Shale Interest Drives North American Upstream M&A

After taking a back seat to Latin America in Q3 2010, North America re-emerged as the key player in the global upstream M&A sector with the majority of deals conducted there in the past two quarters. During Q1 2011 North America accounted for 45% of the deal value with over $20 billion worth of activity. Of this total 78% of the value came from shale resources.

The largest shale deal during the quarter involved PetroChina entering the Canadian shale gas sector. PetroChina paid C$5.4 billion for a 50% interest in Encana’s Cutbank Ridge assets in the Montney shale play. In a similar vein to the Indian Government, China has taken an interest in the North American shale sector due to the possibility of developing their own undeveloped domestic resources. With a near monopoly of shale expertise existing in North America, government backed Asian companies have been aggressively luring partners in the US and Canada to gather the required unconventional production techniques. China further demonstrated its intent to master domestic shale resource extraction during the quarter, with CNPC drilling the country’s first horizontal shale gas well.

Another large entrant into the shale resource sector was BHP Billiton with a US$4.75 billion acquisition of Chesapeake’s interests in the gas weighted Fayetteville shale play. The acquisition was at a distinct discount to PetroChina’s acquisition at $1.42 per proved mcfe compared to the $3.87 that PetroChina paid. The deal represents the first successful major acquisition for BHP since their failed attempts to acquire Rio Tinto in October 2010 and Potash Corp in November 2010.

These two major shale gas deals, which dominated the total value for the sector showed that there is still an appetite for shale gas resources despite subdued gas prices. In terms of the number of deals however the oil weighted Bakken and Eagle Ford plays have been dominant with over 40% of shale deals coming from these two plays. This trend may continue whilst the gas price remains suppressed due to North America’s oversupply of gas coupled with their current lack of LNG export facilities.

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