Unconventional Gas Developments

Our team has attended a few seminars on non-conventional gas. I thought it was worth compiling a few thoughts.

US breakeven costs have further to decline (easily 15%) taking breakeven economics to sub $5.0-5.5/mmbtu. Additionally, internationalization of the unconventional gas outside North America will be slow, with the possible exception of China.

1)North American insights:

a. Currently there is an abundance of plays that make sense at sub $6/mmbtu.

b. Technological advances are still ongoing and Take-up of known practices will cut costs by 15%, bringing breakeven costs to sub $5-5.0/mmbtu. The latest example is the deployment of “zipper” frac’ing.

c. These advances are offsetting a general rise in service costs, even though that rise is being accentuated by the withdrawal of some service capacity (early deployment overstretched rig capability, and those rigs are now failing).

d. Canada has potential to be a significant unconventional gas producer, and will keep downwards pressure on US gas prices into the medium-term.

e. Against that, the pace of drilling/development will slow as the majors become more involved.

f. WoodMac forecast US shale gas adding at least 1.5bcf/d per year through to 2020 on current drilling plans.

2) Outside North America:

a. Service companies are gearing up to take unconventional technology outside North America (eg Schlumberger buying Smiths and Baker Hughes).

b. European plays will be slow to develop:
i. Resource basins are relatively small.
ii. Regulatory issues have to be overcome (eg not only has PGNiG the exclusive rights to drill but all crews must speak Polish).
iii. No infrastructure to support rapid development.
iv. Exxon drilling 10 wells in Germany is a bit of a sidetrack – need to drill over 50 wells to get any understanding of the resource.
v. Costs are intrinsically higher – breakeven today is nearer to $10/mmbtu, but with 20% cost reduction/productivity improvement, there are several basins that can produce at $8/mmbtu.

c. China will be big as an unconventional gas play, and sooner than Europe:

i. Chinese policy has failed to hit coal-bed methane targets (but gas price higher now!).
ii. Resource basins have the right characteristics (big and tectonically stable, silicon strata).
iii. Fiscal terms can be supportive.
iv. Labour can be directed into sector.
v. The second East-West gas pipeline could unlock reserves along that route.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

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