Big Oil Reaching Out to Shale Gas Developers

Big Oil knows where the money is, and its buried with the shale gas. The latest such foray into that arena is ExxonMobil’s agreement to buy Denbury’s shale assets in North Dakota’s Bakken field, which is awash in oil and gas.

Oil companies, which are constrained in the United States as to where they can drill, expect their investments in shale gas to pay off. It’s a way to diversify their holdings in a complementary fashion. In other words, natural gas is often found alongside oil deposits. And while developers have been forced to "flare" the fuel because they have been unable to monetize it, high electric utility demand for it is now providing the push to build the required infrastructure.

“This agreement provides a strategic addition to ExxonMobil’s North American unconventional resource base,” says Andrew Swiger, senior vice president ofExxonMobil. “ExxonMobil’s financial and technical strength will support continued development of America’s natural resources, which strengthens U.S. energy security while creating jobs.”

For its part, Exxon will get 196,000 acres, increasing its total land in the Bakken to 600,000 acres. Texas and North Dakota lead the United States in oil and gas production. The acquisition is considered small for Exxon but it is in keeping with its economic strategy, which is to acquire more such assets. Two years ago, it bought XTO Corp. for $31 billion. Since then, it has spent about $3 billion to collect shale gas leases throughout the United States.

In exchange for its Bakken shale assets, Denbury will receive $1.6 billion in cash and acquire ExxonMobil’s interests in the Hartzog Draw field in Wyoming and Webster field in Texas, which currently produce about 3,600 net oil equivalent barrels per day of natural gas and liquids.

Denbury said in a formal statement it is focusing on fields where it can leverage its know-how of enhanced oil recovery mechanisms using carbon dioxide. By capturing such releases from power plants, they can then be funneled into oil wells to ease the production process. To that end, the company’s Chief Executive Phil Rykhoek said that this ability “offers one of the most compelling rates of return in the oil and gas industry today.”

Potential Problems

The Potential Gas Committee, a research arm of the natural gas and petroleum industries, has said that this country has a natural gas resource base of nearly 2,000 trillion cubic feet -- more than in the last 46 years. Most of the increase since the last 2009 study is the result of re-evaluating shale gas plays along the Gulf Coast Mid-Continent and Rocky Mountain areas.

Eric Potter of the University of Texas has given further estimates that 5,500 wells in the Barnett Shale region in Dallas will generate $100 billion for the Texas economy over several years.

All that is why the oil giants are interested in shale. ExxonMobil, in fact, has previously said in its annual energy outlook that it anticipates natural gas to grow faster over the next 20 years than either oil or coal. ??

Beside ExxonMobil, Chevron bought Atlas Corp. in February 2011 for $3.2 billion. RoyalDutch Shell, meantime, acquired East Resources for $4.7 billion in cash. ??As for ExxonMobil, it now possesses the resource equivalent of 45 trillion cubic feet of shale gas, shale oil and coal-bed methane. By betting on natural gas, all of the oil firms are expecting tighter air quality restrictions; natural gas emits far fewer emissions than either oil or coal.

“As the outlook shows, the world will still rely on oil and natural gas to meet much of its energy demand for years to come ...,” says the American Petroleum Institute. But it goes on to say that the progression toward carbon constraints will force a move toward natural gas and other less carbon-intensive fuels to meet electricity demand.

But potential problems loom. For starters, flaring remains an issue and especially in the Bakken fields. But the industry is insistent that it will make the necessary investments to transport the natural gas.

Furthermore, shale is mined by pumping water, sand and chemicals deep underground to break it free from the rocks where it is embedded. Many communities and environmental groups say the process contaminates the groundwater. The issue, though, is getting a lot of attention and a recent high-profile panel appointed by the U.S. Department of Energy has concluded that through proper stakeholder involvement, the drilling processes in question could be safely done.

It’s a natural extension for Big Oil to reach out to shale gas producers. And it’s also beneficial for those smaller gas developers, which need access to capital. That’s why similar deals such as the one Exxon just entered into will continue.

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