Hess Corporation (HES) beefed up its interest in the Tubular Bells oil and gas field in the Gulf of Mexico (GoM). The company purchased an additional 20% interest from BP plc (BP) for $40 million. Following this deal, Hess will become the operator of this field with a total interest of 40%. Other partners in the Tubular Bells field are Chevron (CVX) and BP with each holding 30% interest. Discovered in 2003, the Tubular field is located 135 miles offshore New Orleans.
Separately, Hess also announced the completion of its interest acquisition in a couple of Norwegian North Sea offshore fields — Valhall and Hod. In June, the company assumed 7.85% and 12.5% interest in Valhall and Hod fields, respectively, for a total consideration of $496 million. The transaction brought Hess’ interests in Valhall and Hod to 64.05% and 62.5%, respectively. It appears that the needle had moved positively for Hess with its recent initiatives in exploration and production. Historically, the company had been lagging its peers in terms of upstream growth and balance sheet strength. Notably, the company keeps maintaining the balance between domestic as well as international upstream development efforts. However, Hess’ international operations in terms of reserves and production growth hold more promise. Also a positive is Hess’ oil-weighted production profile given the positive near- to medium-term oil outlook.
M&A expenditures total $21B for US Shale gas in first half of 2010 (Source: Wood Mackenzie) Wood Mackenzie’s latest corporate analysis highlights that upstream M&A expenditure in US shale gas totalled US$21 billion during the first half of 2010: equivalent to one third of global upstream M&A spend during the period. The independent energy research firm says key indicators suggest that this level of activity is set to continue over the next couple of years, with the large caps and majors continuing to dominate the market.
Luke Parker, Manager of Wood Mackenzie’s M&A research service underlines the magnitude of the market, “Through the first half of this year alone, in excess of 35 trillion cubic feet (tcf) of shale gas resource changed hands at an average cost of US$0.60 per million cubic feet of gas equivalent (mcfe). This expenditure is equal to the total US shale gas M&A expenditure for the 2008 and 2009 combined – which was US$19.7 billion and US$2 billion respectively.”
“M&A activity in US shale gas has evolved with its emergence, play-by-play, as a world scale source of secure, long-term gas supply. The key factor driving this has been the continued evolution and application of new technologies to unlock enormous volumes that were previously considered uncommercial.” The result is lowered development breakeven costs to a level at which the cost of shale gas is highly competitive with other domestic sources of supply - conventional and unconventional - and LNG imports. Operators have made, and continue to make, notable advances and unit costs have fallen in spite of increasingly complex and specialised well design. Parker goes on to highlight the impact of this structural change, “In a wider upstream oil and gas sector characterised by dwindling opportunities and increasing risks, the emergence of such an attractive resource – competitive with other global opportunities by every measure – has been a game changer.”
So has the flurry of activity peaked yet? Parker doesn’t think so, “The ingredients required for continued high levels of M&A activity in US shale gas remain in place. The drivers that make shale gas so attractive – world scale resource, robust economics, access opportunities and limited above-ground risk – are as strong as ever.” Expanding on how continued level of activity is set to unfold Parker explains, “There’s scope for intra-play and sector wide consolidation, facilitated by mounting pressures on existing players to evaluate and restructure their portfolios as strategic priorities evolve. Key among the various pressures that will influence the market, at least in the near-term, is the continued disconnect between oil and gas prices and a depressed Henry Hub futures market.”
Therefore Wood Mackenzie suggests that gas weighted independents with a weak balance sheet and/or hedging position are beginning to look increasingly vulnerable to larger players. In fact, the report suggests that shale gas offers a good fit for the large caps and majors, playing to their technical capability, financial strength and long-term view, all of which are pre-requisites for those looking to build a material position. Hence this peer group will continue to dominate the large scale deal activity. Robert Clarke, Unconventional Gas Research Manager for Wood Mackenzie adds, “The magnitude of the US Shale gas resource is extraordinary. We estimate the total resource potential of the 22 shale plays we currently analyse is approximately 650 trillion cubic feet of gas equivalent (tcfe): equivalent to a resource life of 32 years based on total US gas production in 2009. Shale gas production is set to increase from 17% in 2010 to 35% in 2020 of total US gas supply.”
Enbridge (ENB) to invest $260MM to expand Edmonton Terminal to support growing oil sands production. The company announced that its wholly owned subsidiary, Enbridge Pipelines Inc. (EPI), will expand the tankage of its mainline terminal at Edmonton, Alberta by one million barrels at an estimated cost of approximately $260 million, subject to regulatory approval. The expansion is targeted for completion by late 2012. The expansion is required to accommodate growing oil sands production receipts both from Enbridge's Waupisoo Pipeline and other non-Enbridge pipelines. The expansion will be undertaken under the terms of the 2010 Incentive Tolling Settlement between EPI and the Canadian Association of Petroleum Producers (CAPP). Enbridge has received a letter of support from CAPP to undertake the project.