Energy Matters

“As far as I can see…none will materialize….”

A global natural-gas cartel has yet to materialize, “and as far as I can see—the next five years—none will materialize for various reasons,” says Tom Petrie, vice chairman, Bank of America Merrill Lynch. OPEC controls a great deal of global oil supply—adding or curtailing crude oil onto the market as demand-driven prices wax and wane.

Several years ago, discussion reignited around a “natural gas cartel,” with Qatar and other prodigious gas producers at the top of the conversation. Qatar has practically zero production costs, plus proven reliability and hefty supply.

“The (gas) demand growth is really the issue,” says Petrie, speaking to attendees at the ninth annual A&D Strategies and Opportunities conference, hosted by Oil and Gas Investor and A&D Watch.

U.S. producers have proven they can make more natural gas from the U.S subsurface and for a hundred years, at least, working the unconventional resources that range from the original shale play—the Barnett—to the Marcellus, Eagle Ford, Haynesville, Woodford and Canadian shale’s too.

An advocate of greater dependence on indigenous U.S. natural gas and reduced dependence on crude oil for transportation is wildcatter Boone Pickens. Boone “is on the germ of a good idea…I think the problem (in Washington) is it’s Boone’s idea and not Washington’s,” Petrie says.

If there is a successful effort to increase the use of natural gas—and decrease the use of crude oil—for transportation fuel, “one could see over two decades a period a powerful impact,” Petrie says.

Meanwhile, in the U.S., coal will continue to compete with natural gas as a source of electric-power generation. “It is easier to be bullish, longer term, on crude than any other energy commodity…(Its) role as a transport fuel is not threatened in any meaningful way for decades.”

And, for those in pursuit of unconventional gas resources in North America, “one has to believe (gas) prices have to be higher.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

Also see http://www.oilandgasinvestor.com/Headlines/2010/WebSeptember/item66870.php and http://www.oilandgasinvestor.com/Headlines/2009/WebMarch/item31683.php.

Bill Marko: “They were the natural buyers. They’re not in that game anymore.”

Where have all the serial acquirers gone? To big-money unconventional-resource plays where many start-up, private-equity-funded E&Ps can’t handle the long-development-time, negative-cash-flow stories in their business models.

Just a few years ago, a start-up could plan an exit in a few years—or less, at times—to Chesapeake Energy Corp., XTO Energy Inc. and other avid buyers of proven, held-by-production acreage that just needed more wells to become easily meaningful to the public-company portfolio’s investors, who are focused on reserve and production replacement and growth.

Most of the serial acquirers are busy now with their existing unconventional-resource portfolios, says Bill Marko, a managing director for Jefferies & Co. Inc. They’re not buying conventional-asset packages. Chesapeake Energy Corp. is JV’ing, instead. XTO is now a business unit of ExxonMobil Corp. and, while former president Vaughn Vennerberg says XTO continues to look at bolt-on acquisitions, its focused is on unconventional properties.

“They were the natural buyers. They’re not in that game anymore,” Marko says. In the early 2000s, a start-up could build a package, and sell it in a few years. “Raise $50 million of private equity and build a $200-million company, and successfully sell it to Chesapeake, XTO and some of the other (larger, public) E&Ps.”

No more, for now. Instead, conventional-asset-focused, private-equity-funded E&Ps are targets of roll-up E&Ps that have their exit set on the IPO market, instead.

“This has fundamentally changed the private-equity model as the built-in exit to XTO, Chesapeake and others has disappeared. New acquirers are and will emerge, perhaps with more focus toward IPO or acquisitions-focused policies.”

Marko expects both more unconventional and conventional oil and gas assets will come onto the market, as unconventional-focused players seek to raise the $1.5 trillion he estimates is needed to develop North American shale plays during the next 30 years.

“Average that out and it’s about $50 billion a year.”

Equity and debt markets are open to producers seeking capital, and selling conventional assets is another fund-raising option. “But the two combined are not going to be enough to raise the money that’s needed to do all these developments. In the first five to eight years of a major development, there is a time period where you’re cash-flow negative and it is non-self-funding, so you have to raise money from outside sources to develop these plays.”

