Thursday, January 5, 2012

Dealin' Devon

Earlier this week, Devon Energy announced a big joint venture deal with China Petrochemical Corp. (a.k.a. Sinopec) covering five emerging U.S. basins.  Sinopec will pay Devon $2.5 billion for a one-third share of Devon's 1.2 million acres in the Tuscaloosa Marine Shale (LA-MS), Niobrara (WY), Mississippian (OK), Ohio Utica Shale (OH) and the Michigan Basin (MI). Sinopec will pay $900 million cash upfront and $1.6 billion of carried drilling costs over the next several years.

Devon's deal is yet another example of a multi-national energy giant kneeling at the altar of shale gas in the U.S.  Last week, Total and Chesapeake signed their JV deal for the Utica Shale and last month SandRidge Energy and Spain's Repsol YPF agreed on a $1 billion JV for SandRidge's acreage in the Mississippian play.

One big difference with Devon's deal is that the EIA estimates that China has the largest technically recoverable shale gas reserves in the world.  The Chinese are here to learn so they can exploit their own resources.  China's CNOOC already made a shale deal with Chesapeake last year.  This is a double-edged sword for U.S. shale. On one hand, China represents one of the largest export markets for natural gas (and it sure would be nice to see them burn less coal!) but at the same time it hopes to leverage U.S. expertise to produce its own gas to supply much of its demand in the long-term.

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