One area of significant interest in the US energy market over the past eighteen months has been hydrocarbons extracted from shale. Strong industry interest in shale-derived gas may yet reverse the medium-term decline in US natural gas production. Shale deposits are widespread across the US, but concentrated in states such as Texas, Arkansas, Oklahoma, Pennsylvania and Montana. While the presence of hydrocarbons in shale has long been known, the application in recent years of hydraulic fracturing has made the extraction of shale hydrocarbons economical. As a result, US shale gas production is expected to grow substantially from 10% of US gas production in 2008 to 35% by 2035.

Industry majors such as BP and ExxonMobil, Asian sovereign wealth funds such as Korea Investment Corporation and Temasek, and private equity firm KKR are some of the major investors in US shale assets and companies since late 2008. However, as energy companies began announcing their Q2 2010 financial results, a growing number of gas-focused independents with shale exposure have announced a recalibration of their capital expenditure away from gas and towards oil and natural gas liquids (NGL).

The reasons are twofold:

While gas and oil prices rose substantially during the commodity price bubble of 2008, the post-recession environment has seen a marked divergence. While oil has recovered to the US$70-$80/bbl mark, natural gas prices remain weak. Bearishness has been further entrenched in the market by a glut of LNG supply. As a result, shale investments predicated on a return of bullish gas prices are no longer looking as sound as they did a year ago. Furthermore, concerns have grown over the impact of hydraulic fracturing and other recovery-related techniques on water supplies in exploration areas. In the post-Gulf of Mexico oil spill environment, greater safety regulation can be expected.

The US is the world’s largest natural gas consumer and importer. It consumed 646bn cubic metres (bcm) of gas in 2009, according to the BP Statistical Review of World Energy, June 2010. Owing to the energy-intensive nature of the US economy, BMI currently forecasts LNG imports tripling in the period 2010-20. Although BMI currently forecasts production to remain largely flat over the decade, the development of shale gas might require an upward production forecast revision, and a downward import forecast revision.