Owners of unconventional-resource plays are turning to the joint-venture market to provide cash for drilling and to hold acreage. “The market is really parsing into two groups: You have the shale-focused players and the conventional-focused players. I think there’s room for everybody.”

The shale-resource E&Ps have 5-, 10- and 20-year development horizons and the conventional-asset E&Ps may have a two-, three, five- or 10-year horizon.

“You will continue to see deal flow on the resource-focused side and add a lot more conventional assets on the market. Many of the larger companies are seriously focusing on shale-resource plays—Encana Corp., Chesapeake, Devon Energy Corp., Petrohawk Energy Corp. They’ve all done big transformations of their portfolios, some quicker than others, but they’ve been very consistent in their focus.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

Plus, More Details On Chesapeake And EOG’s Shifts In Emphasis To Liquids

If major U.S. gas producers increase their capex emphasis on drilling for oil, natural gas supply should fall as well as oilfield-service costs, resulting in improved gas prices and an improved profit margin too for players who tough it out.

But that won’t happen—at least not soon—according to Dave Pursell, managing director and head of macro research for Tudor, Pickering, Holt & Co. Securities Inc.

Pursell and the TPH team of analysts slashed their gas-price forecast today (Tuesday, Aug. 11) to $4.50 Nymex for second-half 2010 (from $6.50) and to $5 for 2011-2012 (from $6.50), drastically below the Wall Street commodity-price-forecast consensus and even the Nymex strip itself. Their 2013-and-beyond forecast is now $6 (down from $6.50).

Pursell says that, while producers are increasingly stating a shift in drilling emphasis from gas to oil, “independents cannot shift capex quickly enough…Gas production—in our coverage universe—is still expected to grow 10% year over year in 2010 and 16% in 2011.”

He adds that producers are taking 2011 hedges at between $5 and 5.50, “signaling a willingness to continue to invest at those levels.” Many of them plan to outspend cash flow. And, he notes “the realities of above-average storage levels, the stubbornly resilient gas-directed rig count and the corresponding production growth that is resulting from record horizontal drilling.”

Gas producers’ stock prices are experiencing “shale exhaustion.”

“Bottom line: This industry is drunk on shale liquor and can’t get sober fast enough to avoid a low-commodity-price hangover. In 2010, our coverage universe will spend $52 billion compared with $37 billion in 2009…In 2011, spending is targeted at $57 billion.”

Two major U.S. gas producers are reducing shale-gas spending. Chesapeake Energy Corp. stated last week that its emphasis will be a weighting to liquids by 2012. Also, EOG Resources Inc. now expects its 70%-natural-gas production profile of 2008 will be reversed to 70% liquids by 2012.

Chesapeake can move a gas market. It produces 2.8 billion cubic feet equivalent per day, 90% gas. It plans to take $400 million of capex planned for gas projects in 2011 and spend it on drilling for liquids instead. Operated net drilling and completion capex on liquids plays will grow from 13% of Chesapeake’s total 2008 capex budget to approximately 55% in 2012.

Going forward, at sub-$6 gas, it plans to drill gas wells only to hold acreage or if being carried by a drilling partner.

Meanwhile, EOG Resources Inc. reports it’s unlikely to increase its projected North American gas volumes if a gas-price recovery occurs. It expects its 2012 production of 70% liquids will consist 75% of crude oil and condensate, 25% natural gas liquids (NGLs).

Mark Papa, EOG chairman and chief executive, suggests noting whether a company’s increase liquids production is oil or NGLs. “…As other E&P companies have subsequently proclaimed themselves to be ‘liquids rich,’ the distinction between crude oil and lower-valued NGLs seem to have been blurred.”

Regarding NGLs, Pursell says, “We expect regional pricing dislocations driven by E&Ps chasing liquids-rich plays that will result in continued pressure on natural gas liquids as a percentage of crude oil prices. (Second-quarter) NGL realizations have dropped from 50% of crude (2009) to 47% of crude (2010).” The price may be 40% of crude in this quarter, he adds.

