Shell Venture Starts Fracking Giant Russian Shale Oil Formation

Shell Venture Starts Fracking Giant Russian Shale Oil Formation
By Stephen Bierman
January 13, 2014 5:56 AM EST

Royal Dutch Shell Plc (RDSA) and OAO Gazprom Neft began a drilling campaign to assess the potential of Siberia’s Bazhenov formation, reckoned to be one of the world’s largest deposits of shale oil.
Salym Petroleum Development, the venture between Shell and Gazprom Neft, has started drilling the first of five horizontal wells over the next two years that will employ multi-fracturing technology, according to a statement today.
The Bazhenov layer, which underlies Siberia’s existing oil fields, has attracted Shell and Exxon Mobil Corp. (XOM) because it’s similar to the Bakken shale in the U.S., where advances in drilling technology started a production boom. Exxon will also start a $300 million pilot project drilling in a different part of the Bazhenov with OAO Rosneft (ROSN) this year.
“This is a big theme for Russia,” according to Ildar Davletshin, an oil and gas analyst at Renaissance Capital in Moscow. “Bazhenov holds as much resources as has been produced in Russia to date. The question is what portion of it can be recovered and at what cost.”
The first horizontal well follows three years of study on the prospect, which included three vertical wells, 3D seismic, coring and well logging in the Upper Salym area, according to the Salym statement.
“Bazhenov development is an important element of our growth strategy,” Oleg Karpushin, head of Salym Petroleum Development, said in the statement. “We hope that the pilot project will allow us and our shareholders to make a decision about moving to a large-scale development of the Bazhenov formation in the Salym fields.”
To contact the reporter on this story: Stephen Bierman in Moscow at sbierman1@bloomberg.net
To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net
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Investing in natural gas

29 August 2013

Investing in natural gas

By Bryan Borzykowski
Is it a good idea to invest in natural gas?(Thinkstock)

British Columbia is best known for its beautiful mountain views and world-class skiing, but by 2015 it could be famous for something else: natural gas transportation.

That may not sound as exciting as a night out in Whistler, but if the Canadian province can successfully build North America’s first major liquefied natural gas terminal, it could dramatically alter the energy industry. With many people’s money tied up in energy stocks, it could boost the average investor’s returns too.

While other LNG terminals in places like Malaysia, Qatar, Yemen, Australia and Norway already send gas to Europe and Asia, it is cheap, abundant North American gas, that many utilities and gas companies are waiting to get their hands on. Demand for the commodity is highest in Asia.

One reason why people are excited about North American gas is that many gas-using companies want to buy from a locale that doesn’t face political risks, said Maartin Bloemen, a Toronto-based portfolio manager with Templeton Global Equity Group. European companies import a lot of gas from Russia, while Japanese and Chinese businesses buy from the Middle East.

Currently, natural gas sells for about $3.50 per 1,000 cubic feet in North America; it goes for $9 in Europe, and about $16 in the growing Asian market. Many investment experts think that once China, Japan and other markets get a hold of North America’s abundant supply of gas, the price gap between North American and Asian gas could close, said Ted Davis, portfolio manager at Denver-based Fidelity Investments.

A more global gas market could give people’s investment portfolios a boost. — Andrea Williams

A more global market could give people’s investment portfolios a boost, said Andrea Williams, a London-based portfolio manager with Royal London Asset Management. Since 2008, investors around the world have suffered from falling North American natural gas prices. The price of gas plummeted by about 85% over the last five years and that has impacted the earnings and stock prices of the many energy operations exposed to the region.

If North American gas prices rise, so too should the fortunes of the continent’s companies, said Davis. Conversely, if gas prices fall overseas — it’s likely they’ll drop somewhat after North American supply hits Asian shores, said Williams — the Russian, Middle Eastern and Australian companies that supply Europe and Asia now could be in trouble, she said.

Getting excited

While the first North American gas plants are still a couple of years away from being built, investors are already getting excited about North American investment opportunities, said Davis.

According to the US Energy Information Administration, North America produces the most natural gas out of any region in the world. With such rich resources, many companies will be able to grow production for decades, said Davis. Right now, all that production is a problem — there’s not enough domestic demand to reduce supply — but investors are anticipating that once gas goes offshore, that imbalance will be fixed.

