The development of shale plays continues to be the focus of the energy industry. According to the U.S. Energy Information Administration, almost a quarter of the estimated natural gas resources in the U.S. and approximately 24 billion barrels of technically recoverable oil resources are located in shale formations. Producers have been rapidly developing these formations; however, there is a shortage of infrastructure to gather and process the resultant production. Often, producers lack the capital to drill and/or develop the necessary infrastructure. As a result, producersare: (i) forming joint ventures (JVs) with other companies; (ii) seeking investment capital from venture capital firms; and/or (iii) forming joint ventures with midstream companies to develop midstream assets and acquire additional dedications with the intention of “flipping” to a master limited partnership (MLP).
Due to a lack of capital, producers are forming JVs to develop exploration and production (E&P) assets. The $95 million JV between the Gas Authority of India Limited (GAIL) and Carrizo Oil & Gas in the Eagle Ford Shale play is one example of a foreign JV that developed E&P assets. Since 2008, foreign companies have entered into 21 JVs with U.S. companies, investing more than $26 billion in shale plays. Many of these investments involved acquiring acreage through an upfront cash payment with a commitment to cover a portion of the drilling costs. Both U.S. and foreign companies benefit from these deals because the domestic companies receive financial support and the foreign companies gain experience in drilling operations while earning profits. An example of a JV between two domestic companies is that of Noble Energy and CONSOL Energy in the Marcellus Shale, which is one of the lowest cost domestic shale plays and is ideally located near major markets. Their JV agreement contained provisions that ensured both partners were economically aligned in an environment of low natural gas prices.
Originally published in the Dallas Bar Association | Headnotes - April 2014.
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