For gas-weighted producers, there is one hope: Since the TPH analysts erred on the side of bullish gas-price expectations a year ago for 2010 ($7.50, revised in May to $6.20), their slashing today to far below Wall Street consensus, and even the strip, may reverse the curse and push prices higher.

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

EOG Package To Further Test Market By Year-End

Appalachia’s prized Marcellus shale play may take on yet more shine as offshore producers and investors balk at what the Obama administration’s new rules for Gulf of Mexico E&P may be.

One executive of a privately held, onshore-focused, unconventional-resource E&P says the politically unstable, and potentially more costly, Gulf investment environment will push onshore U.S. property values upward.

“I think anyone who is involved in the Gulf, especially if the government removes the liability cap…there may be midsize independents that might say ‘Maybe we will continue to play in the Gulf, but let’s look harder onshore and see what’s available.’ I think we’re seeing that right now,” he says.

The Marcellus and the liquids-rich Eagle Ford in South Texas have been attracting the most brow-raising deal-making this year, in addition to continuing asset shifts in the Haynesville, activity in the Bakken/Three Forks play, and cease-less transactions in the Permian.

Last week, the price for Marcellus grew further, with India’s Reliance Industries Ltd. paying $327 million for Avista Capital Partners’ 52,200 net acres of leasehold in Pennsylvania and $65 million for 20% of Carrizo Oil & Gas Inc.’s other 52,200 net acres in the total 104,400-net-acre Avista/Carrizo joint venture. The sale represents Avista’s exit from the Pennsylvania acreage but it continues a co-shareholding with Carrizo in West Virginia and New York acreage prospective for Marcellus.

Earlier this year, Reliance paid $1.7 billion to JV with Atlas Energy Inc. in the Marcellus and $1.3 billion to JV with Pioneer Natural Resources Co. in the Eagle Ford.

The Marcellus deal with Avista represents some $6,300 an acre for Marcellus.

Speculation is high that more private-equity-funded Marcellus-focused E&Ps will be grabbed up since Shell Oil Co. paid $4.7 billion in cash in May for East Resources Inc.’s 1 million net acres (650,000 of these are over Marcellus), making 60 million cubic feet equivalent per day. East had received private-equity funding from Kohlberg Kravis Roberts only a year earlier.

A leading Marcellus player says he could see that coming: “There were so many sales and joint ventures preceding the East sale, so it was clear there was quite an appetite, and East was able to sell for a future value at a price everyone was happy with.”

Another test of the price players are willing to pay for Marcellus will come by year-end with bids for EOG Resources Inc.’s Appalachian package. The producer is offering 180,000 acres of shale-gas acreage there and in the Haynesville, and the liquids-rich Eagle Ford.

Mark Papa, EOG chairman and chief executive, says, “We considered a joint venture (in) this acreage, but decided on an outright sale because it’s cleaner and less complicated. This acreage package is larger than we contemplated three months ago. We spent about $1.7 billion over the last few years accumulating first-mover, horizontal, shale acreage, and frankly, we have more good acreage now than we can say grace over, given our manpower and capital-structure plans.

“So we’re going to monetize a bit of this acreage.”

EOG’s divestments there and in Canadian shallow, conventional gas properties are towards retaining a net debt-to-cap ratio of 25% or less through 2012.

More Marcellus acreage on the market is privately listed. Asset marketers expect deal-making in the shale to continue to post headline-making numbers.

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

Anadarko Chief Adds, “What We Have Learned In The Past Few Months Causes Us Great Concern.”

Anadarko Petroleum Corp. president and chief executive Jim Hackett told U.S. senators today that the Macondo well disaster points to that “proper procedures and practices need to be followed” when drilling.

“Our view is that this accident was preventable, this tragic accident. You need to use the proper engineering practices and procedures, and it is clear we have lessons learned from this for the industry, where if we do have, in fact, this series of bad engineering decisions ever happen again—and we hope to goodness we never do—we are in a position to assure the public that there is a better response capability.”