Historically, European and emerging market producers traded at a premium to North American companies, but that’s starting to change. For example, Russian energy companies have traded at an average 24% premium over the past decade, but now trade at a 70% discount, said Davis. Major European energy companies have traded at a 26% premium over the last 10 years, but now trade at a 27% discount.

Despite the rising valuations, Davis still thinks that North America companies are the better bets in this changing energy environment.

Best bets?

The best bets are the mega-cap energy players, such as Chevron, Royal Dutch Shell and ExxonMobil, said both Williams and Bloemen. Many already have a stake in LNG terminals being built in North America. They are also buying stakes in terminals in Australia, which will help get gas off that continent, too.  In addition, these heavyweight companies have a leg up on signing long-term contracts with utility companies.

“You want someone who already has projects on the go,” Bloemen said. “Newer projects are way behind the eight ball and you want to own a company that can scale up easily.”

Williams is partial to integrated producers — companies that sell gas, but also produce and refine oil as well. These operations are more diversified and should therefore be better able to withstand short-term volatility in the sector than a pure gas producer, she said.

While Davis is keen on the bigger players too, he also suggests looking at small North American exploration and production companies, such as EOG Resources and Apache Corp, which have been much more successful at finding resources than their European and Asian peers.

These operations aren’t necessarily involved in transporting gas overseas, but they are assisting other nations, such as China, Latin America and the U.K., tap into their own gas fields.

“These are the companies that took the risk and unlocked these resources over time,” said Davis. “Their technology will be applied elsewhere in the world.”

Energy experts say there’s no question that global demand for natural gas is increasing and that the industry will forever change once natural gas gets shipped from North America to Asia. While it’s likely big global companies that will benefit first, nearly all investors with exposure to the energy sector should see some bump in their portfolio starting in 2015, said Williams.

“We’re happy to invest in this sector,” she said. “As emerging markets become more westernised, the need for gas will just go up.”

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In bustling Houston, it’s a case of ‘Build, baby, build!’

In bustling Houston, it’s a case of ‘Build, baby, build!’

9:11am EDT

By Anna Driver and Ilaina Jonas

HOUSTON/NEW YORK (Reuters) – With Texas one of the few bright spots in the U.S. economy, the skyline of swaggering Houston is where the action is as builders and global oil companies, from Phillips 66 to Exxon Mobil Corp, look past previous busts and spend billions on gleaming new buildings.

The U.S. shale oil and gas revolution – which has already changed industries from railroads to pipelines and refineries – is helping drive the voracious appetite for office space needed for the expanding workforce in the world’s energy capital.

Demand is so hot that Houston is one of the few places where banks – including Wells Fargo & Co, which is seen as one of the more conservative big banks – will loan money for a new building without demanding developers first have a tenant.

“Houston is booming and bar none the strongest market in the United States of America,” said Joseph Sitt, chief executive of Thor Equities, which has two projects underway in Houston.

There are some 56 office buildings totaling at least 11 million square feet under construction in and around Houston, according to real estate services firm CBRE Group Inc. That is equivalent to 190 football fields.

In the forested suburbs, Exxon has what it calls “one of the largest commercial construction projects underway in North America.” The nearly 400-acre campus with 20 buildings will have enough room for 10,000 employees.

With crude now above $100 a barrel, money is flowing freely. And while the shale oil and gas transformation means North America may be energy independent by the end of this decade, economists are wary when people say this boom will be different. They counsel caution.

“The Texas oil and gas industry is not known for long periods of stability,” Karr Ingham, economist for the Texas Alliance of Energy Producers. “Nobody wants what happened (in past busts) to happen again.”

To be sure, the amount of space being built is still only a fraction of the 88.9 million square feet developers constructed in Houston from 1980 through 1986, a flurry that more than doubled the city’s office market, according to real estate research firm Reis Inc.

The Texas economy grew 4.8 percent last year, the fastest pace among the big U.S. states. New workers are pouring into Houston, which needs new offices for the 100,000 jobs it added last year. Houston is on track to add another 80,000 this year.

But over-exuberance about real estate and oil have afflicted Houston before. In the early 1980s developers built a 71-story green glass tower with a footprint shaped like a dollar sign.

It took nearly two decades to recover from Houston’s big crash in the 1980s, which was brought on by a collapse in oil prices. Vacancy rates soared to near 30 percent in 1983 from 9.8 percent two years prior, according to Reis.

