burgeoning non-industry skepticism over the safety of fracing fluid used to make these dense rocks produce.

“We have our own kind of moratorium in the Marcellus,” Billman noted. “Right now, there’s no large volume hydraulic fracing in the state of New York.

“As a result, we’ve seen some New York players move their emphasis into Pennsylvania.” 

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