Hackett testified before the U.S. Senate Subcommittee on Federal Financial Management, Government Information, Federal Services, and International Security on “The Gulf of Mexico Oil Spill: Ensuring a Financially Responsible Recovery, Part II.” Hackett was joined by Ken Feinberg, administrator of claims against the $20-billion BP Plc fund, and Naoki Ishii, president of Japan-based Mitsui & Co. Ltd.’s U.S. Gulf of Mexico operating company Moex Offshore 2007 LLC.

Hackett’s answer was in response to subcommittee chairman Sen. Thomas Carper’s question of what Hackett and Ishii would have been done differently if drilling the well, in hindsight, “to avert this disaster we are going to be facing for some time.”

Anadarko and Mitsui are partners with BP in the Macondo deepwater well project. Neither has paid to BP more than $400 million of claims and other bills that is a percentage portion of what BP has incurred since the well’s April 20 blowout. Anadarko has stated the blowout “may” be a result of “gross negligence or willful misconduct” and that it is continuing its own investigation.

Senators admonished Anadarko in the hearing today for not paying a portion of the bills, meanwhile, suggesting that not doing so means Anadarko is not accepting responsibility to American taxpayers. Hackett says the $20-billion claims fund BP agreed to with President Obama is a deal BP made for its reasons.

Ishii repeated several times during the hearing that Mitsui relied entirely on BP to do a good job on the well, that it had confidence in BP’s reputation and that it was additionally assured when investing in the well by the fact that the U.S. government had permitted the well and it was already being drilled. “This was the first deepwater drilling project (for us)…We were not involved in any of the decision-making, so we relied on BP,” Ishii said.

He assured the senators, “We will honor all of our legal obligations…(yet) it is important we properly investigate and find out why this accident occurred.”

Hackett said, “We are in our own dispute among the parties (about the bills).”

Sen. John McCain asked why Anadarko won’t pay BP. Hackett said, “We don’t think it is necessary to do so.” Anadarko has not set money aside for it but it has substantial assets, he added. Cash on hand at the end of the first quarter was $3 billion, it has an undrawn credit facility and its assets’ value is more than $20 billion.

“We have a very strong balance sheet. There is cash on hand,” Hackett said.

McCain said, “It’s pretty clear you’re going to litigate.” But he suggested Anadarko put money aside and start paying bills to improve its image among Americans and its reputation in the energy industry.

Sen. Claire McCaskill asked, “Why would you suffer that kind of public relations disaster (for not ponying up)?” Hackett said, “The American public is being kept whole.” He added, “What we have learned in the past few months (about the well) causes us great concern.”

McCaskill concluded, “I think you’ve made a mistake (to not pay the bills)…No one is going to make you pay anything unless you’re liable for something.”

Well, no one in court may do that, but not in the U.S. Senate.

Nonoperating partners in wells participate in well-design decisions, but day-to-day decisions during drilling are made by the operator, which was BP in the case of the Macondo project. Hackett said the Macondo project was fairly unextraordinary in the deepwater-drilling business, as the nature of the Gulf, and at that water and subsea depths, is well understood today.

Hackett concluded, “I don’t think my beliefs are at all compromised by this position (of not paying BP)…(But,) we stand ready to honor our obligations if BP fails.”

Ishii said he received a letter from BP one week prior to the blowout that there were problems with the well and that drilling would be stopped. Hackett said reports from BP indicated drilling was proceeding without irregularity: “There wasn’t anything I received that I read through the 19th that would have been a red flag for us.”

For more than 60 tweets from the hearing, see http://twitter.com/NissaDarbonne. For a replay of the proceedings, see http://hsgac.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=54709e95-c25d-4dcc-95e3-95dc1e7733a7.

Also of interest is BP’s simultaneous testimony for the U.S. Department of Interior in New Orleans today: http://www.c-span.org/Watch/Media/2010/07/22/HP/R/35876/BP+staff+Widow+testify+at+Deepwater+Horizon+Hearing.aspx

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

John Hofmeister, former Shell Oil Co. president and founder of Citizens for Affordable Energy, says President Obama’s moratorium on offshore drilling will result in higher gasoline prices—and soon. “In 2012, when the pump price is $5, Mr. President, your administration and all of your dreams are toast,” Hofmeister warned today at the Rally for Economic Survival in Lafayette, Louisiana, protesting Obama’s offshore drilling moratorium.

