Despite a recent recovery, continued depressed gas prices have caused a significant decline in dry gas shale development, with many companies shifting assets toward more economical oil and ‘wet’ plays, which trade at a premium to dry gas. However, certain investors are taking a chance on dry gas reserves. Shale expansion continues with deep shale structures such as the Texas Cline and California’s Monterey, as well as the redevelopment of the Texas Permian Basin.
In certain regions, production is stretching transportation, storage and refining capacities, with an estimated 205 billion US dollars (US$) needed for infrastructure development in the near term.1 LNG exports are forecasted to rise, despite delays in facility permitting. The fracking debate has led to differences in environmental regulations among states, leading investors to favor states with laws that support unconventional drilling methods. Many regions are struggling to provide adequate water supply to support drilling activity (e.g. severe droughts in West Texas) and similarly, certain regions have inadequate disposal infrastructure for water and drilling fluids.
Capital continues to flow into the North American market, and a number of investors have been increasingly allocating capital to exploration and development of lease holdings, rather than trading developed plays. This has impacted M&A activity. Shale gas transactions (as a percentage of total upstream transaction value) have decreased from 38 percent in 2011 to just 6 percent in 2012,2 although some utility providers are buying into dry gas to secure their longer term supply base.
Over the past 5 years, several foreign national oil companies have entered the market via joint ventures, with some taking direct positions as operators of resources. These national oil companies s are interested not just in the resource base, but in absorbing drilling and reserve optimization technologies in order to better exploit their domestic opportunities. China’s Sinopec, PetroChina Co., China National Offshore Oil Corporation (CNOOC) and Sinochem have all been active, along with Japan’s Sumitomo Corporation. Non-traditional players and the super majors are also getting in on the act, including Freeport McMoRan, Nucor, ConocoPhillips and Exxon.
The future of LNG is ultimately uncertain, with a debate over whether to export to Asian markets where prices are higher, or retain a global competitive advantage in the US, by allocating gas supplies to facilitate development of domestic chemical and industrial complexes. Although the required shale infrastructure will take decades to build, and gas prices may not recover for several years, shale has enormous potential, and is forecasted to reach half of total domestic gas production by 2035.3
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1Historic opportunities from the shale gas revolution, KKR report, Nov 2012.
2Energy Company & Transaction Research: IHS Herold, accessed 23 April, 2013.
3U.S. Energy Information Administration, Annual Energy Outlook 2013, Market Trends, 15 April, 2013. http://www.eia.gov/forecasts/aeo/MT_naturalgas.cfm