recogniton once drill bit turns, page-2

Analysts see Bakken deals ahead
Rising costs and the enduring attraction of oil are sparking interest in joint venture and M&A activity among operators in the oil-rich Bakken shale - a more than 500,000 square kilometres formation beneath the US-Canada border.

News wires 11 October 2010 19:19 GMT


In the past year, Reliance Industries , ExxonMobil and BG Group have been among those spending heavily in the mainly natural gas-rich shales of Marcellus and Haynesville, and in Eagle Ford, which is rich in higher-priced natural gas liquids.

However, year-to-date average gas prices have dropped by close to a third, while crude oil is up about 12%.

Now, interest may be switching to oil, and Bakken looks well placed.

"The gas business is basically a bust," Plains Exploration and Production boss James Flores said on a recent conference call with analysts.

Among the unconventional shales, or tight rock formations, Bakken has the highest crude oil content, prompting analysts and industry experts to predict an M&A windfall for the region that straddles North Dakota, Montana and Saskatchewan.

"The large US independents like Devon Energy and Anadarko are increasingly coming to the view that some exposure to oil is good," Frank Murphy, an investment banker with Robert W Baird, told Reuters.

Murphy said these companies were underexposed in the oil shales, so there was potential for them to move in either through joint ventures or buying companies active in the Bakken.

In late July, Hess said it was buying small-cap Bakken operator American Oil and Gas for about $445 million.

Other big independents already in Bakken include EOG Resources and Marathon Oil .

Analysts, however, say valuation is a primary factor keeping buyers away.

Pure-play Bakken producers are overpriced, they say.

"Any type of transaction would be too expensive a reach if someone is attempting a buyout. It would be just too expensive a proposition," said Jefferies and Company analyst Subash Chandra.

For example; Brigham Exploration trades at 74 times its forecast earnings for this year.

Chandra said valuations like these, predicated largely on high oil prices, would make it tough even to work on joint venture partnerships.

"On shale oil, the buyer goes: 'Look, I like it. I like oil, but you're just too expensive.'. You just need to price it down."

Looking ahead, however, smaller operators may need to seek external funding as service costs go up and maintaining acreage becomes increasingly capital intensive.

"The higher costs will squeeze some of the smaller, less well capitalised players ... they may find that teaming up with larger players or selling out is a more viable option," Robert W Baird's Murphy said in a Reuters report.

Private players such as Tracker Resource Development, or small-cap listed operators Kodiak Oil & Gas - which had end-2009 proved reserves of 4.46 million barrels of oil equivalent - and Oasis Petroleum would be the sort of companies that could be in this position, analysts said.

"Before the year-end, we'll see one or two deals in the Bakken, maybe in the $400 (million) to $500 million range. I think we'll see large independents as the primary acquirers," said Murphy.

Geoffrey King, energy analyst at Van Eck Associates, reckoned valuations of Bakken operators may not come down anytime soon, delaying M&A deals and joint ventures until well into next year.

"It looks a stretch, but we'll maybe see some activity in 2011... I don't see a huge need for financing opportunities until then, unless commodity prices collapse," he said.

Published: 11 October 2010 19:19 GM


AND


Analysis: Utica Shale Could Boost Quebec Government Income, Create JobsRigzone Staff|Friday, October 08, 2010

Utica shale gas exploration efforts in Quebec could generate C$278 million per year in revenue for the Quebec government and create at least nearly 5,000 jobs per year by 2015, and generate significant economic benefits going forward, according to a study conducted by independent consulting firm SECOR

The Quebec Oil and Gas Association asked SECOR to conduct the study to estimate the economic impact of exploration and exploitation of shale gas, specifically on jobs and revenues for the Quebec government. SECOR conducted to study last fall.

SECOR analyzed two scenarios in the study. In the base scenario, SECOR assumes that 150 wells per year are drilled from 2015, while the second scenario assumes that the level of drilling will stabilize at 600 wells per year from 2016. Both cases assume that there will be six wells drilled per drill site.

According to SECOR's analysis, in full operation the drilling of one well will generate C$1.85 million in value added to Quebec and some 33 jobs annually. Under the base scenario, in 2015 the production of 150 wells will create C$278 million in revenue for the government and close to 5,000 jobs. This analysis is based primarily on the input-output model of l'Institut de statistique du Qubec.

However, the production phase of a well, which stretches over 50 years, is estimated to create relatively few jobs, or 28 jobs per 100 wells in production, with the 293 wells forecasted in the base scenario in 2015 expected to create 82 jobs. Because fewer jobs would be created, royalties would become important as a revenue source during the production phase. To identify its importance, the SECOR study was based on gas prices in the fall of 2009, $6/Mcf and a royalty rate of 10%. The average royalty per well under these assumptions would be around C$150,000 per year.

"At this stage we cannot predict the level of industry development, as the potential in Quebec is not sufficiently characterized. If a thousand wells are in production on 150 sites, the Government of Quebec could receive C$150 million in royalties annually. Under the second scenario, the exploitation of 7,000 wells, following the assumed hypothesis, would translate into annual royalties slightly above C$1 billion," SECOR said.

The study of benefits does not include expenses incurred for transportation and distribution of the natural gas extracted, corporate taxes paid by the industry and its suppliers, nor does it integrate the dynamic or structural effects for the economy of Quebec.

Developing shale gas resources is part of Quebec's plan to reduce its dependence on hydrocarbon imports. Currently, the province imports all of the hydrocarbons it consumes; the cost associated with oil and gas imports rose from C$12 billion in 2005 and 2006 to C$14 billion in 2008. Quebec imports most of the gas it uses from Western Canada at a high price; the province's industrial sector consumes more than half of the natural gas consumed in the province. At the same time, the province's energy demand also grew by 1.1 percent between 1987 and 2006, despite improvements in energy intensity.

Utica shale could allow Quebec to meet between 50% and 100% of its own energy demand, SECOR said. Development of Utica shale also could significantly improve Quebec's trade balance from C$400 million in 2015 to C$1 billion in 2025.

Over the 2010-2015 period, SECOR estimates that 13,105 jobs will be created or maintained according to the basic scenario of the industry, or an average of 2,184 jobs per year; an estimated C$790 million would be added to the gross domestic product of Quebec, with the Quebec government income expected to increase by C$232 million; and income for the federal Canadian government forecast to rise by C$39.3 million.

The development of technology that has enabled successful development of U.S. shale plays has allowed the Utica shale to emerge as a promising play. SECOR estimates that extractable gas reserves in Quebec total between 9 Tcf and 41 Tcf and have a production value of between C$45 billion and C$210 billion. However, this potential has not yet been proven commercially, and significant investment is required to test this potential. SECOR notes that the discovery of hydrocarbon deposits in neighboring basins with a similar geological context to Quebec will enable technology transfer and economies of scale.

Investment in Utica shale exploration and development in Quebec has totaled C$130 million over the past two years by six companies active in the region, and could exceed more than C$630 million a year by 2015. To date, 19 wells have been or will be drilled, and exploration activity is expected to accelerate over the next few years, with production expected to begin in 2011.

The Quebec government will sign this fall a memorandum of understanding with the shale gas industry that will detail best practices the industry will be required to implement for gas exploration and development in Quebec. This will involve a social agreement between industry, government and the public.

The memorandum of understanding is part of the Quebec government's plan to manage the development of shale gas resources in the Canadian province. The plan will include consulting with partners and the public on how shale gas exploration and development activities will be controlled