More than 12,000 people gathered mid-day at the Cajundome to hear and contribute to more than two hours of messages for Washington from speakers ranging from the wife of an oilfield worker and mother of six children to Louisiana Gov. Bobby Jindal. The crowd consisted of business owners, out-of-work oilfield workers, and other voters. The program began with 93 seconds of silence for the 11 workers who were killed at the Macondo wellsite.

Jim Funk, president and chief executive of the Louisiana Restaurant Association, buttered Hofmeister’s toast metaphor. “We could have burnt toast today in honor of someone in the White House,” he said, drawing one of many dome-raising cheers of the day.

Jindal said Obama suggested in one meeting with him that affected Louisiana energy-industry workers take checks from BP Plc to survive the six-month moratorium. And, if not from BP, then they could take unemployment checks. Jindal said he told Obama, “We don’t want a BP check or an unemployment check. We want to go back to work.”

Chants from the audience included “Drill, baby, drill!,” “Let us go back to work!” and “Lift the ban!” Some speakers repeated phrases in their messages in French, the favored (although fading, due to early 20th century efforts by Washington to Americanize the indigenous French culture) language of South Louisiana.

Don Briggs, president of the Louisiana Oil & Gas Association, which organized the rally along with the Lafayette Chamber of Commerce and supporting organizations, quoted Andrew Jackson: “Where one man has courage, he makes a majority.” Briggs said, “Today, we’ve had 12,000 people make a majority.” Another 3,000 people were watching the program online and millions more will see the proceedings on television, he added.

More quotes:

Lt. Gov. Scott Angelle: “I believe we live in a country where we can do two things at one time (such as fix the spill and keep on drilling)…Mr. President, we need you to work as hard on this job as you did to GET this job.”

CJ McDonald with petroleum consulting firm McDonald Consulting LLC: As for the Louisiana way of life “all of this is changed by one decision by someone who knows nothing about how we make our living…We need to make it clear to Washington: They work for us. (And, to Obama:) No one person should have the power to diminish the liberties we enjoy.”

Hofmeister said he voted for Obama, drawing boos from the audience. “(Mr. President,) I didn’t expect the boot of your secretary on my neck and the industry I love when I did that…You are making a mistake of your seven predecessors…leading this country into an energy abyss….” His remarks and the audience’s concurrence could have made for a Tea Party rally. “This government is unfixable…Tell the government who works for whom…We’re going to take our country back….”

Stone Energy Corp. president and CEO David Welch: The mistake of the moratorium “is self-inflicted and can be changed with a mere stroke of a pen…Everything (in the Gulf) has been inspected. Mr. President, let us go back to work.”

Billy Nungesser, president, Plaquemines Parish, and a regular on Anderson Cooper’s nightly news program: “Stand still? Can’t?” Obama says the U.S. can’t take the risk of trying to handle more than one Gulf oil spill at once. “None of these words correspond with the United States I know—or I thought I knew…We are in a stranglehold between our government and one oil company…Don’t make us wait and beat on us for six months. Put us back to work tomorrow…We don’t have six months to wait.” The state has been crippled by Katrina, Rita, Gustav and now the spill. “We can’t afford to be crippled (by the moratorium too), Mr. President, because of you…Say it, Mr. President: Yes, we can—drill!”

Jindal: “We will win this war, and this is a war…to defend our way of life.” The spill is a disaster. “The second disaster is the moratorium…We shouldn’t have to fight our own federal government…The fact that the federal government can’t do its job shouldn’t cost thousands of Louisianans their jobs.”

See all 50 tweets from today’s rally: http://twitter.com/NissaDarbonne.

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

“…Macondo was the result of human failure, not the failure of technology.”

Recently queried Keith Rattie, chairman, president and chief executive of integrated U.S. gas company Questar Corp., on what the environmental implications would be of a subsea gas-well blowout in the Gulf of Mexico, compared with a subsea oil-well blowout, and whether the Gulf oil leak bodes well for new or renewed Washington interest in greater use of U.S. natural gas as a transportation fuel and in electric-power generation.

