More Mergers Likely in Booming Shale Production Business

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A hydraulic fracturing site

The more than $25 billion in energy deals this week suggest there could be a lot more merger activity among companies looking to gain a foot hold in the oil and gas shale boom that is transforming the American energy business.

Kinder Morgan Sunday announced its acquisition of El Paso Corp for $21.1 billion, a deal that would create the largest operator of natural gas pipelines in the U.S. It is also seen as a play on the growth of shale gas production which will need new distribution.

The new company would have 67,000 miles of natural gas pipelines spanning the U.S. and reach every major natural gas production center. It would also take Kinder Morgan into Florida and connect Pennsylvania, Arkansas and Texas.

The second deal was Statoil's $4.4 billion acquisition of Brigham Exploration . Brigham has assets in the Williston Basin in North Dakota and Montana, which includes the Bakken and Three Forks oil formations. Statoil said it expects current equity production of 21,000 barrels oil equivalents per day to potentially ramp up to 60,000 to 100,000 boe per day equity production over five years.

Norwegian state-owned Statoil already has a stake with Chesapeake Energy in the Marcellus shale formation, centered in Pennsylvania. It also owns acreage in the Eagle Ford prospect in Texas with Talisman Energy.

"Marcellus is primarily dry gas, Eagle Ford is a combination of dry gas and liquids and this (Brigham) is oil. We now have a good deep position in the U.S. in unconventionals," said Statoil Chief Executive Helge Lund.

Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, said this type of deal activity is bound to continue, as the growth in shale oil and gas exploration and production was off the radar of many big industry players just several years ago. "These pioneers went into it a few years ago, when nobody was paying attention. It was thought to be a thing for independents, but it's clear it's a big resource play for majors who have the capital these developments require," he said in an interview from Seattle Monday.

"We reached the high point in terms of (oil) imports in 2005. Sixty percent of our domestic consumption was net imports. Today, it's down to 47 percent. Part of it is conservation, efficiency. A big part of it is increasing production. What we're seeing is a reversal in what seemed to be an irreversible trend in terms of dependence on foreign oil. It shows what technology and innovation can do. It wasn't in very many peoples' play books several years ago," he said

"Suddenly, U.S. oil production is up 10 percent since 2008. This is like a new burst of life in the U.S. upstream, and it's driven by technology," he said.

Yergin, also CNBC's global energy analyst, is currently on tour with his new best-selling book, "The Quest: Energy, Security, and the Remaking of the Modern World."

by Daniel Yergin

In his book, Yergin explores what he calls the "natural gas revolution," which came with the breakthrough in horizontal drilling and hydraulic fracturing technology. For instance, the U.S. recovered just 1 percent of the natural gas supply from shale in the year 2000. It is now about 30 percent, and Yergin expects it to be 50 percent within the next several years.

"It turns out the U.S. is no longer suffering from tired geography," he said.

While creating a boom, the so called "fracking" process is not without its critics. It has raised concerns about water contamination, a topic Yergin also discusses in the book.

The El Paso deal was clearly spurred by the boom in U.S.-produced shale gas, and Kinder Morgan said it will take whatever steps it needs in order to get the deal approved by regulators.

"As natural gas expands and becomes an even larger component of our energy economy, it positions this combined company to have an integrated national system and clearly as this new production comes on line in places as far apart as Pennsylvania and North Dakota, there is going to be a need for new pipeline," Yergin said.

Natural gas futures have been trading around $4 or less per million British thermal units, well below the highs of $15.78 reached in December, 2005.

Yergin points out that perennial shortages of natural gas gave way to substantial surplus, which is keeping prices low. "...these prices are very low. As to where prices are bound, we have to see when we come out of this near recession we're in. I think the whole industry is adjusting to a much lower price than it had been anticipating," he said

"Certainly gas is headed to be the default fuel for electric generation, and I think we're going to see more activity in terms of converting buses and other fleets, where people will have a central refueling station that makes it easier to make gas a transportation fuel," he said.

Yergin said Bakken has put North Dakota on the map as the fourth largest oil producing state in the U.S. "The Bakken formation not so many years ago was producing 10,000 barrels a day. Now it's 450,000. We expect altogether tight [unconventional] oil in the U.S. to reach as much as two million barrels a day by 2020 and perhaps even more," he said.

(In full disclosure, Yergin kicked off his book tour in New York Sept. 19, at an event held by the Financial Women's Association of New York, of which I am a board member. I interviewed him about his book and energy industry issues during that event.)

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