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Itochu joins with KKR to buy US oil and gas firm Samson; eyeing exporting shale LNG to Japan by 2015

23 November 2011

The Nikkei reports that trading house Itochu Corp. has partnered with KKR to buy most of privately-owned US oil and gas firm Samson Investment Co., aiming to start exporting liquefied natural gas to Japan as early as 2015. The Financial Times notes that the $7.2 billion deal would be the largest leveraged buy-out globally outside the real estate sector this year.

The deal will give the Japanese trading house rights to many US shale gas fields and help Japan secure LNG as demand rises amid increased use of conventional power plants following the March earthquake and tsunami.

...With the acquisition, Itochu seeks to raise its crude oil and gas concessions from 34,000 barrels daily to 70,000 by 2015. The company will initially sell shale gas in North America with an eye toward eventually exporting it to Japan and other parts of Asia. A project is under way in the U.S. to launch facilities as early as 2015 to liquefy shale gas. Itochu will consider exporting LNG from these sites.

Samson operates more than 4,000 wells and has interests in more than 12,500 producing properties. Some key producing regions and basins for Samson are East Texas, Texas Gulf Coast, Anadarko, Permian, San Juan, Green River, and the Williston Basin/Bakken.

The Nikkei report puts KKR’s share of Samson at 60% stake, with Itochu acquiring a 25% interest and the remaining shares to be owned by other funds and general investors.

November 23, 2011 in Brief | Permalink | Comments (11) | TrackBack (0)

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US shale gas going to Japan means no advantage for US industries; US NG prices will be driven by the global market.

This ought to be the last nail in the coffin of the "shale gas boom" camp. The solution is nuclear power; if Japan is too frightened to use it, we ought to enjoy it while we sell our gas to Japan.

The solution really should have been nuclear power; maybe it still can be; I hope so but I doubt the far left, and a substantial minority from all corners of politics, will allow it.

The minor "shale gas boom" we see now may grow as it is driven by market forces to supply more domestic power and offset some of our energy imports.

Generally exports are good; importing oil (esp from the mid east) is bad for the US.

Natural gas costs less than 4 USD per million BTU in USA and Canada but it can be sold for 15 USD per million BTU in Asia (read Japan, South Korea and China). That is about the best arbitrage opportunity the world economy has ever witnessed. It only needs NGL export infrastructure and pipelines in order to be exploited. By 2020 both Canada and the US will export several million barrels of oil per day equivalents in natural gas to Asia.

Nuclear power is dead in Japan and Europe (apart perhaps from France and Finland). Coal is also dead in Europe. We don’t want it anymore no matter how cheap it is per ton. Shale gas and wind power is the future of electricity production for Japan and Europe. Unfortunately, I think coal will still survive in the US and China for many decades to come and it will cause a climate disaster of epic proportions that future generations have to cope with.

So if liquefaction and shipping from NA to Japan costs $3/mmBTU (on the low end of what I found here), $15/mmBTU LNG in Japan means $12/mmBTU NG in North America.

The premise of the shale-gas boom proponents is that cheap shale gas will cause an economic renaissance in the USA. High export volumes will just turn the USA into another extraction economy, like Venezuela and Saudi Arabia. Nuclear power is the only energy source that is both cheap and so abundant that exports scarcely matter.

EP
You read your own source wrongly. The 2.6 USD to 4.8 USD is for all costs including the cost of producing the natural gas (presumably from Qatar to NA). The source mentions below in a graph that the total cost of LNG liquefaction, shipping, degasification and storage is less than 1 USD per million BTU.

I expect the arbitrage opportunity between NA and Asia to be exploited and as a result natural gas in NA will increase to 6 or 7 USD per million BTU and gas prices in Asia will drop to 6 or 7 USD plus about 1 USD for liquefaction, shipping, degasification and storage from NA to Asia.

The price increase for natural gas in NA will stimulate an even larger boom for shale gas as it will still only cost about 3 to 4 USD to produce at the best locations of which there are many. It will therefore be one of NA most profitable industries and it will therefore also attract a very large amount of investments (hundreds of billions of USD). Shale gas and shale oil is much bigger than people realize at the moment. It will do a lot of good for NA economy.

You read your own source wrongly. The 2.6 USD to 4.8 USD is for all costs including the cost of producing the natural gas (presumably from Qatar to NA).
I just didn't read it far enough, but thanks for bringing that up.
The price increase for natural gas in NA will stimulate an even larger boom for shale gas as it will still only cost about 3 to 4 USD to produce at the best locations of which there are many.
$4/mmBTU is just what they can get for it right now; shale gas costs a lot more than that. The shale-gas companies are not producing cash flow, their drilling is all driven by investment to produce "reserves". They won't be making any money until prices hit $7/mmBTU at a minimum.

