By Russell Gold and Ryan Dezember
The fast-growing technique of cracking open shale rock to
release oil and natural gas has upended the energy business,
sparking far-reaching changes in the normally plodding
industry.
It has spurred hundreds of billions of dollars of deals,
including Monday's $4.4 billion proposed purchase of Brigham
Exploration Co. by Norway's Statoil ASA, and delivered enormous
profits and revenues to those in its midst, including Halliburton
Co., which reported a record $6.5 billion in third quarter
revenue.
Shale discoveries have reinvigorated U.S. oil and gas production
that just half a dozen years ago was widely seen as in terminal
decline. Today, there is a glut of cheap natural gas, and domestic
oil production is rising for the first time in decades. Shale
development is even spreading to other countries, such as Poland
and Argentina.
The shale boom has already minted a half-dozen new billionaires
comparable to the riches brought by the Internet. "You certainly
have to record the discovery and the exploitation of resources from
both oil and gas shales as one of the great wealth creators in
American history," said Ralph Eads, vice-chairman of investment
bank Jefferies & Co., which has advised on more than $75
billion worth of shale deals over the last three years. "It looks
to be the economic equivalent to any of the big technology
innovations."
The discoveries have been such a disruptive force in the energy
industry that companies that navigated this change successfully are
now ascendant. Many of those that didn't are disappearing quickly.
The shale frenzy has helped push the total value of U.S. oil and
gas deals beyond $292 billion over the last two years, according to
financial-data provider Dealogic.
On Sunday, Kinder Morgan Inc. said it was buying rival El Paso
Corp. in a $21.1 billion deal. It was a major bet by pipeline giant
Kinder Morgan that the glut of new shale gas will not be
short-lived and billions of dollars will need to be invested in
distribution systems.
But it is also a reflection on El Paso, which spent years
cleaning up its financial results after a disastrous strategic
pursuit of Enron-like energy trading and was too slow to embrace
changes in the industry.
Statoil's purchase is the latest move by a foreign oil company
to snap up shale properties in the U.S., this one being Brigham's
oil-producing assets in North Dakota's Bakken Shale field. Foreign
companies, as well as oil behemoths such as Exxon Mobil Corp., have
opened their wallets for U.S.-based companies that invested in
shale production early. They are motivated to buy production assets
and the employees who know how to tap into shales.
Meanwhile, companies that pioneered shale, such as Chesapeake
Energy Corp., have been able to capitalize on their experience and
get others to pay for their drilling. Since 2008 Chesapeake has
sold stakes in five shale fields for nearly $12.8 billion as buyers
are willing to pay top dollar for a chance to learn from it.
Cracking open shale is a much more intensive, and expensive,
process than traditional onshore drilling. Oilfield service
companies, such as Halliburton, Baker Hughes Inc. and Schlumberger
Ltd., have struggled to keep up with the demand while profiting
handsomely.
On Monday, Halliburton reported record revenue and operating
income, driven by surging demand for its hydraulic fracturing
services. It attributed the gains in large part to frenzied
activity in Texas and North Dakota shale formations.
To be sure, the emergence of shale energy and the widespread use
of hydraulic fracturing has raised some red flags. U.S. regulators
are looking into what companies say about the gas they've found to
determine if they are misleading investors. Environmentalists,
concerned that the process could ruin aquifers and air quality, are
calling for more oversight.
But the industry is wagering billions that shale energy is
sustainable and can be exploited without despoiling the planet.
"Shale is clearly the engine driving the train for the
foreseeable future, but it is not a 100% certain bet," said energy
analyst John Olson. While the gains in oil and gas production are
real, he notes that little is known about how these wells will
perform over decades.
How shale has created winners and losers is on display in places
such as Oklahoma City. Kerr-McGee Corp. was once the most important
corporate presence in the city. But the oil company never took a
plunge into shale and was acquired by Anadarko Petroleum Corp. in
2006.
Devon Energy Corp., meanwhile, made a major shale acquisition in
2001 and today is completing a new 50-story headquarters. On the
other side of town, Chesapeake rode shale from obscurity to become
a company with a market value of $18 billion that holds drilling
leases on an area the size of Indiana.
Other industries and government officials are rethinking the
implications of this sudden abundance of gas and increasing supply
of oil. In the early 2000s, the chemical industry was mothballing
U.S. plants and shifting overseas where gas was cheaper. Today, Dow
Chemical Co. and others are building new world-scale facilities
along the Gulf Coast because of the inexpensive energy available.
In the Rust Belt, steel makers are building new mills to meet the
demand for pipes needed to tap shale discoveries.
The impact of shale has reached into many aspects of U.S. life,
creating instant millionaires of some landowners in drilling zones
and creating thousands of jobs even as the rest of the economy was
shedding them.
On Wednesday, the Texas Rangers play in its second consecutive
World Series. The club's success can be tied, in part, to an
increased player payroll covered by its two new owners: Bob
Simpson, whose shale-focused XTO Energy was acquired by Exxon Mobil
in 2009 for $25 billion, and Ray Davis, a former oil and gas
pipeline executive.
-By Russell Gold at russell.gold@wsj.com