US shale gas M&A spending totals $21 billion in first half 2010

Wood Mackenzie’s latest corporate analysis highlights that upstream M&A expenditure in US shale gas totalled US$21 billion during the first half of 2010: equivalent to one third of global upstream M&A spend during the period. The independent energy research firm says key indicators suggest that this level of activity is set to continue over the next couple of years, with the large caps and majors continuing to dominate the market.

Luke Parker, Manager of Wood Mackenzie’s M&A research service underlines the magnitude of the market, “Through the first half of this year alone, in excess of 35 trillion cubic feet (tcf) of shale gas resource changed hands at an average cost of US$0.60 per million cubic feet of gas equivalent (mcfe). This expenditure is equal to the total US shale gas M&A expenditure for the 2008 and 2009 combined – which was US$19.7 billion and US$2 billion respectively.”

“M&A activity in US shale gas has evolved with its emergence, play-by-play, as a world scale source of secure, long-term gas supply. The key factor driving this has been the continued evolution and application of new technologies to unlock enormous volumes that were previously considered uncommercial.” The result is lowered development breakeven costs to a level at which the cost of shale gas is highly competitive with other domestic sources of supply - conventional and unconventional - and LNG imports. Operators have made, and continue to make, notable advances and unit costs have fallen in spite of increasingly complex and specialised well design.

Expanding on how continued level of activity is set to unfold Parker explains, “There’s scope for intra-play and sector wide consolidation, facilitated by mounting pressures on existing players to evaluate and restructure their portfolios as strategic priorities evolve. Key among the various pressures that will influence the market, at least in the near-term, is the continued disconnect between oil and gas prices and a depressed Henry Hub futures market.”

Therefore Wood Mackenzie suggests that gas weighted independents with a weak balance sheet and/or hedging position are beginning to look increasingly vulnerable to larger players. In fact, the report suggests that shale gas offers a good fit for the large caps and majors, playing to their technical capability, financial strength and long-term view, all of which are pre-requisites for those looking to build a material position. Hence this peer group will continue to dominate the large scale deal activity.

Robert Clarke, Unconventional Gas Research Manager for Wood Mackenzie adds, “The magnitude of the US Shale gas resource is extraordinary. We estimate the total resource potential of the 22 shale plays we currently analyse is approximately 650 trillion cubic feet of gas equivalent (tcfe): equivalent to a resource life of 32 years based on total US gas production in 2009. Shale gas production is set to increase from 17% in 2010 to 35% in 2020 of total US gas supply.”