BP Bets Big on USA Natural Gas

By BEN CASSELMAN and RUSSELL GOLD
July 18, 2008

Oil giant BP PLC will pay $1.75 billion for natural-gas assets in Oklahoma, placing a big bet on North America's booming unconventional gas fields.

The deal with Oklahoma City-based Chesapeake Energy Corp. is the latest sign of a major shift in Big Oil's strategy. For years, the largest oil companies have all but ignored the continental U.S. in favor of huge oilfields overseas and offshore. Now, facing declining production, shrinking reserves and increasing political challenges, the companies are coming back.

They're returning to a rapidly changing North American energy scene. In recent years, smaller independent companies including Chesapeake have learned how to produce gas from unconventional reservoirs -- tightly packed sands, coal beds or dense rocks called shales -- that were long considered too difficult or too expensive to produce. That's led to a drilling boom in Texas, Colorado, Pennsylvania and elsewhere, spurred in part by soaring energy prices.
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Global companies such as BP had largely remained on the sidelines, shunning the fields because they require hundreds of small wells managed by large numbers of employees. In years past, they'd sold most of their U.S. assets, arguing it was a mature region that didn't offer adequate returns.

Now that's changing as they face harsh political treatment in energy-rich nations and are losing access to the world's best remaining reserves.

BP's dive into unconventional U.S. gas is "a seminal event," said Ralph Eads, chairman of Jefferies Randall & Dewey, the energy investment banking arm of Jefferies & Co.

Like most big oil companies, BP has struggled recently to replace aging fields and grow its production. Its oil and gas production was down 2.8% in 2007 from a year earlier.

In Thursday's deal, the company is buying 90,000 acres of natural-gas leases, believed to contain two trillion cubic feet of gas, the equivalent of more than 350 million barrels of oil. Chesapeake produces about 50 million cubic feet per day production on the Oklahoma property.

BP's announcement comes three days after rival Royal Dutch Shell PLC announced a C$5.9 billion (about $6 billion) takeover bid for Canadian natural-gas producer Duvernay Oil Corp. Shell also has partnered with EnCana Corp. to enter what has become the hottest new unconventional play, the Haynesville Shale in east Texas and Louisiana.

In April, Exxon bought an interest in an unconventional gas field in Hungary and has plans for gas wells in Germany also. ConocoPhillips jumped ahead of the trend in 2005 when it purchased Texas-based gas-producer Burlington Resources Inc. for $35 billion.

Unconventional oil and gas fields offer significant advantages. Not only are they in politically stable areas, they offer relatively little risk. Because each well is much like another, costs can actually go down over time, a sharp contrast to the rapidly rising costs of wells overseas.