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OPEC Invests in U.S. Shale

Partnerships and Takeovers

Written by Justin Williams
Posted April 18, 2013

The Organization of the Petroleum Exporting Countries (OPEC) has seen its long-term power over the world’s energy market whittle away in recent years. Now, OPEC is repositioning itself by joining forces with those that threaten its global dominance: the U.S.A.

The first to make a move are OPEC members of the Persian Golf: Qatar, Saudi Arabia, and Kuwait.

OPEC logoOPEC currently has nine other members: Algeria, Angola, Ecuador, Iran, Iraq, Libya, Nigeria, United Arab Emirates, and Venezuela.

To be a member of OPEC, a country must have a substantial export of crude petroleum and similar interests to other members. Since its inception in 1960, OPEC has been the dominant world leader in such resources, but with North America’s shale boom entering the picture, OPEC members are forced to rethink the strategies that have allowed them to hold power for so long.

While OPEC has been resistant to change and has fallen behind the times, other international companies have jumped into the U.S. shale mix; Norway’s Statoil (NYSE: STO) and China’s Sinochem are each pursuing major stakes in the U.S. shale industry—a sign that oil producers may turn to foreign investment and ensure integration if a future supply glut were to occur, which looks likely as time goes on.

Trend in Business

Joint ventures have become a trend in the petroleum industry since 2008, and since that time foreign companies have poured $133.7 billion into U.S. shale plays, according to the EIA. Of the 73 deals that took place between 2008 and 2012, 20 percent were joint ventures with foreign companies.

The other 80 percent were from total acquisitions, like Australian BHP Billiton's (NYSE: BHP) takeover of Petrohawk Energy Corp. American partnerships, such as Hess (NYSE: HES) and Noble Energy (NYSE: NBL) teaming up with CONSOL Energy (NYSE: CNX), round out the remaining deals.

Sinochem’s recent $1.7 billion venture with Pioneer Natural Resources (NYSE: PXD) in Texas’ Wolfcamp Shale, which is still awaiting U.S. approval, is just the latest deal in an already rampant trend.

Indian, Chinese, and other far-Eastern countries that don’t have strong domestic markets have been moving into North America for years now.

The way it works is foreign investors come in and buy a percentage of the host company’s shale acreage with a promise to cover a portion of the drilling costs. This agreement is set in a specified time frame, usually between 2 and 10 years.

It benefits both sides because operators get financial backing, while foreign companies gain the experience they need to grow with the industry.

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OPEC Wants In

While smaller companies have rooted themselves in U.S. shale for a while now, members of OPEC have never even knocked on the door. But now, it’s much less a matter of want than need, and one by one they’re wising up to the game and filing in.

Qatar Petroleum is possibly the most significant player to come out of OPEC. The liquefied natural gas (LNG) giant is looking to break in, not only in the U.S., but also in Canada, the Energy Collective highlights. It has a planned investment project with ExxonMobil (NYSE: XOM) to convert the Golden Pass LNG import terminal in Texas to an export facility.

And this week it made its first official foray into North America, as it purchased $1 billion in assets in a deal that involved Centrica (LON: CAN) and Canada’s Suncor Energy (NYSE: SU).

Qatar is already the world’s largest LNG exporter by a landslide; seeking out and successfully operating out of North America will be a stepping stone to solidifying that title and balancing out the potential harm caused by the shale gas boom.

If Qatar can prove successful during early ventures here in the U.S. and Canada, it is a strong indicator that OPEC members as a whole will likely follow suit.

Saudi Arabia is making similar moves in the face of competition that could threaten its exports. In an effort to maintain its exports of one million barrels a day to the U.S., its state-owned Saudi Aramco, along with Royal Dutch Shell (NYSE: RDS.A), recently completed a $10 billion expansion of its Motiva oil refinery in Port Arthur, Texas, the New York Times reports. It will now be the largest processor of gasoline, diesel, and other petroleum products in the U.S.

Kuwait, too, while being more cautious in its endeavors, has quietly been setting up investments in the U.S. shale with its Aref Energy Holding Company.

Now that OPEC has decided to join the party, it’s likely that the countries will maintain their prowess throughout the energy industry. But it is still a wonder what kind of effects these changes will have on global markets.

 

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