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Foreign investors' US power play

If there's any doubt about the interconnected nature of the global energy market, consider that China Shenhua Energy Co.—China's state-owned coal giant and the second-largest coal company in the world—recently announced that it's traveling all the way to Greene County, Pa., to learn how to get natural gas out of shale rock.

A gas flare is seen at an oil well near Williston, North Dakota.
Getty Images
A gas flare is seen at an oil well near Williston, North Dakota.

The joint venture with Energy Corp. of America will allow China Shenhua to drill 25 natural-gas wells in the Marcellus Formation, a gas-rich layer of sedimentary rock that extends from New York to West Virginia, through Pennsylvania and as far west as Ohio. The goal for China Shenhua: Learn the technology needed for shale gas drilling here in the Keystone State and bring it back to China, where shale gas reserves are substantial but as yet largely untapped.

This deal is just the latest in a series of joint ventures and asset purchases that have been taking place since 2008 between foreign companies and U.S. operators. And as the U.S. markets react daily to news of geopolitical tension as a result of Russia's invasion of Crimea—and the impact it could potentially have on gas supplies throughout Europe—it becomes clear how intertwined nations are in the quest to meet the world's energy needs.

According to Ernst & Young, foreign investment in the U.S. oil and gas industry totaled approximately $112 billion between 2008 and 2013. The majority of the deals are for ventures involving shale gas—not surprising, given that India, China and parts of Europe, especially Poland, have huge shale deposits in their own backyards.


It's not difficult to see why these deals are happening. In the wake of the recession, natural-gas prices have remained low, yet the costs to develop shale resources remains high. According to Aloulou Fawzi, an energy economist with the U.S. Energy Information Administration (EIA), it can cost anywhere from $6 million to $10 million to drill a shale well. By partnering with foreign companies, independent and midsize U.S. players, such as Chesapeake Energy, Devon Energy and Hunt Oil, are able to raise much needed capital. In return for the money, foreign companies get the chance to learn more about shale production and hydraulic fracturing technologies that they can then take back home.

The deals also address the supply issue. There's little question that shale gas will play a significant role in meeting the world's energy demands in the decades ahead. Analysts estimate that nearly 60 percent of U.S. energy production will come from shale by the end of the decade. China has set a goal to produce 80 billion cubic meters of gas by 2020.


Since 2008, Japanese, Chinese, British and Norwegian buyers have been the most active participants in the U.S. energy market. According to the EIA, Japan inked 3 of the 5 biggest deals in 2012. China's $1.7 billion joint venture between Sinochem and Pioneer Natural Resources to acquire a stake in the Wolfcamp shale play in West Texas was the biggest deal in 2013.

Deborah Byers, energy market segment leader at E&Y, believes China will continue to be quite active in the U.S. energy market. "China is looking to learn and gain expertise from U.S. companies because they themselves have substantial shale opportunities back home," she said. "This is going to be the next item on their resource agenda."

Of course, this isn't the first time foreign investors have shown interest in the U.S. energy market. In 2005, China National Offshore Oil Corp., known as CNOOC, created a wave of bad publicity for itself when it tried to buy U.S.-based Unocal for $18.5 billion. Lawmakers feared that the deal would allow a Chinese company to control important U.S. energy sources, and CNOOC soon pulled its offer.

(Read more: Tapping 100 years of US energy at light speed)

The deals being done today are most often structured as joint ventures, a form of partnership that has existed in the energy sector for decades. "These are arrangements that have been around since oil was first discovered," said E&Y's Byers. "We've always had companies that were good at finding the resource but didn't have all the money to develop it and had to find a money partner. That is exactly what is happening now." In the case of many of the Asian companies, she said they are "non-operators that agree to fund their share of capital for the interest that they're getting in these partnerships."

(Read more:Natural gas should stay cheap for a long time)

Here at home, states such as Texas, North Dakota and Pennsylvania are benefiting the most from these partnerships, said Byers. For instance, "Pennsylvania has been discussing how to best capture economic rents from shale drilling, and they are very focused on the benefits it has brought to the counties, the cities and the state," she said. "It's not just in taxation and rent payments for drilling rights, but in the number of jobs created. I think that they and North Dakota have been smart in having a business environment that balances safety concerns and zoning with economic growth."

—By Susan Caminiti, Special to CNBC.com

Energy

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