The LNG export idea would prop up NA NG prices and keep the shale-gas plays profitable. The flip side of this is that NA consumers and industry would be paying much higher NG prices than historically. This makes NA industry less competitive and sucks away consumer wealth (like what's happening now with motor fuel). This wealth gets transferred to the owners of energy producers, the 0.01%.

EP
You are right that profits in shale gas are low at 4 USD as we see now. In shale oil they are high with oil at 95 USD. However, most shale gas drillers are profitable and the current negative cash flows is caused because they expand production and as you probably know in gas and oil drilling the expenses are mostly up front (for research, drilling, well completion and well pipeline connection) with the income coming gradually in the 7 years after your main expenses.

You can get a good idea of the profitability of oil and gas business by studying the number of active rigs in operation see here http://www.wtrg.com/rotaryrigs.html

When the number of rigs goes up it is a result of high profits to be made and when it goes down it is because of poor profits. As you can see the rig count closely follows gas and oil prices with a lag because it takes time to gather capital and start drilling.

The number of oil rigs in the US is going up month by month (mostly new shale oil rigs) and the number of gas rigs is stable indicating no particular good profits but neither an unprofitable business either.

Your argument that NA should not export natural gas to keep gas prices down is no good at all and the 0.01% it benefits is also very wrong. The oil and gas industry and all the associated heavy industry in steel and transportation that supports it employ millions of Americans in good well paid jobs. Exporting natural gas to Asia could create more jobs by the millions. Today the US does over 10 million barrels per day in natural gas oil equivalents and it could double if natural gas prices hit 6 to 7 USD per million BTU as a result of exports. That is a lot of high paid jobs for an important share of the US labor market.

I agree with your main point that oil at 100 USD is too expensive and we should switch to alternatives. After all, one barrel of oil contains 5.6 million BTU meaning it costs about 18 USD per million BTU versus 4 USD for natural gas.

Gas could be used in transportation especially heavy duty and shipping and people who still heat their homes with oil should switch now because oil is not going to drop in price with increasing demand from China and other fast growing economies.

You can get a good idea of the profitability of oil and gas business by studying the number of active rigs in operation
I'm privy to a lot of non-public info, and you're only half-right. The number of active rigs depends on the amount of money going in. It doesn't distinguish between money coming from cash flow or speculators. My sources say this is speculation. The decline rate of shale gas wells is precipitous; 80% in the first year is not uncommon. Drillers have to drill like mad just to keep production up, because if they let it fall their stock price will crash.
Your argument that NA should not export natural gas to keep gas prices down is no good at all
Why? Do you hope to be able to buy NA LNG as an alternative to financing the Muslim Brotherhood across the Magreb? As an American, I don't want local resources exported to be turned into products by someone else; I want ALL the associated jobs, profits and taxes here.
Exporting natural gas to Asia could create more jobs by the millions.
That hasn't exactly worked out that way for the Gulf oil states. You ought to look to see what's wrong with your model.

NA gas ought to be used to replace imported oil, and nuclear power ought to be used to replace gas and coal in electric generation and industrial process heat. Exporting NA gas just means depleting reserves faster than replacements can be built, and we can't afford to make that mistake after making it with oil.

EP
Millions of people are employed drilling oil and gas in the Arab countries. However, they employ less domestic people per million barrels per day produced than the US does for several reasons: 1) The Arab countries uses foreign labor from Europe, USA and Asia for much of the work. 2) The Arab countries buy nearly all of their equipment for the oil and gas industry in the USA, Europe and Asia. 3) Most importantly oil can be drilled profitable for about 20 USD per barrel on average in the Arab countries whereas it is more like 60 USD in the US creating three times as many jobs in the US and the same production in the Arab countries.

Read any microeconomic textbook on international trade and you will see that trade between countries is always mutually beneficial. If your logic were right the US could become wealthier by not trading at all with other countries. That was tried in 1929 and the Great Depression was the outcome of that wisdom.

Time will show what will happen. As I get it you say that the shale oil and gas boom is a speculative bubble that is about to bust the industry. I say it is based on real technical advances (horizontal fracking) and that it will continue to grow at frantic rates especially after the first LNG export terminals at the west coast starts operating in USA and Canada at around 2015.

Why assume that shale oil/gas production and export has to be specific to USA/Canada? That's what many people falsely assumed about crude oil 100+ years ago. As we all know, after Pennsylvania and Baku, oil was found in 1001 other places. The very same thing will happen with shale oil/gas.

By 2030, shale oil/gas will be produced in very large quantities on all five continents and in as many as 100 countries. Rigs will go up almost every where with a good enough potential and where local populations will allow it.

Regulations will have to be tighten up (if lobbies and producers will allow it), otherwise, we are due for another round of more complex and more wide spread pollution and an extension (100+ years) of fossil energy uses.

The oil and gas industries do not employ all that many people on a full time basis. Converting power plants to combined cycle and trucks to NG/DME can create jobs, clean the air and reduce oil imports.

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