The current building cycle is in large part propelled by burgeoning domestic production of oil and natural gas unlocked from shale formations through hydraulic fracturing and horizontal drilling.

“If you are investing in Houston, you’re a believer in the energy sector long term, which we are,” said Russell Cooper, managing director of capital transactions at Shorenstein Properties LLC in San Francisco.

The firm in January bought a building of more than one million square feet in downtown Houston from Exxon for $48 million. It plans to put a new glass skin on the building and may connect it to the air-conditioned tunnel system downtown, where office workers eat and shop to escape torrential rains and steamy heat.

Exxon has put two other buildings in Houston and one in Virginia up for sale, ahead of the move to its new campus.

ENERGY CORRIDOR

Tower cranes dot the landscape of Houston’s so-called energy corridor, about 15 miles from downtown. The area, located on the western edge of the city, is experiencing rapid growth as companies build and expand. There, refining company Phillips 66 is constructing a 14-acre campus with over a million square feet for its 1,800 employees.

Firms are loading their blueprints with plans for everything from basketball courts to childcare centers and fancy coffee shops to attract hard-to-find energy experts.

Near the Exxon campus, an entire master-planned community called Springwoods Village with room for up to 5,000 houses and apartments is going up to accommodate new workers.

While others construct facilities for employees, some companies are building space to push the frontiers of oil technology.

BP Plc is spending more than $100 million over the next five years to build a new three-story building that will house the huge supercomputing complex used to speed up BP’s search for oil and gas around the world.

“It made more sense to create a new home,” said Keith Gray, manager of BP’s High Performance Computing unit. “It became clear that a freestanding building was needed to address growth needs.”

Other oil and gas companies with buildings under construction or in preliminary stages in Houston include BHP Billiton Petroleum, Anadarko Petroleum Corp, Royal Dutch Shell and Chevron Corp, which plans a 50-story tower downtown.

One building which started on spec – meaning banks loan money for construction even if a tenant isn’t lined up – is the 550,000-square-foot Energy Center Three in west Houston.

Principal Real Estate Investors, part of Principal Financial Group, and developer Trammell Crow Co started the building with a loan of roughly $100 million from a Wells Fargo-led syndicate.

Within four months, oil company ConocoPhillips signed a lease for the entire building and half of Energy Center Four, which is not yet under construction, said Aaron Thielhorn, managing director of Trammell Crow’s Houston business unit.

Brian Stoffers, president of CBRE Capital Markets, said spec building in Houston in many ways makes it an outlier.

“The dynamics of the Houston market are so robust right now that it’s the exception to the economic rule around the rest of the country,” he said.

Of the buildings under construction, 29 will be rentals that will not be owner-occupied. Of those, 13 broke ground without signed leases but six of those have since found tenants.

Vacancy rates in the most expensive, modern office buildings in Houston are tumbling. Second-quarter vacancy slid to 6.9 percent from 12 percent in the same period two years ago, according to CBRE. The broader office vacancy rate is 14.2 percent versus a national average of 17 percent.

DANGER AHEAD?

While access to shale deposits has diminished worries about supplies, much of the new demand for crude oil in recent years has been led by developing nations such as China and India.

Big slowdowns in those developing economies could hit the price of crude and cool enthusiasm for building in Houston.

“If China and India have hit a plateau, then I think we have to ask where are the drivers for oil demand in the future,” said the University of Houston’s Robert Gilmer.

Chinese growth slowed to 7.5 percent in the second quarter – below the 8.9 percent average of the last six years.

Apart from shale, crude oil prices generally need to stay above $65 per barrel to produce from the deepwater Gulf of Mexico or the oilsands in Canada for companies to make money.

Another risk is overbuilding. Houston, a sprawling 8,778-square-mile metropolis, has no zoning restrictions, a fact that has some investors including New York-based GreenOak Real Estate Advisors, looking elsewhere to buy.

Owners in areas where building is constrained can reap big rewards when demand for space rises, fueling rent spikes of sometimes 20 percent. That rarely happens in Houston, where developers can easily build.

“When you’re dealing with a market like Houston, there’s nothing to hold developers back,” Ryan Severino, Reis senior economist said. “You can literally can go next door and put up a building.”

(Additional reporting by Kristen Hays in Houston; Editing by Terry Wade and Claudia Parsons)

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Energy Journal: Big Oil’s Size Problem
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LESSONS FROM BIG OIL EARNINGS

This week’s round of Big Oil earnings showed that some of the world’s dominant energy companies are struggling to make money from massive bets on the shale boom in North America. The Wall Street Journal explains that this is because the deposits of oil and gas found there are proving abundant, but not always profitable.

