This week we are watching with great interest what will be a reshuffling of US shale assets that paints an interesting picture of the emerging playing field. Anglo-Dutch supergiant Shell is planning to sell off its entire 106,000-acre holding in the Eagle Ford Shale and another 600,000 acres in the Mississippian Lime play in Kansas.
The knee-jerk reaction to this is to ask why would this supergiant sell off these prime producing assets—especially the liquids-rich assets?
On the surface, Shell is making up for a $2.1 billion after-tax impairment charge that recently came out in its second-quarter earnings statement. When it comes to US shale, Shell simply isn’t meeting its size and profitability targets, and the after-tax impairment charge is primarily related to these North American assets.
Shell isn’t the only major player getting rid of US shale assets—but it is the only one so far to divest of the more profitable liquids-rich acreage. Most notably, BG Group and BHP Billiton (BHP) have reduced their North American shale holdings, but those divestitures have been gas-heavy assets.
For Shell, this seems to be the right move: It will see better returns in the Gulf of Mexico and offshore Malaysia, for instance. At the same time, its Eagle Ford liquids-rich assets are very attractive to prospective buyers and the proceeds will boost development in the Gulf of Mexico and Malaysia.
What is most interesting about the North American shale plays is that the integrated supermajors were slow off the starting blocks here, watching while the smaller companies swooped in and starting exploring and developing. Those companies got in while things were great—and crucially, before natural gas prices slumped. Big dogs like Shell moved in too late and when they got there they dumped a bunch of cash into operations only to see natural gas prices take a dive. ExxonMobil did the same. For Shell, this balance isn’t working, so we are now seeing some excellent liquids-rich assets up for grabs.
And within the next couple of years, we’re going to see another improvement that will make these assets even more valuable for whoever sweeps them up. The first liquefied natural gas production facility in the Eagle Ford play is slated to launch operations in 2015, courtesy of a subsidiary of Koch Industries. The operation will host five LNG processors in the Texas play to produce LNG for oilfield fuel applications, which will in turn help developers reduce operating costs.
Setting aside the North American shale reshuffle, follow us across the Atlantic this week in our exclusive interview with former BP chief Tony Hayward, now CEO of Anglo-Turkish Genel Energy, which is storming the scene in Iraqi Kurdistan and paving some interesting new roads in even newer, riskier frontiers like Somaliland.
And be sure to check out this week’s offerings in the premium Oil & Energy Insider if you haven’t signed up already.
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The letter also has four intelligence notes that look at developing geopolitical situation around the work and our oil market forecasts for the coming week.
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That’s it from us this week.
James Stafford Editor, Oilprice.com