Technological advances in hydraulic fracturing and horizontal drilling have resulted in booming gas production from shale deposits in the US.

US gas reserves, once thought due to run out in 30 years, now look sufficient to meet 100 years of demand. While this is good news for the US, as it reduces gas import dependency, soaring shale production means the price outlook for US gas is subdued. In light of this, we have seen the initial ‘shale rush’ to acquire gas-prone acreage in the US taking on a different aspect recently, as explorers and producers seek to snap up acreage with significant associated liquids output potential to improve project economics. BP’s recent move into the liquids-rich Eagle Ford shale play in Texas reflects this trend.

Other international companies have been expanding their exposure to US gas shale with the aim of acquiring technological expertise that can then be applied elsewhere, while American companies have been acquiring gas shale acreage in Europe in the hope of replicating their success at home. Shale exploration is taking place in Austria, Germany, Hungary, Poland, Sweden and the UK. Although Europe’s higher population density and more stringent environmental regulations mean that we’re unlikely to see the same explosion of shale gas production as in the US, significant future growth in European gas production represents a major potential threat to Russian gas giant Gazprom’s dominance over the continent’s gas supply. China is also seeking to exploit its gas shale resources and the US has offered assistance in that regard.

The ‘quiet revolution’ in gas shale has also had a number of other consequences. There has been extensive M&A activity among US oil services companies as they seek to fill in the gaps in their service offerings: Schlumberger is tying up with Smith International, Baker Hughes with BJ Services, and Halliburton with Boots and Coots. More consolidation is expected.

There are also concerns over a glut in the LNG (liquefied natural gas) market. In anticipation of high LNG import demand from the US and high prices, several LNG plants have been built around the world in recent years. Now that US LNG import demand is much weaker and prices much lower than expected, LNG shippers are having to look for markets for their products. This has meant LNG spot prices have come right down. European gas consumers are turning to cheap LNG spot cargoes rather than pay Gazprom’s higher, oil-linked, gas prices. This pushed Gazprom in March to announce it would allow 15% of its gas sales to Europe to be sold at spot prices to avoid being priced out of the European market. With 15% of Gazprom’s gas now price-competitive with LNG, fewer cargoes will go to Europe. Asian LNG consumers are establishing long-term contracts with Australia, so LNG shippers will be forced to send more gas to the US (the market of last resort), suppressing gas prices further. BMI’s long-term outlook for US gas prices is therefore pretty poor.

All in all, the shale revolution may be ‘quiet’ in BP CEO Tony Hayward’s words, but its impact on the global gas market will be resounding.

Tags: China, demand, energy, Europe, gas shale, Gazprom, horizontal drilling, hydraulic fracturing, implications, LNG, prices, US
Posted in: Asia, China, Commodities, Emerging Europe, Eurozone, General, US
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