Exxon Mobil’s earnings, reported here by the Journal’s Tom Fowler, show the company is still feeling the effects of its plunge into natural gas in 2010, which left it exposed to low prices.

Royal Dutch Shell, meanwhile, took a write-down of more than $2 billion on the value of its North American acreage, the Journal’s Selina Williams reports. Although the U.K.-based company didn’t identify which shale formation was responsible for the write-down, the Journal’s James Herron says it likely just failed to get lucky. That’s a big hit for bad luck.

Big Oil is running to stand still, says the Journal’s Liam Denning. Big Oil’s big dilemma, he says, is that every barrel pumped out of the ground has to be replaced with new reserves, unless companies want to shrink to nothing. If they want to increase production, they need to discover more than one barrel for every one pumped.

It’s a treadmill, and investors aren’t buying into scale these days. Growth rates at a company like Apache, which this week reported a significant profit increase, are increasingly attractive.

Sometimes less really is more, the Journal’s Spencer Jakab says. Welcome to Medium Oil.

U.S. BEGINS OFFSHORE WIND REVOLUTION

Some 200 wind turbines will be installed in the Rhode Island Sound, on the U.S. East Coast, as the country’s first ever offshore wind-energy auction concluded this week.

A milestone moment, said U.S. Interior Secretary Sally Jewell. An enormous step forward, said the winning bidder, Deepwater Wind.

It could invest $6 billion building turbines and transmission lines, having snapped up some 165,000 acres of federal waters for just $3.8 million, plus $500,000 a year rent until a wind farm is operational.

Next under the hammer are 113,000 acres offshore Virginia, to be followed by blocks off the coasts of Maryland, Massachusetts and New Jersey.

It has taken a long time to get to this point, and there can be no doubt that a number of factors are behind the U.S. lagging, say, Europe in this sector.

But a revolution could be beginning.

MOVING CANADA’S OIL

TransCanada, the company behind the controversy-plagued, long-delayed Keystone XL pipeline, is planning another route out of Alberta for all that heavy oil.

It plans to spend $12 billion building a pipeline all the way from Alberta and Saskatchewan to Canaport in Saint John, New Brunswick, the Journal reports. From there, Canadian crude will be able to access the world once a deepwater port is built (and have the knock-on effect of displacing imports from Africa, the Middle East and Venezuela).

What does this mean for Keystone? President Barack Obama has twice been openly critical of the proposed pipeline, Bloomberg reports. New Energy Secretary Ernest Moniz won’t even have a say in whether Keystone will be built.

Opposition to the Alberta-Gulf Coast pipeline is mostly on environmental grounds. This New Scientist report on out-of-control oil leaks in Alberta will add fuel to the debate.

MARKETS

Crude oil futures were slightly lower Friday as traders took profits after a slew of positive economic news from the U.S., Europe and China pushed the contracts to recent highs. Read the Journal’s latest market report here.

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US Oil and Gas Boom is Bigger Than Majors Can Handle Alone

EARNINGSAugust 1, 2013, 8:14 p.m. ET

Shale-Boom Profits Bypass Big Oil

Shell, Exxon Came Late to the Party, Then Made Massive Investments

By DANIEL GILBERT, JUSTIN SCHECK and TOM FOWLER CONNECT

Billion dollar write downs and falling profits from two of the biggest oil companies could mean a limit to how big oil companies can get. Heard on the Street’s Liam Denning joins MoneyBeat. Photo: AP.

Some of the world’s biggest energy companies are struggling to make money from massive bets on the shale boom in North America, where deposits of oil and gas are proving abundant but not always profitable.

Royal Dutch Shell PLC, which has had a tough time coaxing crude oil from dense rock formations, said Thursday its shale holdings in the U.S. are worth $2.2 billion less than it had previously determined. The write-down helped push the Anglo-Dutch oil giant’s second-quarter earnings down 60% from a year earlier. The company said it would explore selling some of its U.S. shale properties.

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Heard: Big Oil’s Rodent Problem

Exxon Mobil Corp., the world’s largest publicly traded energy producer, is still feeling the effects of its plunge into U.S. shale gas in 2010, which left it with a big exposure to persistently low natural-gas prices.

