Royal Dutch Shell’s $4.7-billion bid for private-equity-funded start-up East Resources Inc. is further evidence of the transformation of the global oil and gas industry that is being fueled by development of shale technology, says John Moon, managing director of energy investor Morgan Stanley Private Equity.
“Shale technology has turned everything on its head,” Moon told attendees at Argyle Executive Forum’s energy-investment program in New York recently at which Oil and Gas Investor presented.
Morgan Stanley PE committed funding to Henry Harmon’s Marcellus-shale-focused start-up Triana Energy LLC roughly a year ago, shortly before Kohlberg Kravis Roberts invested $350 million in Terrence Pegula’s Marcellus-focused East Resources. They were followed in the fall of 2009 by Metalmark Capital’s investment in Mike John’s Marcellus start-up, Northeast Natural Energy LLC.
The KKR investment represents a portfolio-investment flip in fewer than 12 months and for substantially more than the committed capital.
Moon says the last E&P technology-changing event of this magnitude was the deployment of 3-D seismic technology in the 1970s. In that cycle, the major oil companies funded the development and application of the technology, as these large companies had the most money for access to (at the time, highly costly) computing power and for recruiting technology-leading geoscientists. As costs declined and best practices improved, the technology became accessible by smaller, independent oil companies.
In the case of shale technology in the past decade, it was a small operator, Mitchell Energy & Development Corp, that used horizontal drilling and fracturing to produce economic amounts of gas in the Barnett shale, Moon notes. “Shale technology was not developed by the ExxonMobils of the world.” Shales were not perceived to be sexy enough to merit the attention of the majors. “In this case, the technology was developed and applied first by the independents. That is a transforming shift in the way natural gas will be developed over time.”
Shell’s bid for East Resources, ExxonMobil’s conclusion just this week of its $41-billion, all-stock purchase of U.S. unconventional-resource independent XTO Energy Inc., and shale-play joint-venture deals signed in the past 18 months with U.S. independents by Total SA, Statoil ASA, BP Plc and other majors are testament to this, “that the majors are looking to the independents for access to that technology and not the other way around.
“For a while, the majors dismissed unconventional-resource development as a fad…That is no longer the case.”
Foreign oil companies are particularly motivated to “go to school” on unconventional-resource development in the U.S. to take that training to their portfolio plays abroad, he adds.
“Even 18 months ago, if you told someone outside North America who was knowledgeable about the energy business that shale technology was a really big deal, many would have looked at you like you had two heads.”
When the Morgan Stanley PE investment in Triana was announced, Moon received inquiries about the firm’s interest in the Marcellus from both national media and executives with major oil companies. “I was shocked, actually…An executive with one of the largest oil companies in the world wanted to know what we were up to.”
It was a leading indicator. “Shale technology has marked a seismic shift in the global oil and gas industry.”
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