Chesapeake & Statoil Ink Natural Gas Deal

By Vibeke Laroi and Marianne Stigset

Nov. 11 (Bloomberg) -- StatoilHydro ASA agreed to pay $3.38 billion to Chesapeake Energy Corp. for shale assets and to finance drilling as Norway's largest oil and gas producer taps unconventional sources to increase reserves.

StatoilHydro will buy a 32.5 percent stake in Chesapeake's Marcellus Shale gas acreage in the U.S. northeast for $1.25 billion, the Stavanger-based company said today. It will pay $2.13 billion to fund 75 percent of drilling and completion costs from 2009 to 2012, which will require ``a significant level of drilling activity.''

``It's positive that they add to their reserves, because that has been a problem for them,'' said Christian Nagstrup, an analyst at Jyske Bank A/S, who has an ``accumulate'' on the stock. ``They have a strategy of international expansion and this is a relatively fast way to do that.''

Oil producers are tapping unconventional sources, such as oil sands in Canada and shale assets, to stem a decline in production from fields in the North Sea and other maturing areas. StatoilHydro last year bought an oil sands company in Canada for $2.1 billion, while BP this year has bought shale assets from Chesapeake Energy for $3.7 billion.

Production

StatoilHydro shares fell 7.5 kroner, or 5.6 percent, to 126 kroner as of 5:30 p.m. in Oslo. Chesapeake slipped $1.19, or 5 percent, to $22.49 as of 11:30 a.m. in New York.

StatoilHydro expects equity production from Marcellus of at least 50,000 barrels of oil equivalent a day in 2012 and a peak of at least 200,000 barrels after 2020. By contrast, the company forecast earlier this month it expects total equity production of 2.2 million barrels of oil a day in 2012.

``It's a good price if you compare it to the price per acre BP paid in their deals,'' said Trond Omdal, an analyst at Arctic Securities in Oslo, who has a ``buy'' on the shares. ``They're increasing their production at a low price.''

The company will pay about $5,800 a net acre, said StatoilHydro Executive Vice President Peter Mellbye at a press conference in Oslo. That's almost half of the $14,074 a net acre BP paid in September for shale assets from Chesapeake.

17,000 Wells

``BP paid an awful lot more for the rights they acquired,'' Mellbye said. ``But they bought in an area that's much more mature where you find much more experience so the risk is less but so is the upside potential.''

The field is now producing 3,000 barrels of oil equivalent a day from six wells, he said. The companies expect as many as 17,000 wells.

The credit crisis and a 50 percent slump in U.S. gas prices since July have pared asset prices. Chesapeake in July said it was looking for buyers for part of its Marcellus assets.

Unconventional gas sources, such as shale deposits, are more expensive to develop and need a greater number of wells than conventional reserves. They became economic to develop because of high oil and gas prices and less so when prices fall.

``It's the most cost effective option in the U.S. today'' to produce energy, Mellbye said, adding that exploration would still be profitable if gas prices fell ``on the lower end of the $5-10 million Btus scale.''

U.S. natural gas for December delivery traded at about $7.25 per million British thermal units yesterday.

China

Chesapeake in September sold a 25 percent stake in the Fayetteville Shale project to BP Plc for $1.9 billion, following a July sale of 20 percent in the Haynesville Shale project to Plains Exploration & Production Co. for $3.3 billion. BP also paid $1.75 billion for Chesapeake's assets in the Woodford Shale formation in Oklahoma in July.

Royal Dutch Shell Plc, Europe's biggest oil producer, is also developing shale projects in the U.S.

Chesapeake and StatoilHydro also agreed to jointly develop unconventional natural gas assets in China, Ukraine and Romania, Mellbye said today on a conference call with investors.

StatoilHydro, the second-largest gas supplier to Europe, is increasingly looking to gas as large oil discoveries become a thing of the past and companies seek stable gas supplies. StatoilHydro expects half of its production to come from natural gas in 2012, spokeswoman Rannveig Stangeland said by phone today. The U.S. is the world's largest gas market.

The company's average daily gas production rose to 619,000 barrels of oil equivalents in the first nine months of 2008, from 581,000 barrels a year earlier.

Strategic

``Strategically this move is absolutely right for the company, notably in comparison to their involvement in Shtokman, which carries sky-high risk,'' said Gudmund Halle Isfeldt, an analyst at DnB NOR ASA, who has a ``buy'' recommendation. ``Gas is more environmentally friendly than oil and this is in a more politically stable environment, close to major U.S. cities.''

StatoilHydro is one of the partners in OAO Gazprom's Arctic Shtokman natural-gas project.