Chinese oil company, Chesapeake Energy enter deal for shale project in Texas

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By Steven Mufson
Washington Post Staff Writer
Sunday, October 10, 2010; 11:06 PM

The China National Offshore Oil Corp. will pay Chesapeake Energy $2.2 billion for a one-third interest in a South Texas oil and natural gas shale project and will pay billions of dollars more for its share of development costs over the next several years.

Chesapeake Energy, an Oklahoma City-based domestic exploration company, announced the deal Sunday night, saying it will help speed development of resources on 600,000 acres in the Eagle Ford shale play that could help keep natural gas prices low and boost production of unconventional U.S. oil resources.

"They're providing the capital and we're providing the expertise and assets, and the output will be the development of American assets, less U.S. dependence on foreign oil and the creation of 20,000 jobs and tax revenues for all levels of government," Aubrey K. McClendon, Chesapeake's chief executive, said in an interview.

The investment by CNOOC is one of the company's biggest. Other CNOOC investments around the world have been aimed in part at securing sources of oil for China's growing economy, but this investment will not result in any oil shipments to China. Chesapeake will sell the resources, almost certainly in the United States, and send CNOOC its share of the proceeds.

Chesapeake has been seeking to raise money to help develop its extensive inventory of oil and gas acreage. The company has also been trying to pare its debt, which peaked at about 60 percent of the company's book value and which on Sept. 30 stood at about 42 percent. McClendon said the company's target was in the 30s.

CNOOC will pay $1.1 billion now and another $1.1 billion over the next two years by covering 75 percent of Chesapeake's share of development costs. After that, CNOOC will pay a third of the cost of all wells, which run about $6 million each and could number 5,000 or more over the next few years as the region is developed, McClendon said.

Chesapeake said CNOOC's investment will enable Chesapeake to quadruple the number of rigs it has drilling in the region to about 40 by the end of 2012.

Given the cost of development, many independent companies such as Chesapeake have been looking overseas for investors. U.S.-based oil giants such as Exxon Mobil and Conoco Phillips already have stakes in the region. Last week, Statoil and Talisman bought about 100,000 acres from Denver-based Enduring Resources. They paid about the same price as CNOOC did for its interest.

China has some shale gas, but the deal with Chesapeake does not involve any technology transfer or future project in China, McClendon said. He said Chesapeake has its hands full trying to develop resources in the United States.

Unlike shale developments elsewhere in the United States, the Eagle Ford has greater potential to produce crude oil as well as natural gas, McClendon said. He estimated that the United States could ultimately produce half a million barrels a day from shale. The country consumes 19.5 million barrels of oil a day, most of it imported.

The development of oil and gas from shale has aroused controversy over questions of how it would affect water supplies. And so far, most shale developments in the United States recently have produced natural gas, much of it from Pennsylvania and other parts of the northeast.

"Chesapeake's embedded safety culture and integrated environmental protection strategies will be adopted to safeguard personnel and the surface and subsurface environment," Chesapeake said in its news release.

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