NEW YORK — ExxonMobil CEO Rex Tillerson says fears about climate change, drilling and energy dependence are overblown.

In a speech Wednesday to the Council on Foreign Relations, Tillerson acknowledged that burning of fossil fuels is warming the planet, but said society will adapt. The risks of oil and gas drilling are well understood and can be mitigated, he said. Dependence on other nations for oil is not a concern as long as access to supply is certain, he said.

Tillerson blamed a public he called illiterate in science and math, a lazy press, and advocacy groups that “manufacture fear.”

The oil executive questioned the ability of climate models to predict the magnitude of the impact, and said that people would adapt to rising sea levels and changing climates that may force agricultural production to shift.

“We have spent our entire existence adapting. We’ll adapt,” he said. “It’s an engineering problem and there will be an engineering solution.”

Andrew Weaver, chairman of climate modeling at the University of Victoria in Canada, disagreed with Tillerson’s characterization of climate modeling, warning that adapting to those changes will be much more difficult and disruptive than Tillerson seems to acknowledge.

Steve Coll, author of the recent book “Private Empire: ExxonMobil and American Power,” said he was surprised Exxon would talk about ways society can adapt to climate change when there is time to try to avoid its worst effects. Coll said research suggests that adapting to climate change could be far more expensive than reducing emissions now. “Moving entire cities would be very expensive,” he said.

Original Article

Despite a volatile crude market, both oil and gas producers remain bullish on commodity prices and are continuing to invest.

In a quarter that has seen crude prices plummet, the longer-term outlook for both oil and gas remains uncertain. This sentiment was echoed recently by news that Canada’s largest natural gas producer has decided to accelerate its shift into the liquids market.

Encana to invest $600 million

Encana (NYSE:ECA) has stated that during the remainder of the year it plans to invest an additional $600 million in order to take advantage of positive results achieved at a number of its oil- and liquids-rich natural gas plays. In addition, the company has increased its expected total liquids production for the year to 30,000 barrels per day (bbls/d) – an increase of 7 percent.

Encana projects that liquids production in 2013 will range from between 60,000 bbls/d to 70,000 bbls/d, of which 40 percent is expected to be comprised of oil and field condensate, according to a press release. At the same time, its natural gas production is expected to remain near current levels of approximately 3 billion cubic feet per day (bcf/d) for 2012 and 2013. The move has surprised many as the operational shift is set to exceed the company’s cash flow for at least 18 months.

Shift becoming increasingly popular

The shift from natural gas to liquid plays has become a common occurrence as natural gas prices trade at ten-year lows on the back of a surge in supplies and increasingly efficient methods of extraction. While some feel that the commodity is likely to rebound, not all companies are as optimistic, with many shifting their initiatives to liquid oil.

The move has not only been evident on the production side; TransCanada (TSX:TRP) recently announced that it is “actively” pursuing a move to ship oil rather than natural gas along a key pipeline network as prices for Alberta gas plunge.

“More balanced portfolio”

“Our stated goal is to transition to a more balanced portfolio of production and cash flow generation and to do so as prudently as we can,” said Randy Eresman, President and CEO of Encana. “We plan to increase the pace at which we develop our liquids-rich natural gas and oil plays while minimizing our investment in dry natural gas plays to largely preserve their value.”

The sentiment of many natural gas producers was clear when he added, “[a]s an almost pure-play natural gas producer, Encana has been most affected by the low price of the commodity caused by the continued excess of supply.”

The company expects that dry gas output at its Haynesville shale gas play in Louisiana, Greater Sierra project in British Columbia, and coalbed methane fields in Alberta will decline as it cuts off capital funding as a result of low prices.

Negative outlook

Despite the move, executives remain optimistic that North American gas prices could start to recover later this year. However, this view is in sharp contrast to that of the Canadian National Energy Board, which outlined in a recent market outlook that prices for natural gas have declined over the past few months, averaging US$2.53/MMBtu at Henry Hub, US$2.96/MMBtu at Dawn in Ontario, and $2.12/GJ at AECO in Alberta. It added that prices for the next three months could also move lower due to reduced demand and an excess volume of gas in storage.

The shift in Encana’s focus has been deemed a high risk by many; however, if energy prices recover, the Calgary-based company’s spending could be well-timed. A rebound in prices could see Encana rapidly boost spending on ten oil-prone plays at which it plans to drill between 115 and 120 wells this year – a marked increase on the 40 to 50 wells announced under its previous plans for 2012.

