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Royal Dutch Shell plc Expands Tight Gas Position in US; $4.7B Cash Acquisition of East Resources

Royal Dutch Shell plc is expanding its portfolio in North America tight gas (natural gas produced from tight, low permeability formations) with new positions in high potential US shale gas acreage in the Marcellus shale and Eagle Ford plays.

Shell has agreed to acquire subsidiaries which own substantially all of the business of East Resources, Inc. for a cash consideration of $4.7 billion, from East Resources, its private equity investor, Kohlberg Kravis Roberts & Co. and its advisors Jefferies & Company. The transaction is subject to certain regulatory approvals.

East Resources is a privately-owned business with its primary activity focused on the Marcellus shale, in the northeastern US. East Resources has some 650,000 net acres (2,600 square kilometers) of highly contiguous, operated acreage in the Marcellus, and 1.05 million net acres (4,250 square kilometers) of acreage overall. East Resources has some 60 mmscfe/d (10,000 barrels oil equivalent per day) of production, predominantly in natural gas, with substantial medium-term growth potential.

In addition, as part of its on-going acreage build strategy, Shell has acquired ~250,000 net acres (1,000 square kilometers) of mineral rights in the Eagle Ford shale play, in South Texas, in 2010. These undeveloped acreage positions are in the liquids-rich window of the Eagle Ford play. Shell will be the operator in this highly contiguous acreage, and will be able to integrate these new assets into its existing South Texas operations, where Shell has been active for many years.

All together in 2010, Shell has added some 1.3 million acres (5,250 square kilometers) of North America tight gas acreage. Shell estimates that these new positions have the potential to yield over 16 trillion cubic feet of gas equivalent (tcfe) of resources (>2.7 billion boe).

Shell’s activities in US tight gas began in 2001, with acreage purchases in the Pinedale Anticline in Wyoming, where the use of multi-well production pads and reservoir fracturing technology has led to rapid production growth, a competitive cost structure, and reduced environmental footprint, according to the company. Following Pinedale, Shell has more recently expanded its tight gas acreage positions in South Texas, in the Haynesville play in Texas/Louisiana, and in Western Canada, through the 2008 acquisition of Duvernay.

Shell’s 2009 North America tight gas production was some 140,000 boe/d (810mmcfe/d), an increase of 62% from 2008 levels, from a 3.7 billion boe (21 tcfe) resources base. Continued focus on operating efficiency has resulted in competitive costs, with Shell’s cash operating costs in North America tight gas at less than $2/mcfe in 2009.

Prior to today’s announcements, Shell projected that its North America tight gas production could reach more than 400,000 boe/d (>2.3 bcfe/d) by 2020, subject to annual investment rates. The addition of the East Resources, Inc and the Eagle Ford acreage will enhance this growth potential, bringing Shell’s total North America tight gas position to some 3.6 million acres.

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