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Yearenders – Shale Gas

Yearenders: Shale Gas
The global gas market has experienced a turnaround since the start of this century, when two newly-proven technologies – fracking and horizontal drilling – marked the beginning of what is now commonly referred to as the shale gas boom, or even revolution.

For countries with high shale gas potential like the United States, it has become an increasingly important source of natural gas in recent years and is expected to remain so.

In 2000, shale gas provided 1% of US natural gas production; by 2010 it had exceeded 20%. Within the next 20 years, shale gas will account for up to 46% of the country’s natural gas supply, the US government’s Energy Information Administration estimates.

"The United States has been one of the world leaders in developing the new technology. The economic success of the Barnett Shale play in Texas has particularly spurred the search for other sources of shale gas across the US and Canada. With fracking stepping on the toes of conventional extraction methods, growing shale gas production has influenced the global gas prices. But despite the boom, prices are going to remain low," says Dr. Fred Beach, an assistant director for policy studies at the University of Texas’ Energy Institute in Austin.

Shale gas within the US is still very robust, with a strong market; prices are going to remain low. I think the supply is still very robust, it’s just a matter of how much demand will continue to grow, and we’ve seen slow, steady demand growth for the gas in the US.

"But like anything in the world, the shale gas revolution has two sides – and in the last couple of years more analysts have been pointing to the darker one. The economics of getting the gas out of ground – namely the expense of the massive hydraulic fracturing treatments required – has been the key issue in this controversy. Fracking also requires costly research and exploration, as well as special infrastructure. The slump in oil prices has also affected the new industry," says Patrick Young, Executive Director at DV Advisors.

That’s going to be a problem at the moment because as we ended the year prices were obviously going down quite dramatically and that threatens to make much of the production uneconomic. At the same time, some of the biggest fields – like North Bakken and Dakota – their cost of production can be as low as $28, so it’s quite feasible that the shale gas issue is not going to go away. The difficulty is that some kinds of shale production are going to be very difficult because they [are only profitable when oil prices average] $100 per barrel.

Now that crude prices have fallen by almost 40% in six months, market watchers question whether low oil prices will curb America’s shale boom, or in other words – at what point the US drillers will stop drilling. Analysts at a research consultancy, Wood MacKenzie, think the break-even oil price for the US projects hovers between $65 and $70. If the price stays at $70, the investment is likely to be cut by 20% while production growth for the US could slow to 10% annually; at $60, the investment could drop by half, with production growth grinding to a halt, the consultancy says.

Figures might differ but the overall trend is clear – investment cuts coupled with slowing growth and probably even slight declines, mean that what OPEC wished for when holding output steady is most likely to be coming true already in 2015. Many US firms are expected to announce budget cuts in January, and a few have already done that. But what comes next is another tricky question – some analysts predict that after a shale crash a rapid rebound will come triggered by a wave of high oil prices.

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