EIG in $1.25bn shale oil club deal

EIG Global Energy Partners has agreed to invest $816.5m in Ohio and Pennsylvania’s Utica shale region, with $316.5m coming from the firm’s limited partners. EIG’s $4.1bn fund that closed in May is already 50% invested.

Washington DC-based EIG Global Energy Partners, formerly the energy and infrastructure group of TCW, is leading an investor group that together will invest $1.25 billion in Chesapeake Energy Corporation, which owns approximately 700,000 acres in Ohio and Pennsylvania’s Utica Shale region.

EIG is investing $816.5 million in the deal, with $500 million coming from its energy-focused fund and $316.5 million coming from the fund’s limited partners, who are participating as co-investors. EIG closed its fifteenth fund on $4.1 billion in May. Fund XV is the first fund under the EIG banner since the firm spun out from Los Angeles-based TCW in December 2010.

EIG has already invested about $2 billion from the fund, co-president and chief investment officer Kurt Talbot told Private Equity International.

“I think [shale] is going to continue to dominate the domestic [energy and production] landscape,” he said. “That’s what everyone’s doing. There’s been a shift to more liquids-rich or oily shale, but shale is not going away. Not in the near term and probably not even in the long term.”

The final close for EIG’s Fund XV exceeded both the firm’s original target of $2.5 billion and the original hard-cap of $3.5 billion. Fund XV launched in February 2010, and held a first close on $600 million last June. The fund focuses on oil, gas, renewable energy and energy infrastructure investments globally.

Many private equity firms have been cashing in on the enormous potential of natural gas deposits under shale rock formations. In June, Kohlberg Kravis Roberts’ exited Hilcorp Resources, which held acreage in South Texas’s Eagle Ford Shale natural gas deposits. The firm had spent $300 million a year earlier for a 40 percent stake in the company. That was quickly turned into $1.13 billion when Marathon Oil purchased the company for $3.5 billion.

But the bonanza may be tempered by environmental concerns. Activists have raised questions about the method by which natural gas is extracted from shale. A mixture of water and chemicals is shot into shale formations, breaking up the rock layers and releasing deposits of natural gas. The process, called hydraulic fracturing, or fracking, has drawn the ire of environmental groups who claim it could contaminate groundwater supplies.

A debate has been raging in New York State, where the Marcellus Shale offers a large deposit of natural gas. Fear of groundwater pollution prompted New York to adopt a seven-month moratorium on fracking last December.

EIG has plans to open an office in Hong Kong in early 2012, according to a statement, to “strategically position EIG to take advantage of opportunities for investments in energy, resources and related infrastructure fueled by demand growth in Asia”. The Hong Kong office will be EIG’s fifth. In addition to its Washington DC headquarters, the firm has offices in London, Sydney and Houston.

EIG Global Energy Partners had $9.2 billion under management as of 30 September 30. During its 29-year history, EIG has invested more than $11 billion through more than 260 projects or companies in 33 countries.