BHP in $4.75bn deal to enter US shale gas market

BHP Billiton has placed a big bet on the unconventional gas market by agreeing to purchase shale gas reserves from Chesapeake Energy in a $4.75bn (£2.9bn) deal.

The push, the mining giant's maiden foray into the US shale gas market, is BHP's first attempt at deal-making since it was trumped in its $39bn gambit to buy Potash, the Canadian fertiliser giant, last year. The miner has also failed in its plan to merge with Rio Tinto, and in efforts to set up an iron ore venture with its rival Anglo Australian.

The deal, which is expected to be funded from BHP's cash resources, will see the miner buying out Chesapeake's interests in the Fayetteville Shale gas field in Arkansas, including the mid-stream pipeline system.

The assets produce more than 400 million cubic feet of gas a day, and include development options for "substantially higher production over a 40-year operating life", BHP said.

Shale gas is natural gas extracted from sedimentary rock composed of mud, quartz and calcite. Recent advances in the extraction technique have prompted a number of firms to pick up shale gas assets.

BHP's competitors in this potentially lucrative arena include PetroChina, the Chinese state-owned energy group, which recently sealed a $5.5bn deal to buy shale gas stakes from Canada's Encana Corporation. China's Cnooc has also bought about $2.4bn worth of shale gas interests from Chesaspeake.

"The Fayetteville Shale is a world-class onshore natural gas resource. This transaction marks BHP Billiton's entry into the US shale gas business," the chief executive of BHP's petroleum business, Michael Yeager, said. "The operated position we are obtaining will immediately make BHP Billiton a major North American shale gas producer... Longer term, the expertise we gain here will be usable elsewhere as we continue to grow our business."

Asset prices have come down, with BHP paying less than the $1.9bn BP shelled out for 25 per cent of the same shale gas field in 2008. Hayden Bairstow, an analyst at CLSA, said that while companies were moving into shale gas, "it's an early stage technology".

He continued: "The asset grab might happen at some stage, but the price BHP is paying shows the market is not yet hot," he explained."You need to be able to weather low prices for a few years. Obviously someone the size of BHP can do that."

Peter Davey of Ambrian, said BHP's interest was no surprise given the advances in the field on the other side of the Atlantic.

"The North Americans are at the leading edge of technology in [developing and producing] oil and gas products from unconventional sources that [seven to 10] years ago were not even considered in the global energy mix," he explained.

Alongside the announcement, BHP highlighted the strong fundamentals underpinning the gas market, with US demand for natural gas set to increase at an annual rate of 1.6 per cent.

2011: The year of the mining boom?

The mining sector is set for a flurry of deals in 2011 as companies compete over shrinking resources and the recent mergers and acquisitions (M&A) trend accelerates, according to a report by Ernst & Young published this morning.

The pace of listings is also likely to increase as the IPO pipeline is strong, not least because of the roll-call of postponed offerings, the report says.

The analysis comes as investors await news on the possible listing of Glencore, the world's biggest commodities trader, whose debut is expected to be among the biggest of the year.

After spending the recent past repairing their balance sheets, miners have already begun scouting for new avenues. In 2010, while the number of deals was up only 7 per cent on 2009, the total deal value rose by 89 per cent to $113.7bn. Although strong, the report points out that the overall figure was still "well below 2007 and 2008 levels".

Looking to 2011, Ernst & Young predicts "more deals, more diverse buyer competition and continued appetite for projects in frontier markets in South America and Central Asia, and increasingly in Africa".