BG Group Alliance with EXCO Resources to Develop US Shale Gas

Tuesday, June 30, 2009

BG Group has announced an alliance with EXCO Resources, Inc., a US oil and natural gas exploration and production company.

Key points

Upstream

• BG Group acquires a 50% interest in 120 000 net acres in east Texas and north Louisiana. Of these, 84 000 net acres cover the Haynesville shale gas formation, a substantial proportion of which lies within the prolific Harrison County, Texas and DeSoto and Caddo Parishes, Louisiana. EXCO has completed eight horizontal wells in DeSoto Parish with an average initial production rate in excess of 23 million standard cubic feet per day (mmscfd).
• The acquisition adds 2.6 trillion standard cubic feet (tcf) to BG Group's resources, with current net production of 78 mmscfd, anticipated to increase to some 250 mmscfd in 2012, net to BG Group.
• A consideration of US$1 055m equates to approximately US$0.40 per thousand standard cubic feet (mscf). This comprises US$655m on completion plus US$400m to be paid as a carry of 75% of EXCO's future costs to develop the Haynesville shale gas.
• Substantial potential for growth in resources through further exploration and appraisal.
• BG Group and EXCO will enter into a joint development agreement to co-operate in the further development and production of shale gas in east Texas and north Louisiana.

Midstream
• Agreement to negotiate to acquire a 50% interest in related and complementary EXCO gas-gathering and transportation assets for US$249m.

BG Group Chief Executive Frank Chapman said: "This alliance brings material new resources and supply to our existing US business at a competitive price and in a prime location at the heart of the world's largest gas market. These domestic exploration and production activities yield strong synergies with the Group's established LNG import and 3.5 billion standard cubic feet per day US gas marketing business. Furthermore, the transaction increases BG Group's exposure to long-term unconventional gas resources and skills. We look forward to working with EXCO on this strategic partnership to deliver the significant growth potential of these assets."

The Haynesville shale gas interests are being acquired for a consideration of approximately US$19 000 per acre.

The upstream acquisition and the joint development agreement are conditional on the acquisition by BG Group of the 50% interest in EXCO's midstream assets and relevant regulatory approvals. EXCO will operate the jointly held upstream acreage.

The total consideration for the midstream assets, which will be operated by a newly incorporated, jointly owned midstream company, has been agreed at US$249m. Both transactions have an economic effective date of 1 January 2009.

The midstream business includes the EXCO-owned TALCO and TGG gas-gathering and intrastate pipeline systems. These systems deliver EXCO's and other companies' production to markets in Louisiana and Texas and are connected to major intrastate and interstate gas transmission pipelines serving markets across the Midwest and Eastern US.

Key Facts

Upstream Assets

The acreage to be acquired includes the Oakhill, Holly, Kingston, Caspiana, Danville, Longwood/Waskom, Carthage and Minden fields and excludes EXCO's Vernon, Redlands, Gladewater and Overton fields.

Haynesville shale
The Haynesville shale gas play extends across parts of east Texas and north Louisiana, covering approximately 12 950 square kilometres. EXCO's leasehold portfolio comprises approximately 84 000 net acres that are prospective or producing from the Haynesville. EXCO has drilled and completed nine Haynesville horizontal wells to date. Eight of these have been drilled in DeSoto Parish and have achieved an average initial production rate in excess of 23 mmscfd.

Cotton Valley tight gas sands
The Cotton Valley tight gas sands is a mature play covering large portions of east Texas and north Louisiana. Cotton Valley operations are characterised by long-life proved developed reserves and high drilling success rates. The Cotton Valley overlies the Bossier shale at depths of approximately 2 133 metres to 2 743 metres. EXCO's net Cotton Valley acreage is approximately 120 000 leasehold acres. As of December 31 2008, EXCO reported that the Cotton Valley and other shallow rights included approximately 414 billion cubic feet equivalent (bcfe) of net proved reserves and approximately 445 bcfe of net probable and possible reserves, based on year-end SEC pricing.

Bossier shale
The Bossier shale is a gas bearing shale that directly overlies the Haynesville. Recent successful completions in this interval by operators in east Texas and north Louisiana suggest that this gas rich interval may also be commercially viable with improvements in gas price or advances in drilling and completion technology.

Midstream Assets
EXCO currently has in excess of 700 miles of pipeline and gathering assets in the area and is constructing a 29 mile, 36" diameter header system to transport its Haynesville gas production. Throughput in the midstream business to be contributed to the joint venture is approximately 440 mmscfd of which approximately 50% is EXCO gas and 50% is third party gas.

Shale Gas
Shale gas is natural gas stored in organic rich rocks such as dark-coloured shale, interbedded with layers of shaley siltstone and sandstone. Shale can be the source, reservoir and the seal for the gas. Shale gas plays are classified as a “continuous” type gas accumulations extending throughout large areas, typically with low permeability and perhaps natural fractures.

Shale gas is considered an unconventional source as the gas may be attached to or "adsorbed" onto organic matter. The gas is contained in difficult-to-produce reservoirs that require special horizontal completions and fracture stimulation techniques to achieve economic production. Shale gas may also be contained in thin porous silt, sand and calcite beds interbedded in the shale.

Shale gas has become an increasingly important source of natural gas in the United States over the past decade.

Advisors
BG Group is being advised by Deutsche Bank.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. More

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