Big oil's step into shale 'a no-brainer'
Friday, June 10, 2011 10:50 PM
(Source: The Pittsburgh Tribune-Review)By Kim Leonard, The Pittsburgh Tribune-Review
June 10--Exxon Mobil Corp.'s latest purchase of a Western Pennsylvania natural gas producer shows that big oil continues to take a big interest in the Marcellus shale basin, despite low gas prices.
"It's really a no-brainer that all these companies are moving into shale gas," energy expert Kent Moors said on Thursday, a day after Exxon announced it bought privately held Phillips Resources Inc. of Marshall Township and a related company for $1.69 billion.
With natural gas being used more and more to generate electricity, "They know this is not a flash in the pan," said Moors of Duquesne University. He expects Exxon to step up Phillips's gas exploration and production activities.
Exxon made one of the oil industry's first deals in the gas-rich Marcellus region with its $35 billion purchase last year of XTO Energy Inc., an experienced driller with large lease holdings. Buying Phillips gives the company access to another 317,000 acres.
XTO will manage Phillips from its Appalachia division, to be based at the Phillips Resources office in the Thorn Hill Industrial Park. XTO, now an Exxon subsidiary, will continue to run a small Mt. Lebanon office on a limited basis.
Exxon intends to keep the nearly 200 Phillips Resources employees, said Jeff Neu, public and government affairs adviser for XTO.
The Phillips Resources acquisition included Butler-based TWP Inc., which was the holding company for the gas exploration and production business and, until last month, for gas utility T.W. Phillips Gas and Oil Co.
SteelRiver Infrastructure Fund North America LP, which also owns Peoples Natural Gas Co., bought T.W. Phillips for an undisclosed price and renamed it Peoples TWP.
Phillips Resources produces 50 million cubic feet of gas daily. "Every credible forecast shows the United States and the world will need more natural gas to meet rising demand, especially for power generation," Neu said.
Natural gas futures have fallen dramatically since 2005, and declined yesterday to $4.70 per million British thermal units. Still, global companies with plenty of financing can afford to take a long-term view, said Steve Haffner of PricewaterhouseCoopers LLP.
"They are counting on high levels of natural gas to be part of the energy mix for the next 30 years," he said.
Some other recent Marcellus deals:
-- Shell Oil Co.'s parent acquired East Resources Inc. of Marshall in July for $4.7 billion, giving it access to 650,000 acres. Shell has 270 wells in Tioga County, and is studying Butler and other counties. The company expects natural gas to account for more than half its production next year.
-- Chevron Corp. acquired Atlas Energy Inc. of Moon in November for $4.3 billion, picking up 486,000 Marcellus acres. Last month, Chevron also bought mineral rights to 228,000 acres from Chief Oil & Gas LLC and a Texas investment firm.
Acquisitions in the shale industry are likely to continue with "vulnerable smaller guys being taken out" as they face higher costs and increased regulation, said Tony Regan, a consultant at Tri-Zen International.
Moors said oil companies are "moving energetically" into unconventional natural gas -- meaning pockets that were virtually inaccessible before advances in drilling techniques.
The Marcellus shale layer is attractive because it is relatively shallow compared to the Barnett field in Texas and Fayetteville in Arkansas. And drilling 5,500 to 7,500 feet down, compared to 12,500 feet, can cut costs by $3 million to $8 million per well, he said.
Higher-than-expected gas volumes are coming out of the shale play, as well. The industry will know more when 8,000 to 11,000 wells are completed, but so far it looks like an average Marcellus well will turn a profit with production costs well below Nymex futures -- around $3.60, he said. So far, around 2,000 wells have been drilled.
Exxon's investment "underscores the critical role that American natural gas will continue to play" in fueling the nation's economy, said Kathryn Klaber, president of the Marcellus Shale Coalition, a trade group that represents the industry.