Late last week, Total
France-based Total agreed to pay $700 million outright for a 25% stake in 619,000 acres in Ohio that currently belong to Oklahoma-based Chesapeake and EnerVest, a privately held Houston company. Total will also pay up to $1.63 billion in drilling and well completion costs for up to seven years, making this joint venture worth $2.3 billion when all is said and done.
The deal is a win for both sides. Total gains exposure to the booming U.S. natural gas industry and Chesapeake picks up a chunk of cash to throw at its debt problem, and doesn't have to spend nearly as much on capital expenditures to develop the acreage.
This particular swath of acreage is expected to be rich in natural gas liquids, another bonus for Total as American dry gas prices continue to plummet.
Of course, every time you mention a U.S. shale play, it is only fair to mention hydraulic fracturing. Once simply the elephant in the room, fracking has since donned a tutu and taken center stage. Though the Utica Shale is nowhere near as developed as other shale plays across the country, controversy has already arrived in Ohio.
An earthquake Dec. 24, and another one Dec. 31, prompted state regulators to place a moratorium on injecting wastewater into disposal wells near Youngstown, Ohio. The fluid is waste fracking solution that was being trucked in from Pennsylvania for disposal.
Two earthquakes, one of them of 4.0 magnitude, in one week in a region with no history of seismic activity is cause for concern. Indeed, the concern over earthquakes related to fracking is not limited to Ohio.
Finally, there is the standard risk E&Ps face the world over, that is, what you think is in the ground may not actually be what's in the ground. Total needs Chesapeake's wells to produce NGLs at, or better than, expected levels to really unlock the value of this play, given that methane is essentially worthless right now.
The oil and gas business has never been, and will never be, risk-free. The landscape of U.S. domestic energy development will likely change many times over in the coming years, due in part to developing technology and burgeoning government regulations, and investment decisions are not always easy to make right away. Sometimes it pays to put companies like Total and Chesapeake on My Watchlist for a few months, or more, until things shake out.