Too little, too late

At the same time, some feel that the company’s shift has come relatively late compared to the rest of the industry, and believe that the move is too risky considering prices may not recover. Low prices and uncertain industry conditions will almost certainly also disrupt Encana’s ability to sell assets.

Regardless, the shift in focus by a company of this magnitude remains significant. As both crude and natural gas prices are on the decline and have less-than-stellar outlooks in the longer term, many question the move. In a note to investors, CIBC analyst Andrew Potter said that he views the move by Encana as both good and bad, stating: “[w]hile deals have been relatively easy to come by during the last two years, in the current environment (collapsing NGL [natural gas liquids] prices and rapidly declining oil prices) we are more cautious on deal flow or the parameters at which deals get done.”

He recently gave the company a “mixed” rating, noting that Encana is bucking the industry trend by increasing spending as oil prices fall and gas remains locked at near-record lows.

Only time will tell whether Encana’s move is well timed, but the fact remains that investors are facing a markedly more high-risk market environment than they did in the past. A tense market, high crude inventory numbers, and increased production levels suggest that this high-risk market environment is here to stay – at least in the oil and gas sector.

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A source with direct knowledge of the joint venture confirmed to Upstream that it had been signed, but declined to offer details of the contract.

Officially, both Mitsubishi and EOG representatives declined to comment on the deal, as EOG continued to decline to comment on its TMS position.

It is believed that EOG controls more than 120,000 acres in the play, primarily on its western edge in Vernon, Rapides and Avoyelles parishes, and that it continues to lease to the east into what has been considered the heart of the play, where Devon Energy and Encana have drilled wildcats.

Already, EOG has applied for its first two drilling units in the play, both in Avoyelles Parish.

The deal is one of the first joint ventures aimed solely at the TMS, a Cretaceous-aged formation that lies between 11,000 feet and 14,000 feet below the border of Mississippi and Louisiana.

Encana entered the TMS under what was essentially a farm-in agreement with Denbury Resources, and the TMS also was one of five plays included in the $2.5 billion joint venture between Sinopec and Devon Energy earlier this year.

The Canadian giant announced earlier this month that it was looking for joint venture partners in a handful of its emerging US shale plays including the TMS, as it looks to bolster its cash position and survive the impact of record low natural gas prices.

Shell had long been rumoured to be interested in shifting activity from its Haynesville Shale joint venture with Encana to the TMS as the companies look to tap higher-value liquids instead of dry gas, but no deals have been announced.

Encana brought on its latest TMS well, the Horseshoe Hill 10H in Wilkinson County, Mississippi. The well came on at 732 barrels of 44 API oil, 483,000 cubic feet of natural gas and 498 barrels of water per day on a 14/64-inch choke.

Meanwhile, sources indicate that Halcon Resources, the newest company headed by Petrohawk founder Floyd Wilson, was leasing land in the same area as EOG.

The area lies between two plays where Halcon has publicly targeted acreage – the Woodbine-Eaglebine in east Texas and the Wilcox liquids play in south western Louisiana.

The company has acknowledged that it is trying to amass up to 250,000 acres in three unnamed US liquids plays, and will start drilling wells in those plays this year.

Original Article

Chesapeake (CHK) recently raised $2.6 billion in natural gas asset sales in order to make up for this year’s weak earnings. As part of the bundle of transactions, Chesapeake , the most active new well driller in the United States, will sell 58,400 acres to Exxon Mobil (XOM). Chesapeake also made a $745 million deal with a subsidiary of Morgan Stanley (MS), which included cash upfront for Chesapeake in exchange for a ten-year production agreement involving natural gas assets located in Oklahoma.

Based on previous research on Chesapeake, I view the company’s sale to Exxon as both a debt solution for Chesapeake and a promising investment for Exxon. However, in spite of my view of the transaction, Exxon continues to express serious interest in the possibilities of natural gas as an alternative fuel.

Exxon’s purchase from Chesapeake is an extension of its 2009 acquisition of the natural gas company XTO Energy. In that transaction, Exxon acquired $10 billion of XTO’s debt in order to expand natural gas development. Traditionally, energy companies extracted natural gas by drilling vertical wells into pockets of methane above underground oil deposits. Previous methods of extracting natural gas burned off methane as a waste product.

