China Petrochemical Corp., the second-largest Chinese oil company, agreed to buy a one-third stake in five Devon Energy Corp. exploratory oil projects in the U.S. for $900 million to expand holdings of reserves trapped in shale.
The company, known as Sinopec Group, will pay $900 million in cash and as much as $1.6 billion in Devon’s future drilling costs, funding 125 wells in the coming year, according to a statement from Devon today.
China National Petroleum Corp., Sinopec Group and Cnooc Ltd. are seeking to gain technology through partnerships in order to develop China’s shale reserves, estimated to be larger than those in the U.S.
“In these joint ventures, the partner does typically get some education on drilling,” Scott Hanold, a Minneapolis-based analyst for RBC Capital Markets, said today in an interview.
Chinese companies announced about $18.3 billion worth of bids in 2011 for overseas oil and gas exploration and production companies, according to data compiled by Bloomberg. Sinopec Group bought Daylight Energy Ltd., based in Calgary, for about C$2.2 billion ($2.18 billion) last month after falling crude and natural-gas prices made valuations attractive.
Chinese shale may hold 1,275 trillion cubic feet of gas, or 12 times the country’s conventional natural-gas deposits, the U.S. Energy Information Administration said in April. China’s “technically recoverable” reserves are almost 50 percent more than the 862 trillion cubic feet held by the U.S., the EIA said.
Premium for Acreage
Sinopec Group is paying about $5,500 an acre when drilling costs are included, Hanold said. “Market expectations were at best $3,000 an acre, so Devon did pretty well,” Hanold said. “There’s been a clear interest by Asian companies taking a position in U.S. shale.”
Devon, based in Oklahoma City, rose 6.6 percent to $66.11 at the close in New York.
Devon’s wells were the first to economically extract gas from dense Barnett Shale in Texas, helping trigger a resurgence of U.S. petroleum production. After first tapping gas deposits by drilling horizontally through rock and fracturing it, companies are now chasing oil, worth more than gas in current North American markets.
Selling to Drill
Devon joins Chesapeake Energy Corp. and other U.S. producers in raising cash to accelerate drilling by selling asset stakes. Devon expects to spend all the so-called “drilling carry” by the end of 2014. Chesapeake has seven joint ventures, including one in the Utica Shale with Total SA, France’s largest oil company.
Devon spent $700 million on U.S. leases after selling $10 billion of overseas and offshore assets in 2010 to focus on North American operations.
Chief Executive Officer John Richels said in a conference call with analysts and investors in November that Devon began had begun receiving offers for the package that includes 1.2 million acres (4,856 square kilometers) in the Utica Shale in Ohio, the Tuscaloosa Shale in Louisiana, the Niobrara Shale in Wyoming and Colorado, and tight-oil deposits in Michigan and Oklahoma.
China Petrochemical Corp. is the parent of Shanghai- and Hong Kong-listed China Petroleum and Chemical Corp.