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Shale gas – a fossil fuel with a future

"Everybody knows that this is a game changer," says Aubrey McClendon, chief executive of the $16bn (£10bn) Chesapeake Energy Corporation, the largest independent producer of shale gas in the US

"It's where the biggest opportunities for the world's energy companies lie right now."

It may seem like an inappropriate mission, but Mr McClendon has flown to the international climate change talks in Copenhagen to argue for the commercial potential of a fossil fuel.

"We need people to stop associating natural gas with coal and oil," he urges evangelically, pointing out that the energy source is currently oversupplied, produces 50pc less carbon dioxide than coal and is quick to extract.

Striding into a city currently housing 15,000 green campaigners to champion a traditionally dirty fuel is not such publicity suicide as it first appears.

For Mr McClendon seems to have made a good call on the new political and corporate attraction to natural gas, which is heating up the mergers and acquisitions market after a stagnant year of recession.

The primary target is shale, the gas formation embedded in rocks across the US e_SEmD and potentially the world e_SEmD that needs to be fractured with water and sand leaving vast open scars across the landscape.

As Mr McClendon, one of the world's highest paid energy chiefs, touched down at the talks in the Danish capital, ExxonMobil had just completed its most significant purchase in a decade, buying his rival shale producer XTO Energy for $30bn.

The move stamps Exxon's seal of approval on the US shale gas revolution, after critics had watched and waited to see if the technological advances really did yield the miraculous returns predicted by its cheerleaders. Now even the US Energy Department believes shale will provide 50pc of the country's demand within 20 years.

Within hours of the announcement, Citigroup analyst Robin Shoemaker was heralding the beginning of an oil and gas merging fury, forecasting that "the takeover of XTO by Exxon may signal the start of a new round of consolidation among oil and gas producers".

Analysts are tipping Chesapeake as the next prime candidate for an acquisition, along with Canada's EnCana Corp and British producer BG Group, which recently bought shale assets from Exco Resources. Shopping has been the last activity on the minds of the Western supermajors over the last year, as they struggled with oil and gas prices more than 60pc lower than their peak in 2008.

Out of the $5bn of mergers and acquisitions in the first half of the year, 80pc was related to China's voracious grab for energy assets, mostly in Africa and the Middle East. But buying activity is likely to rebound next year and reach pre-recession levels by 2011, says Ian Sperling-Tyler, head of oil and gas corporate finance at Deloitte.

US gas is bound to hold certain geographical attractions to the Western oil companies on the hunt for acquisitions, as they battle declining reserves in a world where 70pc of proven oil lies in countries controlled by OPEC, the cartel.

Reports that Shell wants to sell $5bn of its flagship Nigerian fields, where rebels repeatedly disrupt production, may be a sign that Big Oil is bailing out of the most hostile areas for safer terrain.

The stampede for mature assets outside the most protectionist regimes has already begun, with BP's attempt to gazump Exxon's $4bn bid for Kosmos Energy's fields in Ghana and Tullow's threat to derail Heritage's sale of Ugandan fields to Eni Spa.

And with China venturing further into politically difficult oil-rich areas from Iran to Nigeria, Exxon, Chevron, BP and Shell have increasingly turned to unconventional resources, such as Canada's heavy duty tar sands, deepwater drilling in the Gulf of Mexico and – of course – shale.

Despite the current glut of gas on the markets, both Peter Voser, the new boss of Shell, and Tony Hayward, chief executive of BP, have been speaking out at every opportunity to push the importance of gas to companies traditionally known as oil majors.

Also at the Copenhagen gas conference, Ian Smale, head of policy and strategy for BP, urged governments to consider the attractions of natural gas ahead of alternative energy sources. "Gas will have a bigger role," he says. "Nuclear will not happen fast enough, wind will not happen fast enough, carbon capture and storage (clean coal) will not happen fast enough."

Hinting at the potential acquisition frenzy to come, one person close to BP adds: "This Exxon deal is more than a sneeze in the markets. Bankers are getting a bit more of that animal spirit back."

Centrica, the owner of British Gas, has also tuned its attention to US shale, after its hostile acquisition of North Sea producer Venture earlier this year. "We are definitely considering investing in the area," one senior executive says.

Now that Exxon with its "great reputation for patience and long-term timing" has entered the game, Malcolm Graham-Wood, director of oil and gas broking for Westhouse Securities, believes it is only a matter of time before rivals follow.

"Exxon is, in my view, saying we are as close to the bottom as is possible to judge, and this is their way of putting a marker down," he says.

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/6852723/Shale-gas---a-fossil-fuel-with-a-future.html