However, over the course of twenty years, horizontal well drilling replaced vertical well drilling for natural gas development. The horizontal wells are fractured by a high-pressure water drilling process known as “fracking.” Horizontal well drilling exposed new sources of natural gas in unexplored oil lands in the United States. As a result of new oil field expansion, Exxon seized the new profit opportunity through the XTO acquisition and its recent purchase from Chesapeake.

Exxon’s recent business deals indicate a continuing interest in natural gas production from major companies that traditionally focus on crude oil. Natural gas prices currently sit at noticeable lows when compared to crude oil prices. Additionally, natural gas recently garnered newfound attention as a popular fuel source for vehicles due to increasing media coverage.

For example, one media commentator noted in an online article that the trucking industry could save money by using natural gas. The same article noted that buses and other modes of public transit in cities use a form of natural gas fuel cells that were an inexpensive and environmentally-sound fuel source. The author suggested that natural gas was also being implemented into cars after mentioning that the car rental company Hertz introduced ten cars that used compressed natural gas (CNG) at its Oklahoma City airport facility.

I believe that Exxon recognized the potential for natural gas development in the United States in its recent purchase from Chesapeake. Consumer backlash from rising gas prices and negative public perception of U.S. foreign oil dependency sources probably directed Exxon to consider natural fuel sources within the United States. Speculations aside, Exxon proved that it is seriously invested in developing natural gas as a staple fuel source within the US. The company increased domestic natural gas production and recently pledged to invest $37 billion in natural gas production within the year.

In fact, Exxon proved its commitment to natural gas drilling in the United States through an unlikely partnership with three rival oil companies. In March, Exxon announced that it will partner with BP (BP), ConocoPhillips (COP), and TransCanada (TRP) as part of the Alaska Pipeline Project to develop natural gas production in Alaska. The companies plan to develop the North Slope of Alaska’s natural gas resource land to meet global fuel demand by producing large-scale liquefied natural gas (LNG) exports from south-central Alaska. The Wall Street Journal blog post stated that the fuel company partnership hoped that the Alaska natural gas project will serve as an alternative to a natural gas pipeline through Alberta, Canada.

However, Exxon is not the only company expanding its natural gas production options. Devon Energy (DVN) recently announced that it will continue oil and natural gas production in the Barnett Shale region of Texas. The company also stated that it would increase production from the area over the next five years. Devon’s announcement followed its plan to spend $950 to drill 300 wells into the Barnett Shale in 2012. Additionally, rival energy company Marathon (MRO) seeks to participate in the push for natural gas drilling in foreign markets. Marathon reportedly has 1.2 million net acres of land in Poland, some of which has shale gas potential.

Nevertheless, some analysts are skeptical about Exxon’s commitment to natural gas development. One online analyst stated that Exxon should not expand its natural gas drilling operations, while Chesapeake decreased its natural gas output. It stated that Exxon’s business decisions in terms of natural gas will not lead to a steady increase in stock value, since the company may underperform on actual output.

Additionally, another analyst stated that investing in Chesapeake will not be wise in the near future. According to the analyst, any investment in Chesapeake will be associated with the company’s major debt (in spite of the recent multi-billion-dollar deals with major oil companies). This viewpoint makes a point for not investing in either company.

However, I feel that investing in Chesapeake will have more long-term benefits in the future. Major auto manufacturers will recognize the strong interest in natural fuel and implement fuel cell technology in more vehicles.

Based on recent increased interest on natural gas development, some analysts state that Chesapeake’s recent sale to Exxon is a low-cost opportunity to invest in the natural gas company. I agree with this perspective based on growing public concern over increases in crude oil prices and possible fuel shortages in the future.

Current natural gas prices are considerably low compared to crude oil prices because of recent expansions of natural gas sources within the North American continent. Natural gas sources have a surplus that is not directly impacted by global conflict like crude oil. For now, at least until prices rise from new drilling ventures to meet demand, natural gas is a plentiful, relatively cost-effective fuel source.

Oil companies investing in natural oil production see past the immediate future. The companies recognize that many mass transit and personal vehicles now operate on natural gas fuel cells. Oil companies invest in natural gas now in order to adapt to the possibility that many mainstream personal vehicle companies will create more cars utilizing this technology. In spite of the previously-stated concern over Chesapeake’s major company debt associated with its stock, an investment in a natural gas company like Chesapeake will pay off in the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Original Article

Oil and gas companies set a record number of upstream merger and acquisition deal values and counts in the U.S. in 2011, in part due to the race to obtain profitable shale resources.

