Friday, April 8, 2011

Analysis: Independent oil cos risk big money on unproven shale

http://www.reuters.com/article/2011/04/08/us-niobrara-analysis-idUSTRE73722K20110408

By Thyagaraju Adinarayan and Arup Roychoudhury

BANGALORE

BANGALORE (Reuters) - Independent oil and gas companies are placing big bets on a new shale field on the hopes of tapping into vast supplies of oil, but some fear they could be pumping large amounts of cash into a region whose potential is still far from proven.

Niobrara shale, which is spread across Colorado, Western Nebraska, Wyoming, parts of Montana and North and South Dakota, has been in the limelight ever since some independents planned to spend more in the area amid high oil prices.

U.S. crude rose to a new peak of $111.68 on Friday, the highest since September 2008, prompting producers to seek out supplies once thought difficult to reach. Niobrara shale, whose prospects are often compared with the highly successful oil-rich Bakken shale, is thus seen as a beneficiary.

"This is a known petroleum system and is very regional. I think it is probably one of the most important plays going on in North America, other than Bakken," said Stephen Sonnenberg, a geologist and a professor at the Colorado School of Mines.

However, Niobrara's potential is still under scrutiny, as it has not been completely proven as a repeatable source of energy, and analysts say the companies' ventures there could well not live up to the hype.

"In my view, companies are probably getting ahead of themselves in terms of magnitude as they talk up the prolific nature of Niobrara," MKM Partners analyst Curtis Trimble said.

The analyst added that although the region had promising well results, currently available data indicated its potential may not match Bakken's.

And some companies are already showing signs of a rethink.

Recently, Mark Papa, CEO of EOG Resources (EOG.N), one of the first entrants and largest holders in the shale with about 300,000 net acres, told investors he was "cautiously optimistic" about early results from the emerging Niobrara shale field in Wyoming, but said more data was needed.

This is a marked difference from what Papa said in the last quarterly conference call in February that the company was encouraged by the results in its Niobrara fields in northern Colorado and southern Wyoming.

EOG's smaller peer Rex Energy (REXX.O), which according to Trimble owns about 45,000 net acres in the play, said in March that two of its wells in Wyoming did not turn up enough hydrocarbon to be "commercially viable.

Analysts say such uncertainty is what is preventing the integrated majors from getting in and trying out deals, as they still wait for more substantial production and well results.

"We do not see oil majors like ExxonMobil (XOM.N) and Royal Dutch Shell (RDSa.L) entering before the independents crack the code there. Maybe after that we will be seeing more joint ventures here," Pritchard Capital analyst Anuj Sharma said.

However, Colorado School of Mines' Sonnenberg said it is large independents like Anadarko Petroleum (APC.N), Chesapeake Energy (CHK.N) and EOG who will have the first mover advantage if activity increases.

Deals have started to trickle in with many energy firms interested in investing in this emerging shale. Marathon Oil (MRO.N) and Chesapeake recently tied up with foreign companies like CNOOC (0883.HK) and Marubeni (8002.T) to get access to liquidity required to unlock the value of the shale.

While the Chesapeake-CNOOC deal valued the shale at about $3,000 per acre in January, Marathon's agreement with Marubeni came in at about $5,000 an acre on Wednesday. Deals in top liquids-rich shales Bakken and Eagle Ford have gone for up to $12,000 per acre.

Trimble and Sharma also said given that the shale is in an exploratory phase, it would take a long time for development to kick in and for the companies to find highly productive wells.

"It could take easily 4-5 years before you make sense of where the good spots are... Still a lot of de-risking has to happen," Sharma said.

"Clearly hydrocarbons are there, clearly oil is there, it is a question of economics of the play."

(Reporting by Thyagaraju Adinarayan and Arup Roychoudhury with additional reporting by Matt Daily; Editing by Sriraj Kalluvila)

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