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Shale gas boom in the US: Natural Gas price has become disconnected from oil

Date: 21 Jul 2012

Shale gas boom

Shale gas is natural gas formed from being trapped within shale formations. Shale gas was first extracted as a resource in Fredonia, NY in 1821 in shallow, low-pressure fractures. ... Although shale gas has been produced for more than 100 years in the Appalachian Basin and the Illinois Basin of the United States, the wells were often marginally economical. Higher natural-gas prices in recent years and advances in hydraulic fracturing and horizontal completions have made shale-gas wells more profitable. (Wikipedia)

Shale gas production became noticeable in ~2008 and in 2010 accounted for 23% of US Natural Gas production. This was a jump unexpected by many analysts, a boom, a revolution. Source: http://www.eia.gov/forecasts/aeo/ppt/aeo2012_full.ppt

Natural Gas market is not global and flows between continents are limited by LNG capacities (which has become introduced to the market at large scales only in recent 10 years) and between countries by pipelines on the ground. Not surprisingly that due to boom of shale gas US natural gas price became much lower than in other continents. Source: BP (http://www.bp.com/.../Natural_gas_slidepack_2012.pptx)

US natural gas price disconnected from oil

Natural gas prices were following oil prices for decades and it was considered to be a common wisdom. But US shale gas boom changed it on one continent. Take a look at the charts below. Source: US DoE (http://wikiposit.org/uid?DOE.RWTC), Federal Reserve Bank of St. Louis
(http://research.stlouisfed.org/fred2/series/GASPRICE/downloaddata?cid=32217), author's analysis Source: BP (http://www.bp.com/sectiongenericarticle800.do?categoryId=9037181&contentId=7068643), author's analysis

This change is so dramatic and unexpected that broader public still is not aware about it or doesn’t recognize the consequences.

Consequences of decreasing natural gas vs. oil prices

Long term consequences of shale gas revolution and decreasing natural gas price vs. oil price are multifold.

1) Negative push to oil price. If US shale gas production continues to grow and its prices are lower than the prices for other sources of natural gas, natural gas will substitute oil in several industries in the US.

As oil supply is integrated globally and oil price is global, decrease of oil demand in the US will cause downward push to oil price. This in turn can have numerous consequences, the most obvious of them pointed out below.

2) Value creation in many US industries Many US industries will directly benefit from cheaper natural gas price costs. Examples are:
  • UPS and Fedex (savings on natural gas-powered cars)
  • Other industries will benefit from switching from oil products to natural gas
Cummins and Caterpillar (manufacturing of natural gas-powered engines for replacement)
  • GM, Honda and Ford (manufacturing of natural gas-powered cars for replacement)
  • The other good examples can be found in this paper: http://seekingalpha.com/article/690501-how-to-profit-from-the-shale-gas-boom
Keep an eye on the stocks of the companies in the heart of oil-products to natural gas substitution.

3) Move of economic and political power to countries with growing shale gas production.

Shale gas boom can happen in other regions of the world. April 2011 EIA report found shale gas reserves across the world with China having the biggest reserves WW. To be balanced, "Russia and Central Asia, Middle East, South East Asia, and Central Africa were not addressed by the current report. This was primarily because there was either significant quantities of conventional natural gas reserves noted to be in place (i.e., Russia and the Middle East), or because of a general lack of information to carry out even an initial assessment. In addition, certain limitations in scope reflected funding constraints." (http://www.eia.gov/analysis/studies/worldshalegas/).

If shale gas reserves estimations in the report is true, courtiers possessing them and being able to start their profitable exploration would get economic and political power from traditional natural gas producers and suppliers, key of whom are Russia and Middle East.

The small but direct result of falling US natural gas prices will be US natural gas importers (Trinidad & Tobago and Peru are the largest) will continue to lose volumes, margins and consequently economic power in the region.

4) Shale oil can also become true. Prospects of shale oil are much less clear and they deserve a separate post. What is known is shale oil does exist and one day one big country may start producing noticeable volumes of shale oil at prices cheaper than global oil price. This will change the world order built in XX century forever.


Tags: Crude oil, Natural Gas



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11 Dec 2018 21:06