Rising expenses and falling oil-and-gas production contributed to a 57% drop in quarterly earnings for the Irving, Texas, company. Its profit per barrel of oil and gas fell 23% from a year earlier.

Shares in both companies declined Thursday, with Shell’s class A shares dropping more than 5% to $64.47 in trading on the New York Stock Exchange. Exxon’s stock dropped a little more than 1% to close at $92.73.

U.S. oil production has soared to levels not seen in decades, and profits at some smaller energy companies have surged. But big international oil companies, which were late to exploit shale rocks, haven’t capitalized on the boom in the same way.

Exxon and Shell have spent billions to acquire companies and drilling rights to shale discovered by others at a lower cost. Their sheer size—Exxon produces nearly as many barrels of crude a day as the entire state of Texas—also makes it harder for them to replace the reserves they deplete and increase their output.

As for shale, “they bought in late in the game, and it’s hit or miss,” said Ken Medlock, senior director of the Center for Energy Studies at Rice University in Houston. “Whether or not it pays off is going to be highly dependent on what happens to commodity prices.”

Along with Chevron Corp., Exxon and Shell are investing at record levels to find and produce energy, aiming to spend a combined total of about $111 billion this year, 8% more than in 2012. They are adjusting to a world in which countries with some of the richest oil deposits—from Iraq to Mexico—have limited their access, adding to the difficulty of expanding production.

Exxon and Chevron are sticking to aggressive goals to increase their slumping production over the next four years, by about 14% and 26%, respectively, from 2012 levels.

But Shell said it would stop setting targets for how much oil and gas it hopes to pump and just focus on profits. “If we are solely focused on a volume-related target, we may make less profitable long-term investments,” Simon Henry, Shell’s chief financial officer, said in an interview.

In Big Oil’s hunt to add to its reserves, North America emerged as a bright spot in recent years. Smaller companies like EOG Resources Inc. and Chesapeake Energy Corp. capitalized on drilling sideways through shale, breaking it up with a high-pressure stream of water, sand and chemicals, allowing oil and gas to flow.

The Energy Information Administration said Thursday that exploration and production companies operating in the U.S. raised their oil reserves by nearly 3.8 billion barrels in 2011, the largest single-year increase since the government starting publishing the data in 1977. The EIA now estimates the U.S. has about 29 billion barrels of oil that companies can recover at a profit, the most since 1985.

Natural-gas reserves also expanded to 348.8 trillion cubic feet, the EIA said, a 9.8% annual jump that ranks as the second-largest increase on record.

The boost in domestic oil production is providing a “major economic benefit” by reducing the amount of crude the U.S. has to import, according to U.S. Energy Secretary Ernest Moniz.

That hasn’t necessarily translated into corporate profits, however.

Shell has tried for months to boost the profitability of its U.S. shale assets. Since U.S. gas prices remain low, Shell said early this year that it would try to shift its North American production toward more profitable oil.

The strategy hasn’t panned out. Finding shale oil turned out to be tougher than finding gas, the company said. Its overall exploration and production operations in the Americas sustained a loss in the second quarter, partly because of higher costs. And, with current oil and gas prices, the business will likely continue losing money at least through the end of this year, Shell said.

Exxon, which spent $25 billion in 2010 to buy shale-gas specialist XTO Energy Inc., said an increase in natural-gas prices in the U.S. last quarter helped increase its domestic profits by 62% to just over $1 billion. But its XTO investment diluted its profits and isn’t making up for the company’s problems increasing oil-and-gas production around the globe; its overall production fell 1.9%, the eighth quarter in a row of year-on-year declines. Profits from producing energy dropped 25% in the quarter to $6.3 billion.

But the steep drop in Exxon’s overall profit for the second quarter was due in part to a tough comparison; asset sales and tax breaks helped drive earnings to a record in 2012.

Chevron, which reports earnings Friday, has taken a more moderate approach to investing in shale resources in the U.S. and Canada. But late Thursday, Chevron said that a subsidiary had acquired drilling rights to 67,900 acres in a shale formation in Western Canada, adding to its holdings there. The company didn’t disclose a purchase price.

—Ryan Tracy contributed to this article.

Write to Daniel Gilbert at daniel.gilbert@wsj.com, Justin Scheck at justin.scheck@wsj.com and Tom Fowler at tom.fowler@wsj.com