BG Group Takes Billion-Dollar Bite of US Shale

NEW YORK (THE WALL STREET JOURNAL via Dow Jones Newswires), Jun. 30, 2009

BG Group agreed to pay $1 billion for a stake in Dallas-based Exco Resources Inc.'s shale-gas properties in Texas and Louisiana, becoming the latest European oil major to move into U.S. unconventional natural gas.

The deal follows similar moves by StatoilHydro ASA of Norway and the British oil major BP PLC, who both recently acquired interests in shale-gas fields in the U.S., one of the hottest new hydrocarbon plays.

Trapped in tightly packed sands, coal seams or dense rock called shale, unconventional gas can't be extracted by traditional drilling methods.

But recent technological breakthroughs have unlocked these vast resources. Combined with easy credit and high natural gas prices, they sparked an unprecedented four-year drilling boom.

BP paid Oklahoma City-based Chesapeake $3.6 billion last year for stakes in fields in Arkansas and Oklahoma. StatoilHydro later also struck a $3.4 billion deal with Chesapeake.

In May, Quicksilver Resources Inc., a Fort Worth, Texas, gas producer, announced a $280 million partnership with Italy's Eni SpA. Royal Dutch Shell PLC has amassed a large position in the Haynesville Shale through a partnership with EnCana Corp.

In those deals, and in the one announced Tuesday, the U.S. companies got cash to drill, while the European majors gained experience in producing gas from shale. That Is a boon to BG, which has little exposure to unconventional gas beyond its coalbed methane assets in Australia, where it extracts gas trapped in depleted coalfields.

Tuesday's deal involves Exco, a small but aggressive producer that has been one of the most successful players in the Haynesville Shale, a huge gas field in northern Louisiana and east Texas that Chesapeake discovered last year.

Exco has grown quickly, increasing its gas production 19% last year.

But the company was hit hard by falling gas prices. Revenue from oil and gas sales fell 47% in the first quarter, year-on-year, even as production rose 4.7%.

In response, Exco has cut spending and sold of stakes in its gas fields. The day before the BG deal was announced, the company said it had agreed to sell assets in Oklahoma and elsewhere to Encore Operating LP for $375 million.

Under the deal announced Tuesday, BG will acquire a 50% interest in 120,000 acres of land held by Exco in east Texas and north Louisiana, most of it in the Haynesville Shale.

It said it would also negotiate to purchase a 50% stake in Exco's gas-gathering and transport assets for an additional $249 million. BG said the deal would add 2.6 trillion cubic feet to the company's resource base -- equivalent to 4-5% of its existing resources.

Analysts said the deal makes strategic sense for BG but expressed concern about weak U.S. gas prices.

Gordon Gray, an analyst at Collins Stewart in London, said with gas prices currently at $4 per million BTUs, the economics of the Haynesville shale "look below breakeven," though they would stack up reasonably at more realistic longer-term prices of between $5 and $6 per million BTU.

Companies say Haynesville wells remain economic at current prices.

Analysts at Bernstein Research said the deal means BG could use shale gas produced in Haynesville to meet contractual commitments in the U.S.

That would allow it to divert cargoes of liquefied natural gas away from North America to higher-priced markets elsewhere.

BG is one of the world's largest suppliers of flexible LNG cargoes that can be diverted to wherever prices are highest.

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