Rattie wrote from the road, while providing details to the investment community on the roll-out of Questar’s E&P business, QEP Resources Inc., that will begin trading on July 1 (NYSE: QEP).

Rattie says, “Deepwater drilling—irrespective of whether the target is oil or natural gas—poses little risk to the environment, provided that operators adhere to good safety practice in both well design and drilling and completion operations. In this case, BP, in an effort to limit its liability for the Macondo disaster, has left the public with the impression that the industry’s practices were lacking and need changes.

“But Macondo was the result of human failure, not the failure of technology. BP personnel on the rig, for whatever reason, failed to heed clear indications that they had a bad cement job and thus dangerous levels of gas in the well bore.”

Questar is among founding companies of America’s Natural Gas Alliance, a consortium of U.S. gas producers that communicates natural gas facts to law- and policy-makers and to voters.

“I do believe that development of onshore gas resources will benefit from the Macondo disaster. The industry has gotten its act together on communicating the message of the U.S.’ abundance of natural gas, and we see signs of sustainable gas-market demand growth for the first time in nearly a decade. That said, many uninformed members of Congress conflate offshore oil-spill risk with a risk of groundwater contamination from fracture stimulation (of gas wells).

“Natural gas prices have strengthened of late, in part perhaps because the Obama offshore drilling moratorium not only destroys jobs in the offshore drilling industry, it reduces natural gas supply from the deepwater Gulf, the source of roughly 4 billion cubic feet per day of U.S. gas supply—all of which is still flowing; the market-price impact is partly psychological and partly due to an expectation that gas supply will be negatively affected by hurricane events this summer.

“The offshore-drilling moratorium is profoundly wrong-headed on many fronts: It destroys jobs, harms the Gulf Coast economy, reduces federal tax and royalty receipts, increases dependence on foreign on imports and drives energy prices higher. It might make sense if blow-outs occurred every few years. But Macondo is unprecedented, and the U.S. has not had a major spill related to drilling since the 1969 spill offshore Santa Barbara (California).

“Macondo is, without question, the result of a confluence of human errors. It was very preventable. The questions those of us in leadership roles must ask in its wake are: Do our people know that we’re serious about safety? Would one of our employees have ignored the warning signs that were flashing bright red in the hours before this disastrous explosion?

“We do not have all the facts yet, but the industry will—and the industry will—adopt whatever changes are necessary to ensure that this never happens again. In the end, the public’s only real protection is industry self-regulation, not bureaucratic rules administered from Washington.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

Royal Dutch Shell’s $4.7-billion bid for private-equity-funded start-up East Resources Inc. is further evidence of the transformation of the global oil and gas industry that is being fueled by development of shale technology, says John Moon, managing director of energy investor Morgan Stanley Private Equity.

“Shale technology has turned everything on its head,” Moon told attendees at Argyle Executive Forum’s energy-investment program in New York recently at which Oil and Gas Investor presented.

Morgan Stanley PE committed funding to Henry Harmon’s Marcellus-shale-focused start-up Triana Energy LLC roughly a year ago, shortly before Kohlberg Kravis Roberts invested $350 million in Terrence Pegula’s Marcellus-focused East Resources. They were followed in the fall of 2009 by Metalmark Capital’s investment in Mike John’s Marcellus start-up, Northeast Natural Energy LLC.

The KKR investment represents a portfolio-investment flip in fewer than 12 months and for substantially more than the committed capital.

Moon says the last E&P technology-changing event of this magnitude was the deployment of 3-D seismic technology in the 1970s. In that cycle, the major oil companies funded the development and application of the technology, as these large companies had the most money for access to (at the time, highly costly) computing power and for recruiting technology-leading geoscientists. As costs declined and best practices improved, the technology became accessible by smaller, independent oil companies.

In the case of shale technology in the past decade, it was a small operator, Mitchell Energy & Development Corp, that used horizontal drilling and fracturing to produce economic amounts of gas in the Barnett shale, Moon notes. “Shale technology was not developed by the ExxonMobils of the world.” Shales were not perceived to be sexy enough to merit the attention of the majors. “In this case, the technology was developed and applied first by the independents. That is a transforming shift in the way natural gas will be developed over time.”

