A captive of its own success, the oil and gas industry in North America is looking for a way to get projects done.

The massive scale of shale oil and gas projects, pipelines and liquefied natural gas (LNG) facilities has become so expensive, and the price of natural gas so imbalanced, that money is tighter than ever.

In Calgary, leading executives of independent oil and gas firms talked in February about the challenges of financing game-changing projects at Hart Energy’s DUG Canada 2013.

More and more, oil and gas is a North American market. Yet support from public equity has dwindled, and resource plays require staggering capitalization,

However, joint ventures and private equity have picked up where public investment has fallen off. Since December 2010, Canadian firms have teamed up for at least C$8 billion worth of joint ventures, many of those to develop unconventional resource plays like the Montney and Duvernay shales. Energy firms have partnered with eager investors from Asian markets such as China and Japan in particular, where prices for LNG are high.

The public equity market for energy dropped dramatically in 2012 and 2013 could be worse, said Andy Evans, senior vice president and director, ARC Financial Corp., Calgary.

Canadian E&P equity market financings fell nearly a third, to roughly C$8 billion in 2012 from about C$12 billion in 2010, he said.

The silver lining: private equity has taken up the slack. Sponsorship for start-up capital has increased to an average C$142 million in 2012 from C$69 million in 2010. The average is based on 70 start-ups.

Evans said the influx of private equity into Canada’s oil patch has helped companies reap sizeable profits. Nevertheless, the price tag can be breathtaking, with financing requirements of up to C$300 million.

“It takes a lot of capital to develop unconventional,” he said. “We’ve seen a dramatic increase in the initial capitalizations of private start-ups in the Western Canadian Sedimentary Basin.”

ARC sponsors some companies that don’t set out to do full development. They aim for preliminary drilling, gathering seismic data and other information in order to sell to a resource aggregator, such as ExxonMobil.

A major difference between conventional and unconventional plays has been reserve value. “Now there’s a much bigger prize (unconventional). It’s the contingent and prospective resources that companies are trying to demonstrate,” Evans said. “But the problem is there’s a lot more capital required to get to the finish line.”

A recent example is ExxonMobil’s acquisition of Calgary-based Celtic Exploration Ltd. Exxon bid C$3 billion for the company’s 650,000 net acres in the Montney and Duvernay shales. “If you look at the value that was placed on their undeveloped resources, it was multiples of their reserves,” Evans said. International intentions

To be sure, money is still rolling across North America. In the past four years, M&A activity has averaged about $100 billion a year. In 2012, $116 billion of assets changed hands, said Bill Marko, managing director, Jefferies & Co.

What’s changed since 2009 is “a vastly increasing amount of international investment,” Marko said. Canada in particular is gaining ground in raising capital through Asian interests.

Earlier in 2013, Marko traveled to Asian countries such as Korea, Japan and China, where he met with 19 companies, a dozen of which wanted to do liquids-rich Canadian deals.

“I was surprised because the feedback was so consistent,” Marko said. “They think this is the best place to shop right now.”

John Moon, managing director and partner at Morgan Stanley, said global partners, competition and players are going to have a big impact on the industry, “whether you like it or not. You might as well use that to your advantage.

“One of the ways we see that taking place in our own investment strategy is really trying to stick to the middle market.”

Moon said that the middle market hasn’t been penetrated by international companies, because it’s too much work for them to take on from thousands of miles away. “We think that is where the better investment opportunities are,” he said. “On the other hand, we are very much focused on the global competitor, because we think they can be interesting partners and, frankly, buyers of assets we are developing.”

The Asian JV

With the prospect of 3,600 trillion cubic feet (Tcf) of natural gas, Encana Corp., worth roughly $13 billion, couldn’t go it alone on the opportunities its executives saw. But Encana is an opportunity for Asian investors even as it faces domestic challenges, said Richard Dunn, vice president, regulatory and government relations for Encana.

“Unlocking the unconventional natural gas presents an opportunity for Canada,” Dunn said. “The challenge is that our traditional customer, the U.S., no longer needs us to the extent it once did as it develops its own prolific shale plays.”

Canadian producers are turning over their expertise and money in a quest to export LNG and develop shale plays using joint ventures.

Global investors are taking note of Canada’s competitive environment, its vast natural gas resource and the opportunity to export LNG, Dunn said. Asian demand is projected to more than double to 65 billion cubic feet per day by 2020, with growth in Chinese consumption leading the way.

“It’s clear these days that market diversification through the export of LNG to a growing Asian market, along with accompanying Asian foreign direct investments, will be the keys to the continuing viability of the Canadian natural gas industry,” Dunn said.

Canada is witnessing a paradigm shift as U.S. shale production has meant a drop in dollars flowing into the country.

“Essentially we’re moving from a model of U.S.-based investment export to a model more focused on an Asian-based export,” he said. “It’s the new Canadian reality, but in some respects it’s really just business as usual.”

Canadian officials have estimated a need for C$650 billion worth of investment in the next 10 years to realize just oil and gas projects.

“We’ve entered into these joint-venture agreements to accelerate the value of assets that otherwise would have sat dormant for a significant period of time,” Dunn said.

Japan and LNG

For Asia, the need for partnerships is equally important. Shinya Miyazaki, chief executive officer of Diamond Gas Management Canada Ltd., a Calgary-based subsidiary of Mitsubishi, said, “Japan would welcome additional supplies of LNG in a country where natural resources are scarce and industry relies heavily on imports.”

In 2011, global LNG imports totaled 240 million tons. Japan imported 32.3%, more than all of Europe and the most by any country.

“Looking at the future, we anticipate that LNG demand in Asia will continue growing very steadily and very rapidly,” Miyazaki said. “Due to the substantial increase in China and India, we are anticipating LNG imports into Asian countries will grow by 100 million tons in the next 20 years.”

Japan’s import of LNG has increased to 80 million tons per year from 70 million tons since an earthquake and tsunami devastated the country in March 2011.

Whatever the future, increased reliance on nuclear power seems to be unlikely or at least further off. “Naturally, nuclear power can’t be as much as what we planned after the earthquake, so we anticipate Japanese (LNG) requirements will grow further,” he said.

For Canada to become a player, Japan will want considerations such as supply stability, price competitiveness and involvement in the value chain.

“We still need to see more assurance that Canada can be a new LNG supply source that is more attractive than other potential supply sources,” Miyazaki said.

Victor Ojeda, managing director, LNG Canada Project, Shell Canada Ltd., said that’s easier said than done. Joint ventures are necessary to make an LNG export work. The capital and the technology required for producing, storing and shipping LNG are significant and lead times are long.

Nearly all fail, Ojeda said. In Australia, for instance, in the past 30 years hundreds of LNG export facilities have been proposed.

“Only a very small subset actually happens,” he said.