Shale Bubble Inflates on
Near Record Prices
http://www.bloomberg.com/news/2012-01-09/shalebubble-inflates-on-near-record-prices-for-untestedfields.html
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By Joe Carroll and Jim Polson - Jan 9, 2012 12:01 PM
GMT+0700 Mon Jan 09 05:01:01 GMT 2012
Shale Bubble Inflates on Near-Record Prices
Eddie Seal/Bloomberg
Workers move a drill pipe collar as pipe is removed from a
natural gas well being drilled in the Eagle Ford shale in
Karnes County, Texas.
Workers move a drill pipe collar as pipe is removed from a
natural gas well being drilled in the Eagle Ford shale in
Karnes County, Texas. Photographer: Eddie Seal/Bloomberg
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Jan. 3 (Bloomberg) -- Total SA, France's largest oil
company, acquired a $2.32 billion holding in Ohio's Utica
shale region from Chesapeake Energy Corp. and EnerVest
Ltd. Elliott Gotkine reports on Bloomberg Television's
"Countdown." (Source: Bloomberg)
Surging prices for oil and gas shales, in at least one case
rising 10-fold in five weeks, are raising concern of a bubble
as valuations of drilling acreage approach the peak set
before the collapse of Lehman Brothers Holdings Inc.
Chinese, French and Japanese energy explorers committed
more than $8 billion in the past two weeks to shale-rock
formations from Pennsylvania to Texas after 2011 set
records for international average crude prices and U.S. gas
demand. As competition among buyers intensifies, overseas
investors are paying top dollar for fields where too few
wells have been drilled to assess potential production, said
Sven Del Pozzo, a senior equity analyst at IHS Inc. (IHS)
Marubeni Corp. (8002), the Japanese commodity trader,
last week agreed to pay as much as $25,000 an acre for a
stake in Hunt Oil Co.’s Eagle Ford shale property in Texas.
The price, which includes future drilling costs, exceeds the
$21,000 an acre Marathon Oil Corp. (MRO) paid last year
for nearby prospects owned by KKR (KKR) & Co.’s Hilcorp
Resources Holdings LP. In the Utica shale of Ohio and
Pennsylvania, deal prices jumped 10-fold in five weeks to
almost $15,000 an acre, according to IHS figures.
“I don’t feel confident that the prices being paid now are
justified,” Del Pozzo said in a telephone interview from
Norwalk, Connecticut. “I’m wary.”
Vast New Resources
The world’s largest energy producers, including Exxon Mobil
Corp. (XOM) and Royal Dutch Shell Plc (RDSA), are
revisiting onshore U.S. prospects passed by in recent
decades in favor of deep-water finds in West Africa and the
Gulf of Mexico. New drilling techniques developed in the
Barnett shale of north Texas have enabled companies to
crack previously-impervious formations.
Overseas explorers such as China Petrochemical Corp. and
Total SA (FP) want to learn from U.S. partners so they can
exploit vast shale resources in Europe and Asia, said Mark
Hanson, an analyst at Morningstar LLC in Chicago.
The U.S. holds an estimated 2,543 trillion cubic feet of gas,
enough to meet domestic demand for more than a century
at current rates of consumption, according to the Energy
Department in Washington. Shale accounts for 862 trillion
of that total, or 34 percent. In China, shale formations hold
an estimated 1,275 trillion cubic feet of gas, 12 times as
much as the nation’s so- called conventional fields.
Buying to Continue
The buying spree is likely to continue because international
oil producers are eager to amass reserves in the U.S.,
which surpassed Russia in 2010 as the world’s largest
source of gas, said Christian O’Neill, an analyst at
Bloomberg Industries in Princeton, New Jersey.
Oil production also has blossomed in the world’s largest
economy, rising to a 9-year high of 5.78 million barrels a
day in October, the most recent month for which the
Energy Department in Washington has figures.
Hunt, the closely held Dallas company founded by Texas
tycoon H.L. Hunt in 1934, has only drilled “a handful” of
wells in its Eagle Ford shale acreage, which means it
doesn’t yet know how extensive or rich those holdings are,
Del Pozzo said. Similarly, because drilling in the Utica shale
in the U.S. northeast still is in its infancy, the geological
characteristics and potential bounty of the region are hard
to assess, said Manuj Nikhanj, head of energy research at
ITG Investment Research Inc.
“The big risk is that people are jumping in with both feet
too early,” Nikhanj said in a telephone interview from
Calgary. “Of course, the other side of that is that if they
wait, they risk missing out on what could turn out to be a
big deal.”
More Science
Buyers are studying fields more closely before committing,
he said. Total, Europe’s third-largest oil producer by market
value, was selective about what sections of the Utica shale
will be included in the 25 percent stake it acquired on Dec.
30 in 619,000 acres controlled by Chesapeake Energy Corp.
(CHK) and EnerVest Ltd.
Total’s outlay, including drilling costs, will be $2.32 billion,
or the equivalent to about $15,000 an acre, based on
Bloomberg calculations. That’s more than four times the
average per-acre price from seven Utica shale transactions
tracked by IHS from March 2011 to September 2011.
“We are seeing prices move up quite dramatically in these
exploratory shale plays,” Nikhanj said. “But the Total joint
venture also shows us that these companies with deep
pockets are doing more science” before signing deals.
High-Risk Prospects
The quirky nature of shale geology means the risks are high
that an investment made in a sparsely drilled prospect will
go bust, Nikhanj said. Rock density, porosity and pressure
levels vary widely within each field, which means one parcel
may hold enough fuel to justify prices of $30,000 or
$50,000 an acre, while the adjacent land is almost
worthless to drillers.
Brent oil futures, the London-traded benchmark for twothirds of the world’s crude, jumped 26 percent to an
average of $110.91 a barrel in 2011, the highest on record,
spurred by supply disruptions in North Africa and escalating
worldwide demand for fuels to run trains, airplanes and
trucks.
As long as crude commands such lofty prices, explorers will
continue to seek out geologic formations soaked in oil and
gas components such as propane, Dan McSpirit, a Denverbased analyst for BMO Capital Markets, said in a telephone
interview.
Learning the Drill
China Petrochemical, the Beijing-based crude producer
known as Sinopec (600028) Group, and Total expect to
glean expertise from their U.S. partners in the horizontal
drilling and high-pressure water injection necessary to
extract oil and gas from shale, said Hanson, the
Morningstar analyst. Ultimately, the know-how will be
transferred to virgin shale prospects in Europe, Asia and
Latin America, he said.
U.S. gas explorers including Chesapeake and Devon Energy
Corp. (DVN) are selling interests in shale fields to
international energy companies such as Total and Sinopec
to finance drilling on leases acquired during a “massive land
grab” in 2007 and 2008 as oil and gas prices soared to
record highs, O’Neill of Bloomberg Industries said.
The plunge in energy prices that followed Lehman’s
bankruptcy and subsequent global financial crisis left
operators like Chesapeake too poor to fulfill clauses that set
deadlines for finishing wells on pain of forfeiting the leases,
O’Neill said.
“These deals give the domestic exploration companies
capital to drill so they won’t lose those assets, and gives the
foreign companies the learning process they’re going to
need to exploit shale resources on their own,” O’Neill said.
To contact the reporters on this story: Joe Carroll in
Chicago at jcarroll8@bloomberg.net; Jim Polson in New
York at jpolson@bloomberg.net
To contact the editor responsible for this story: Susan
Warren at susanwarren@bloomberg.net