Taking advantage of low barriers to entry and even lower natural gas prices, two large foreign-owned oil and gas companies announced plans to invest billions of dollars to develop shale resources in the United States.
Sinopec, China's second-largest oil company inked a $2.5 billion deal with Oklahoma-based Devon Energy to invest in five new shale development areas ranging from Ohio south to Alabama. In another deal, France's Total Group is investing $2.3 billion in a joint venture with Chesapeake Energy and EnerVest on an Ohio oil and gas project.
The two deals have a similar structure and purpose. The foreign companies are paying a majority of the development costs plus cash up front for a minority stake. The reason? Total and Sinopec want to learn a thing or two about advanced drilling techniques.
In the Sinopec-Devon deal, Sinopec is taking a one-third share in the five oil projects it is developing with Devon Energy but will pay $900 million in cash and 80 percent of the development costs, or up to $1.6 billion, reports The Financial Times. The additional costs born by Sinopec are being paid to Devon in exchange for transferring some of the technical knowledge used in shale gas development, namely horizontal drilling and hydraulic fracturing.
Total’s deal has a similar structure with the French company taking 25 percent of the joint venture with Chesapeake and EnerVest in Ohio’s Utica formation. Total will pay $700 million in cash and 60 percent of its partners’ future development costs—up to $1.63 billion.
The French government, which has a 5 percent minority stake in Total (down from a peak of 30 percent), has outlawed hydraulic fracturing in France.
The two new foreign-led ventures are not the first big shale plays by foreign companies in the U.S. Rather they are emblematic of a growing trend of foreign investment in American natural resources. According to figures published by The Pittsburgh Tribune-Review, $24.5 billion of the total $39.9 billion in gas and oil field deals in the first three quarters of 2012 came from foreign investors.
There are no legal requirements preventing foreign-owned companies—whether they are privately-held or nationally-owned—from developing oil and gas resources on American soil or in its coastal waters, only that they be registered in the United States through the State Department. With natural gas prices lower in the U.S. than just about anywhere else in the world, foreign companies are clamoring for a piece of the action.
And they are clamoring successfully.
Back in July, Sinopec Group vice president Zhang Yaocang told Reuters that the company wanted "to enter the shale gas area in Canada and America" within two to three years.
But with the announcement of the deal with Devon Energy, that timeline just got a lot shorter.
Photo credit: Qyd via Wikimedia Commons