3rd UPDATE: Mitsui & Co To Invest In US Shale Gas Project

Mitsui & Co. (8031.TO) said Tuesday it will invest about $1.4 billion to take part in a shale gas development project in Pennsylvania, in hopes of taking advantage of the growing U.S. market for such gas.

Mitsui, which does business in everything from natural resources to chemicals to food, is a big player in the liquefied natural gas market. Its most profitable business division in the fiscal third quarter ending December was energy, which includes its LNG operations. But in response to increased U.S. production of shale gas--deposits of natural gas trapped in shale-rock formations--the Japanese trading company decided to make a big bet in that market too.

Mitsui's move into the Marcellus Shale, a rapidly developing natural gas field in Pennsylvania, New York and other states, underscores the growing interest foreign companies have in gaining a foothold in shale gas production. Chesapeake Energy Corp. (CHK) has struck a deal with Norwegian oil and natural gas company Statoil ASA (STO) to develop the Marcellus and formed a joint venture with the French energy company Total SA (TOT) to develop the Barnett Shale, a natural gas-rich formation in Texas. Shales are widely credited with creating a gas production boom in the U.S., where shales have become a hotbed of drilling activity. Prospective shale formations, however, are still being identified in other parts of the world.

A U.S. joint venture Mitsui controls will take a 32.5% slice of the interest in the project held by Anadarko Petroleum Corp. (APC) of the U.S., the Japanese trading firm said in a statement. Mitsui E&P USA LLC is expected to spend between $3.0 billion to $4.0 billion over about a decade to develop its portion of the Marcellus shale project.

Analysts with the Houston-based energy investment bank Simmons & Co wrote in a note to clients that the pact highlights the value of Andarko's Marcellus assets, "which has largely been overlooked and undervalued by the street."

Anadarko has 715,000 gross acres in the Marcellus. Shares of Anadarko recently traded 3.69% higher at $67.73.

Mitsui said it hopes "that participating in U.S. shale gas operations, which is expected to see high growth, will help (it) move into long-term and sustainable growth businesses."

Shale gas was once considered too costly to exploit but it has become commercially viable thanks to innovative technologies such as horizontal drilling and new ways of fracturing rock.

U.S. shale-gas output grew from less than a billion cubic feet a day in 1998 to about five billion cubic feet daily last year. In 2009, the U.S. overtook Russia as the world's largest natural gas producer.

The U.S. government, in announcing a "shale gas resource initiative" with China in November, said that potential shale gas production in the U.S. "has grown dramatically in recent years due to technological advances," and "the development of shale gas is expected to significantly increase U.S. energy security and help reduce greenhouse gas pollution."

Mitsui & Co. had expected a few years ago that U.S. imports of LNG would increase, but "the picture has changed" because of the recent rise in U.S. shale gas demand, said Hiroyuki Tsurugi, a Mitsui deputy general manager in charge of energy businesses.

However, "demand from Asia and Europe for LNG is expected to grow. Both [shale gas and LNG] can develop," he said.

At the peak, Mitsui expects to produce between 360 million to 460 million cubic feet of shale gas a day from the Pennsylvania project, the company said.

Anadarko said in a statement that Mitsui will earn approximately 100,000 net acres in exchange for funding 100% of Anadarko's share of development costs in 2010 and 90% of these costs thereafter, with an estimated completion of all obligations by 2013.

-By Kenneth McCallum and Jason Womack, Dow Jones Newswires, 813-6895-7551; ken.mccallum@dowjones.com

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