Monday, May 31, 2010

Oil giant Shell acquires company with Northern tier gas leases

Published: May 29, 2010

Royal Dutch Shell PLC is the latest petroleum giant to acquire a company with substantial holdings in the Marcellus Shale, buying the Warrendale, Pa.-based East Resources Inc. for $4.7 billion.

A small company, but one of the biggest players in the Marcellus region, East Resources has control over 1.25 million acres from West Virginia to New York. Most of its holdings are in Pennsylvania, including large tracts in Tioga and Bradford counties.

The entree of global giants could alter the pace and character of the development of the Marcellus Shale in the state. At the same time, some observers say having larger companies involved could offer a layer of security for property owners who leased mineral rights to a smaller company that have since become acquired by multibillion-dollar companies.

ExxonMobil, with annual revenues in excess of $300 billion, is putting the final touches on its $31 billion acquisition of XTO Energy, another independent oil and gas producer. As recently as 2008, global petroleum giants showed little interest in unconventional sources of natural gas such as shale.

"The scale of this has surprised Big Oil," said Kenny DuBose of, an online resource for mineral rights owners.

Mineral leases convey to the acquiring company, so a corporate takeover should be seamless to the property owner, said Steven Saunders, a Scranton-based environmental and oil and gas attorney. Most agree the only visible difference may be the source of the royalty checks.

New York-based Hess Corp., which has more than $30 billion in annual revenue, has partnered with Newfield Exploration Co. to invest about $100 million so far on roughly 126,000 acres of leaseholds in north- ern Wayne County.

Acquisitions, buyouts and other types of partnerships are not unusual in the energy development industry, analysts said.

"Leases are traded all the time, and the only thing that should change is the source of your check," said landowner consultant Earle Robbins of R & R Energy Consulting. "A good lease will require that the company notifies you when that happens."

A large corporation has greater resources to honor lease obligations, particularly if something goes wrong. They also have greater ability to drill and start paying royalty checks.

"With a small company you worry if they can indemnify you, but that's less of a concern with a behemoth corporation," Mr. Saunders said. "You don't want things going the other way, where your lease ends up with a guy working at the 7-11 and drilling on nights and weekends."

The initial leasing and development of Marcellus Shale has been pioneered by smaller companies specializing in unconventional sources of natural gas. Increasingly, these companies have found themselves needing financing.

Having laid out so much money in leasing, exploration and initial drilling, they still have little opportunity to sell gas without pipeline systems. Many have had to turn to outside investors for the funds needed to develop wells before the expiration of the first wave of leases.

Last year, East Resources turned to a private-equity firm for $350 million.

Mr. Robbins said one subtle change may be the way the new company interacts with landowners.

"East has been a good company to work with and they are responsive," said Mr. Robbins, who has a lease with East Resources. "One thing that may change is the relationship and how a bigger company will handle things."

In Tioga County, the number of companies with leases consolidated from 25 to 30 to about five or six as companies swapped and traded leases, Mr. Robbins said. He expects continued consolidation and petroleum giants in the Marcellus region which will hasten drilling and development.

In 2007, East Resources was one of the first companies to up the ante on lease prices, offering $80 and $100 per acre lease at a time when most were accustomed to $2 to $5 an acre, Mr. Robbins said. Recent leases have been signed for $5,700 per acre.

Contact the writer:

No comments: