Devon, Sinopec Swap Stakes for $2.2B

HOUSTON (Dow Jones Newswires), Jan. 3, 2012

China Petrochemical Corp. struck a multi-billion dollar deal with Devon for a one-third stake in five U.S. shale oil and gas fields, another move by Chinese state-owned firms eager to play a bigger role in a global rush to tap unconventional fossil fuels.

Under the deal, expected to close in the current quarter, Devon will serve as the operator. Sinopec, as the Chinese oil giant is known, will pay Devon $900 million at closing; that payment includes $300 million in reimbursements for money Devon already spent on acreage and drilling acquisition, according to a Devon spokesman. In addition, it will pay $1.6 billion to Devon in the form of a drilling carry expected to be realized by the end of 2014.

Sinopec is making first foray into the U.S. oil patch through the deal with Devon, one of the first companies to successfully tap shale fields. But it follows a path already trod by CNOOC, which in 2010 and 2011 bought stakes in Chesapeake's operations in South Texas's oil-rich Eagle Ford shale and in shale assets in Colorado and Wyoming.

The deals give Chinese state oil giants a front-row seat to one of the most dynamic oil regions in the world, where production is rising dramatically - and unexpectedly - thanks to fracking technology applied in the past decade. Learning and adapting fracking methods to shale plays in China could unlock massive new oil and gas reserves for the emerging super-power, just as it is changing the energy landscape of the U.S.

In addition to buying stakes in U.S. shale, CNOOC and Sinopec are competing to buy a 30% stake in FTS International, an oilfield services company specializing in fracking technology, the Wall Street Journal reported in December. Saudi Arabian Oil Co., known as Saudi Aramco, is also bidding, the Journal reported.

The U.S. Energy Information Administration estimates that China's technically recoverable shale gas reserves at nearly 1.28 quadrillion cubic feet, by far the most in the world and more than the agency's estimate for the combined volumes in the U.S. and Canada, which amount to 1.25 quadrillion cubic feet.

For Devon, the agreement helps cover operating expenses at a time when natural gas prices are low. "This arrangement improves Devon's capital efficiency by recovering our land and drilling costs to date and by significantly reducing our future capital commitments," said Devon Chief Executive John Richels. Devon shares were up 5.6% at $65.45.

The deal includes positions across five shale regions: the Tuscaloosa Marine Shale in Louisiana, the Niobrara in the U.S. mid-continent, the Mississippian in Oklahoma, Ohio's Utica Shale and the Michigan Basin.

The drilling carry is expected to fund 70% of Devon's capital requirements, which will result in Sinopec paying 80% of the overall development cost. The companies expect to drill 125 wells by the year's end across the five areas.

Devon in November reported third-quarter earnings fell 50% from a year-earlier period that included a $1.5 billion divestiture gain, as its hedging losses continued to mask its revenue growth.

Devon's deal is the third billion-dollar-plus investment in U.S. oil fields by a foreign oil company in the last three weeks. Spain's Repsol on Dec. 22 agreed to a $1 billion pact with SandRidge Energy to jointly develop oil fields in Kansas and Oklahoma while Chesapeake on Tuesday said France's Total paid $2.32 billion for a stake in some of its Ohio shale discovery.

Copyright (c) 2012 Dow Jones & Company, Inc.


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