The upstream sector includes exploration and production-related services.

A Jan. 13 report from Pls Inc. , a Houston-based listing service for the oil and gas industry, found 369 upstream oil and gas deals had a total value of $86 billion in 2011. In 2010, 313 only had a total value of $75 billion.

A large majority of 2011’s deals — worth $62 billion — were in the unconventional category, which includes shale upstream activity. Looking back five years ago, almost all of the deals were in the conventional category.

The largest deal of the year was Kinder Morgan Energy Partners LP’s (NYSE: KMP) acquisition of El Paso Corp. (NYSE: EP) for $37.8 billion, $7.2 billion of which was an acquisition of El Paso’s upstream portfolio.

Another one of the largest unconventional deals of the year was also in Houston. Noble Energy Inc. (NYSE: NBL) acquired Consol Energy Inc. (NYSE: CNX) for $3.4 billion.

In 2012, Pls expects to see even more deal activity as additional companies expand shale resources.

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–The rising tide in mergers and acquisitions in North American shale sector is expected to continue surging.

–Buyers could include Asian state-owned companies bullish on the long-term recovery of natural gas prices.

–Natural-gas prices in the U.S. have remained depressed due to an overabundance of supply due to the shale boon.

HOUSTON (Dow Jones)–A wave of multibillion-dollar deals by major oil companies has swept the North American shale oil-and-gas sector during the last few years. The rising tide is expected to continue to surge.

So-called shale oil and gas, which are extracted by fracturing the underground rock and then pushing water through cracks to release hydrocarbons, has seen the total value of deals in the U.S. shale sector rise from $15 billion in 2008 to more than $50 billion in 2009, a year when Exxon Corp. (XOM) announced it purchase of XTO Energy. Deal value totaled more than $38 billion in 2010, according to consultancy IHS Herold.

To date, including the mid-July $15 billion proposed takeover of Petrohawk Energy Corp. (HK) by BHP Billiton (BHP), transaction value in the shale sector has garnered about $33 billion, nearing the total for all of 2010, IHS Herold said.

And more deals are expected. The shale market will continue to attract long-term strategic-minded international investments by well-funded global international oil companies. It will also attract Asian state-owned companies bullish on the long-term recovery of natural gas prices, experts said. Natural-gas prices in the U.S. have remained depressed, trading at about $4 per million British thermal units, due to an overabundance of supply caused by the shale boom. Natural gas prices abroad have been trading higher.

“North American assets are in demand,” says Dan Pickering, chief energy analyst at Tudor, Pickering & Holt. “The combination of visible growth, long-lived assets and a reasonable regulatory regime is attractive to buyers and will continue.”

International oil companies are expected to continue adding to their recently acquired shale-gas positions. They will also expand their foothold in oil-and-liquids rich shale properties to boost their hydrocarbons reserves. At the same time, state-owned oil companies, some of which already have venture partnerships with independent producers, are seen becoming operators by acquiring entire companies.

“Overtime many of the Asian national oil companies that are currently joint venture partners will aspire to become operators,” said Adam Waterous, head of Scotia Waterous, the oil and gas merger and acquisitions division of Scotia Capital. “These guys are very good students.” The bank advised BHP on the Petrohawk deal and on the purchase of Chesapeake Energy Corp.’s (CHK) shale assets in Arkansas.

Some joint-venture partners with enough resources to continue expanding include Cnooc Ltd. (CEO, 0883.HK), China’s biggest offshore-oil producer, which has a agreement with Chesapeake in oil-and-gas rich shales in Texas and Nebraska. France’s Total SA (TOT) and Norway’s Statoil ASA (STO) are also partners of Chesapeake in various shales across the U.S., while Korea National Oil Corp. has a joint venture agreement with Anadarko Petroleum Corp. (APC) in Texas. India’s Reliance Industries Ltd. (500325.BY) became partner with Chevron Corp. (CVX) in the Marcellus Shale after the oil giant closed its purchase of Atlas Energy this year.

Possible buyers could also include large independent oil and production companies that are eager to acquire shale assets to improve their production growth profile, says Jim Dillavou, a merger-and-acquisition transaction partner at consultancy Deloitte & Touche LLP.

