Chinese buy third of Chesapeake South Texas field

[October 11, 2010]  DALLAS (AP) -- China's state-owned offshore oil and gas company has bought a one-third interest in 600,000 acres that Chesapeake Energy leases in a South Texas oil and gas field.

CNOOC Ltd. and Oklahoma City-based Chesapeake announced the deal worth up to $2.16 billion Sunday in the Eagle Ford Shale project between Laredo and San Antonio. A joint statement says CNOOC will pay Chesapeake $1.08 billion in cash at closing and share 75 percent of Chesapeake's drilling and completion costs up to another $1.08 billion.

Chesapeake expects to produce 400,000 to 500,000 barrels of oil equivalent per day at the project's peak.

For Chesapeake, the deal provides capital to put towards drilling and other aspects of its Eagle Ford operation. For its part, CNOOC is looking to tap into the expertise that Chesapeake has used to cheaply tap reserves of oil and gas buried deep in shale rock formations. Chesapeake has entered into similar deals with other foreign oil and gas companies like Statoil of Norway and Total of France.

Chesapeake chief executive Aubrey McClendon said in an interview that CNOOC probably wants to "see how an American independent (oil and gas company) conducts its business and learn a few things along the way."

Chesapeake currently has 10 rigs developing its Eagle Ford lease. The additional capital from CNOOC should allow it to boost that total to 12 rigs by the end of this year, 31 rigs by year-end 2011 and about 40 rigs by year-end 2012.

McClendon said he expects the deal to result in 20,000 new jobs.

The Eagle Ford shale is expected to contain mostly oil and natural gas liquids, as opposed to strictly natural gas. Chesapeake is in the midst of an effort to expand its shale oil drilling operations.

The development of cheaply accessible natural gas resources by Chesapeake and others has pushed natural gas prices to below $4 per 1,000 cubic feet. It is far more profitable to instead drill for oil, which is trading above $82 per barrel.

The deal is the second in as many days for CNOOC. It announced Saturday that it has bought 2.6 million tons of liquefied natural gas from French utility GDF Suez.

[Associated Press; By TERRY WALLACE and JONATHAN FAHEY]

Fahey reported from New York.

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