Supermajors are getting into shale plays in a big way. With the recent announcements of the Exxon/XTO acquisition and the Total/Chesapeake joint venture, “Big Oil” has emerged as the latest, and perhaps most influential, player in “Big Shale.”

No one can deny that the successful development of the Big Shales over the past decade has permanently changed the nature of the North American natural gas industry, but the capital intensity of the full-cycle development of the resource has tested the balance sheets of even the most successful independents.

Enter the well-capitalized, resource-light majors.

While it was the independents that developed the technology and know-how to unlock the potential of shale gas, it may prove to be the majors that take unconventional resources to the next level.

One of the greatest risks in unconventional resource development is running out of money, as 2009 clearly showed. During a year in which A&D activity was largely diminished and many producers limited their capital budgets to internally generated cash flow, one might have expected a relatively quiet year in the capital markets. But the opposite occurred in 2009 as US independents raised almost US $25 billion in new equity and debt, an amount roughly equivalent to one-third of total US capital expenditures.

After years of outspending cash flow, companies generally did not use these proceeds to fund acquisitions or current drilling programs but rather to repay credit facilities and extend debt maturities in preparation for the next wave of drilling.

Shale gas may ultimately prove to be a cash cow, but accelerating the learning curve and ramping up production requires consistent access to new sources of capital.

With much of the last decade in North America characterized by independents dominating the large-scale aggregation of acreage, the ability to organically build a meaningful position in the Big Shales is largely limited today. As the focus shifts from land grab to exploitation, the synergies between the independent shale producers and the majors is clear as each controls a scarce commodity: the independents with unconventional acreage and the majors with capital.

As a result, it’s no surprise that six of the nine largest integrated oil companies have now either partnered with or acquired leading independent shale producers. But is access to acreage where it ends?

Certainly the decades of drilling inventory and rapid production growth potential of the Big Shales is attractive, but perhaps more important to the majors is the strategic objective of obtaining a better understanding of

the technologies and operating practices that have unlocked the massive resource potential of shale gas. It was the independents that de-risked these high-tech drilling techniques in North America, but it is now the majors who aim to take them global.

Just over a year following their joint venture in the Marcellus shale, Statoil and Chesapeake were the first to move international with a joint bid (along with Sasol) to develop shale gas in South Africa. Exxon signaled a similar ambition in its acquisition of XTO,

stating it “intends to establish a new upstream organization to manage global development and production

of unconventional resources.” And without question, this was top of mind for Total, with its CEO commenting that his company’s joint venture Chesapeake “will allow Total to develop its expertise in the unconventional hydrocarbons to expand its unconventional business worldwide.”

The ultimate impact of taking the North American Big Shale phenomenon global remains to be seen.

While information and intellectual property are replicable, people are not. New techniques for the development of shale gas eventually disperse throughout the industry, but clearly there are still producers that consistently outperform their peers. The simple reason: the quality and expertise of their people. Will the attention of the best and brightest be shifted overseas, or will the resident knowledge remain in North America?

If the latter, how steep will the learning curve for the majors prove to be?

Big Oil will have big resources behind its push to take shale technology global, but the success of its execution and ultimately its profitability will depend on much more than a big balance sheet.

Comments