Marathon Oil Corp. (MRO), which became an independent producer in July after spinning off its refining arm, recently paid $3.5 billion for 141,000 acres in the Eagle Ford in Texas, one of highest prices paid for oil shale assets. Marathon’s move was driven by its need to boost its production growth estimates. Oil giant ConocoPhillips (COP), which announced last week it will split into two stand-alone companies next year, could find itself in the same position, says Sterne Agee & Leach analyst Michael McAllister. “They may have to go and acquire growth,” he said.

On the other hand, takeover targets include exploration companies like Range Resources Corp. (RRC), Whiting Petroleum Corp. (WLL) and Cabot Oil and Gas Inc. (COG), which have vast shale resources in U.S. basins, says Fadel Gheit, an analyst at Oppenheimer and Co.

There have been attempts at shale deals outside the U.S. as well. A $5.5 billion proposed investment by PetroChina Co.’s (PTR) in a big shale-gas project in Canada, led by Encana Corp. (ECA), fell apart last month. That deal faltered on technical issues related to the investment, according to both sides, but experts said interest in Canada shale gas will continue.

The recent string of deals show focus on shale oil and gas resources in North America, Gheit said. “This trend will continue and may accelerate, and the question now is, who is next?”

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LONDON, Dec. 29 (UPI) — The oil spill in the Gulf of Mexico is no deterrent to major oil companies keen to tap into deep-water fields, investors said.

Washington imposed a moratorium on deep-water drilling after BP’s Deepwater Horizon oil rig caught fire and sank in April, leading to one of the worst environmental disasters in the history of the industry.

A survey by investment bank Barclays Capital, however, indicates that major energy companies are planning to spend as much as $500 billion next year on oil and gas exploration. James West, an energy analyst at the bank, told The Wall Street Journal that spending on new energy efforts in 2011 should be 10 percent higher than in 2010.

“This is being driven by the appetite to find more oil, comfort that today’s oil prices will be sustained and companies getting out of a hunker-down, recession mode,” he was quoted as saying.

Chevron, one of the so-called supermajors, announced in early December that it was planning to spend lavishly on offshore projects off the coast of Australia and in the deep waters of the Gulf of Mexico.

“It doesn’t slow us down because the demand is there and we need to harness the resources available to us,” Chevron spokesman Kurt Glaubitz told the Journal.

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BANGALORE (Reuters) – Independent energy company Petrohawk Energy Corp (HK.N) sold its natural gas assets in Fayetteville shale, Arkansas, to Exxon Mobil Corp (XOM.N) unit XTO Energy for $650 million, in a deal that analysts said undervalued the assets.

Petrohawk shares were down 2 percent at $18.26 in midday trade on Thursday on the New York Stock Exchange, having touched a low of $18.02 earlier in the day.

This is the last of the four asset-packet divestitures that Houston-based Petrohawk had planned for the year.

The company had sold its stake in its Haynesville midstream operations to Kinder Morgan Energy Partners (KMP.N) for $875 million in April and said it would reduce its rig count in the “gassy” Haynesville and double it in the liquid-focused Eagle Ford shale in Texas.

And in March it had sold assets in Louisiana and Oklahoma for combined proceeds of about $475 million.

Oil prices are up over 23 percent year-to-date but gas prices are down about 30 percent, pushing U.S. exploration and production firms to shift dollars to acreage with crude oil or natural gas with a high liquids content.

The company said it will sell its Fayetteville upstream assets for $575 million and midstream assets for $75 million.

Jefferies and Co analyst Subash Chandra said in a note that the Fayetteville sale was below his expectations, adding he expected $650 million for the upstream assets and $300 million for midstream.

Chandra, however, said the company will not face problems with funding its capital needs till the end of 2011. In November, Petrohawk set its 2011 capital budget at about $2.3 billion.

Wells Fargo Securities analyst Michael Hall said the deal value was below his expectations, but viewed it as a positive in terms of funding.

The sale values the assets’ proved reserves at $1.92 per thousand cubic feet equivalent, according to brokerage firms Global Hunter Securities and Tudor Pickering Holt.

This is about 32 percent lower than what Exxon Mobil was estimated to have paid for XTO, which it acquired in December last year.

Petrohawk estimates Fayetteville upstream proved reserves of about 299 billion cubic feet equivalent as of December 31, 2009, and current production of 98 million cubic feet equivalent per day.

Bank of America Merrill Lynch acted as financial adviser to Petrohawk for both transactions.

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