Shell’s bid for East Resources, ExxonMobil’s conclusion just this week of its $41-billion, all-stock purchase of U.S. unconventional-resource independent XTO Energy Inc., and shale-play joint-venture deals signed in the past 18 months with U.S. independents by Total SA, Statoil ASA, BP Plc and other majors are testament to this, “that the majors are looking to the independents for access to that technology and not the other way around.

“For a while, the majors dismissed unconventional-resource development as a fad…That is no longer the case.”

Foreign oil companies are particularly motivated to “go to school” on unconventional-resource development in the U.S. to take that training to their portfolio plays abroad, he adds.

“Even 18 months ago, if you told someone outside North America who was knowledgeable about the energy business that shale technology was a really big deal, many would have looked at you like you had two heads.”

When the Morgan Stanley PE investment in Triana was announced, Moon received inquiries about the firm’s interest in the Marcellus from both national media and executives with major oil companies. “I was shocked, actually…An executive with one of the largest oil companies in the world wanted to know what we were up to.”

It was a leading indicator. “Shale technology has marked a seismic shift in the global oil and gas industry.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

Valuing U.S. E&P investments is challenged today by the eventual outcome of federal and state law and policy regarding future best practices in drilling in the Gulf of Mexico and elsewhere offshore the U.S. as well as onshore, such as the Marcellus shale, which has recently experienced well blowouts.

This is according to energy-industry executives and investors who were at Argyle Executive Forum’s recent energy program in New York in which Oil and Gas Investor presented.

Chris Ortega, a Connecticut-based director for energy private-equity investment firm First Reserve Corp., says, “It’s obviously something we’re following very closely. It’s premature to come to any conclusions (as data are changing), but energy demand is going to continue to increase, nevertheless…Regulation is something you have to think through no matter where you are.”

Changing Gulf and other drilling costs as a result of the ongoing leak emphasizes the importance of a diversified portfolio and of “portfolio construction,” he says.

First Reserve’s energy investments span the energy chain, from E&P, such as Gulf-focused Cobalt Energy International Inc. (NYSE: CIE), Deep Gulf Energy LP and Deep Gulf Energy LP II, and oilfield services, such as CHC Helicopter Corp., to solar and nuclear. And its investments span the globe.

The possibility of changing law and policy regimes is an important consideration when investing in a firm in any country, he notes. Australia’s natural resources tax is being debated, for example. “(Investors) have this sense that, because this is OECD, you don’t have to think about (game-changing) regulation.” But it is a possibility in any political regime, he says.

Christopher Manning, a partner with private-equity investor Trilantic Capital Partners, says issues in the Marcellus and the Gulf are of concern. “Our diligence on new opportunities will probably be different as a result of that.” Trilantic’s E&P investments include U.S. onshore-focused Antero Resources Corp. and Enduring Resources LLC and Europe-focused Mediterranean Resources LLC. Another portfolio company, Cross Holdings Inc., provides oilfield services in the Gulf of Mexico.

Marcellus drilling costs may grow as concerns about the use of hydraulic fracturing continue, he says.

As for the Gulf of Mexico, “right now, we would be very reluctant to invest until we have some transparency” as to what new rules and costs will be.

Craig Jarchow, a managing director for energy private-equity investor Pine Brook Road Partners LLC, says new rules as a result of the BP blowout will affect how industry participates in drilling wells in the future. “We’ll see more operators not interested in being operators.”

Pine Brook’s energy investments include Mike Harvey’s U.S. onshore-focused Stonegate Production Co. LLC, Andy Lydyard’s Comet Ridge Resources LLC and Roger Jarvis’ Common Resources LLC; Paul Favret’s Europe onshore-focused Source Energy Partners LLC; and Bill Flores’ Gulf-focused Phoenix Exploration Co. LP

He suggests that funding and insuring liabilities for oilfield incidents in the future may be handled as the nuclear industry insures catastrophic risk. In this, the first tranche is insured by the nuclear plant’s operator up to $300 million. “Above this exposure, the entire industry kicks in a retrospective premium and, since the whole industry is in, the insurance capacity is huge.”

