August 3, 2011 / 8:16 PM / 8 years ago

Analysis: Cash-rich shale drillers boost output, cap prices

NEW YORK (Reuters) - Until recently, the nascent U.S. shale gas industry faced a major constraint on its growth, one that was bigger than environmental risk, more vexing than technology, and more challenging than the scrum for new acreage: capital.

A drilling rig in the Eagle Ford Shale in South Texas is seen in this Petrohawk Energy Corporation handout photograph released to Reuters on July 14, 2011. REUTERS/Petrohawk Energy Corporation/Handout

After some $40 billion of foreign investment in the sector in the last two years, including BHP Billiton’s record $15.1 billion plunge last month, that limitation is no longer a factor, analysts say. And as a result, production may grow even faster than previously expected, putting an ever firmer cap on prices.

Capital-rich companies from ExxonMobil to Royal Dutch Shell have picked up the pace partnering with or acquiring smaller shale producers or parcels of land to gain access to reserves and technology to release them.

BHP’s purchase of Petrohawk Energy Corp gave it more than one million net acres of land rich in shale oil and gas deposit. The Australian mining giant is expected to expand on Petrohawk’s drilling plans, further driving down the natural gas forward curve that has been pummeled by the surge in U.S. shale development in recent years.

“Two years from now given that Petrohawk was going to grow activity, under BHP, it’s likely that activity will be higher, not lower,” said David Pursell, a natural gas analyst with boutique energy investment bank Tudor, Pickering, Holt & Co in Houston.

Shale-related mergers and acquisitions account for 26 percent of announced deals in the oil and gas sector this year alone, according to data from Thomson Reuters.

The influx of capital has revolutionized the U.S. natural gas market, feeding oversupply and smoothing prices.

The technology known as hydraulic fracturing or “fracking” that has let flow a flood of natural gas from dense layers of shale rock thousands of feet beneath the ground has tamed a market once known for 10 percent daily price swings.

There are some 750 trillion cubic feet of recoverable gas reserves in the U.S., according to a recent government report.

The mergers have paid off for many top energy companies acquiring their way in to shale plays.

With the prospect of a decades-long bonanza in cheap domestic shale gas production the forward strip for NYMEX 2012 natural gas futures has halved since 2008 at a $9 average to around $4.60.

But some analysts say even that may now be too optimistic, if producers eager to start generating cash on their investments push aggressively forward.

“Really what (BHP’s acquisition) does is it probably puts an acceleration on Petrohawk’s plans,” said Tom Sherman, senior energy analyst with Bentek Energy, an arm of Platts, in Evergreen, Colorado.

“We really don’t see prices jumping up a whole lot.”

Bentek’s most recent price outlook forecasts an average gas price of $3.80 per million British thermal units through November, rising to the mid-$4 range by winter.


There are, of course, risks that could yet hinder quickening growth. The prospect of tougher federal or state environmental regulations has many producers spooked; a shortage of drilling rigs and trucks to haul waste water could prove material hurdles; and many producers are now shifting their forecast toward shale oil rather than gas.

Last week, the U.S. Environmental Protection Agency issued preliminary rules to impose emissions caps on natural gas streaming into the atmosphere from the drilling process.

State governments continue to develop rules on fracking, attempting to balance economic and environmental concerns.

Coal-to-gas switching for electricity generation has nearly doubled this summer from last year, another factor that has boosted gas demand, especially during peak times.

In addition, drilling to hold leases by production begins to drop as those leases expire next year and acquisition interest in oil shale nudges gas off the main stage, said Bob Brackett vice president and senior analyst with Sanford C. Bernstein & Co in New York, who expects prices to rise as high as $7.00 in 2013.

With the ability to export liquefied natural gas so far off in the U.S., LNG prices fetching double abroad and oil prices at recent triple digits, dry gas shale deals are losing luster.

“Now it’s show me something with some liquids in it or on the west coast of Canada near an LNG export terminal,” Brackett said.

Reporting by Jeanine Prezioso;editing by Sofina Mirza-Reid

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