International interest boosts price of U.S. shale formations

Surging prices for oil and gas shales, in at least one case rising tenfold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc.

Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields where too few wells have been drilled to assess potential production, said Sven Del Pozzo, a senior equity analyst at IHS Inc.

Marubeni Corp., the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas. The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. paid last year for nearby prospects owned by KKR & Co.’s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped tenfold in five weeks to almost $15,000 an acre, according to IHS figures.

“I don’t feel confident that the prices being paid now are justified,” Del Pozzo said from Norwalk, Conn. “I’m wary.”

The world’s largest energy producers, including ExxonMobilcorp. and Royaldutch Shell PLC, are revisiting onshore U.S. prospects passed by in recent decades in favour of deepwater finds in West Africa and the Gulf of Mexico. New drilling techniques developed in the Barnett shale of North Texas have enabled companies to crack previously-impervious formations.

Overseas explorers such as China Petrochemical Corp. and Total SA want to learn from U.S. partners so they can exploit vast shale resources in Europe and Asia, said Mark Hanson, an analyst at Morningstar LLC in Chicago.

The U.S. holds an estimated 2,543 trillion cubic feet of gas, enough to meet domestic demand for more than a century at current rates of consumption, according to the Energy Department in Washington. Shale accounts for 862 trillion of that total, or 34 per cent. In China, shale formations hold an estimated 1,275 trillion cubic feet of gas, 12 times as much as the nation’s so-called conventional fields.

The buying spree is likely to continue because international oil producers are eager to amass reserves in the U.S., which surpassed Russia in 2010 as the world’s largest source of gas, said Christian O’neill, an analyst at Bloomberg Industries in Princeton, N.J.