He concludes, “Liability is going to be very interesting going forward.”

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com

Gazprom and the powers that be in Russia would like an end to unconventional-gas drilling worldwide—for successful results to become fewer and for prohibition of drilling to become commonplace. While the former is yet to demonstrate probability, Gazprom is trying to affect the latter.

Gazprom deputy chief executive Alexander Medvedev was quoted by the Wall Street Journal earlier this year from a London press conference as prosaically saying, “Not every housewife is aware of the environmental consequences of the use of shale gas. I don’t know who would take the risk of endangering drinking-water reservoirs…

“There are shale-gas reserves in Europe, but I honestly don’t think anybody would launch themselves into production using existing techniques. Even the French would never agree with the replacement of their drinking water with wine.”

Making Medvedev’s statements so much more laughable is that Gazprom and its fellow Russian industries are widely known for reckless environmental disasters. While examples of environmental stewardship in the country likely exist, statistically, they are relatively rare and unremarkable.

Recently, a media-relations firm based in New York submitted an op-ed piece, “The Boom In Non-Conventional Gas: An Economic Mirage Or An Economic Peril?” to Oil and Gas Investor written by a France-based scientist. The communications firm represents Gazprom.

The scientist concludes, “Even if strictly applied environmental regulations…did allow profitable exploitation of shale-gas deposits in Europe, the question of the economic rationale still remains unanswered. Conventional gas is clearly less polluting and less expensive to produce than shale gas…To develop the extraction of non-conventional gas in Europe would involve an environmental sacrifice for the sake of an industrial fantasy on the part of the oil companies, and a geostrategic mirage on that of the politicians.”

Dan Whitten, vice president, strategic communications, for U.S. gas producers’ America’s Natural Gas Alliance, says, “To the extent Gazprom has expressed concern about the European market, it seems pretty clear that they view it as some kind of a competitive threat.”

ANGA’s 34 members include U.S. companies Chesapeake Energy Corp. and Devon Energy Corp., and non-U.S.-based producers Encana Corp., BG Group, Talisman Energy Inc. and BHP Billiton. It was formed in early 2009 to represent the industry in Washington and in gas-producing communities.

This spring, Worldwatch Institute, a seriously green group that, for example, advocates on its homepage cremation instead of burial, issued a report in support of natural gas. “…Natural gas could take us a big step closer to a carbon-free energy system,” says the organization’s president, Christopher Flavin, in a press release.

And, Sierra Club executive director Carl Pope is on record in a video interview with Investor from early 2008 in support of drilling for natural gas in the U.S. Pope says “Natural gas is the next-cleanest fuel (after renewables), then we have oil and then we have coal…We’re trying to make sure that we innovatively and creatively use whatever fuel we burn (and) that we rely primarily on the fuels that are the cleanest. And, among the fossil fuels, natural gas is at the top.”

He adds that producing indigenous U.S. gas has a smaller carbon footprint than importing it. “…Taking a bunch of natural gas from Indonesia and moving it to the United States is intrinsically not terribly efficient, so we would rather see what we can do with domestic production here in the United States before we start substituting imported natural gas for imported oil.”

ANGA’s Whitten says it is no surprise Gazprom would appear threatened by unconventional-gas production. “Hydraulic fracturing is a game-changer all over the world and it may well pose a threat to traditional gas supplies.”

Gazprom has shut off natural gas to Europe at least twice in this past decade, while in disputes with Ukraine through which Russian gas supply westward travels. Europe’s reaction the first time was to commence a heavy effort toward procurement of reliable supply via other means, such as LNG, and to promote development of indigenous gas resources. It had been fooled once.

The second time it lost this heating and industrial fuel, European leaders’ response was unyielding: “Shame on you.” Gazprom has been killing its customers—not a successful business model for most types of trades. That it is concerned with the world’s health and is carrying a green flag now is great comedy.

–Nissa Darbonne, Editor-at-Large, Oil and Gas Investor, OilandGasInvestor.com, OilandGasInvestor.com Today, Oil and Gas Investor This Week, A&D Watch, A-Dcenter.com, UGcenter.com