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Shale Advantage to Stay in North America, Moody's Says

The North American shale revolution "is now deeply entrenched," and is expected to keep natural gas prices at "historically low prices for some time," creating both long-term benefits and hardships for a variety of sectors and companies, according to a report issued by Moody's Investor Services on Monday.

"Because natural gas sees little trade in the international marketplace, low prices will give a number of North American industries significant advantages over foreign competitors for many years to come," Moody's said. And the shale revolution isn't likely to be repeated elsewhere anytime soon. "North America will stand alone in the shale revolution in the coming decade, despite shale's worldwide potential.

"China, Argentina and Australia boast significant potential shale assets, but face high production costs and remote locations. Complications for European shale include geological complexity, a dense population and widespread environmental concerns. Other regions will need greater technological expertise and environmental study before they can begin to develop shale resources."

A recent Raymond James & Associates Inc. analysis found that it may be two years -- or longer -- before drilling progresses to commercial success outside of the United States (see Shale Daily, May 7).

A surplus of natural gas production, combined with rising light crude production, "will give North American refiners and chemical producers a long-term competitive advantage over their peers worldwide," Moody's said.

"Unconventional shale drilling reduces the refining sector's operating and energy costs, providing large new supplies of lower-cost, predominantly light crudes to the refining system and opening up new export opportunities. Lower energy costs and rising domestic crude supplies will continue to benefit refiners well into the future." Rising crude production from the Bakken and Eagle Ford shales, Permian Basin and Western Canada "are changing refinery patterns and economics," according to the report. And the shale boom "will result in rising gasoline and diesel production, even as North American demand for gasoline drops."

Low natural gas prices will give regulated utilities lower input costs and better regulatory relations in the coming years, Moody's said. "U.S. shipping companies will benefit as new pipelines struggle to keep up with oil production in shale plays and other basins, and solid waste companies that convert fleets to natural gas will see lower fuel costs. Rail companies will see strong marginal benefits, if not enough to offset lost coal volumes." And the gas glut will continue to pose "formidable competition" for the U.S. coal industry, as prices and stricter environmental regulations prompt fuel switching.

With natural gas prices remaining low, electric generators have been steering away from coal, but a recent increase in gas prices may already be stemming the tide. Last month the Energy Information Administration (EIA) reported that gas for electric generation dropped across most of the nation on a month-over-month basis in February compared to February 2012. EIA's monthly report, which recorded a 32% jump in gas prices in February, compared to the same month in 2012, indicated that generation from coal and other fossil fuels displaced natural gas generation in February.

Still, coal's portion of the nation's fuel mix may be reduced for years to come, Moody's said.

"Over the next decade, coal will fuel about one-third of all U.S. power generation -- down from nearly half before shale development began. Most of the power producers' fuel-switching has already taken place, and further substitution cannot happen without considerable capital investment. Greater capacity factors will increase maintenance costs for the combined cycle natural gas plants, and as older, less efficient coal plants close, the large, efficient coal-fired baseload plants will remain online."

IMS Research, a unit of the global research/consulting firm IHS, recently found that the shale gas boom is having a "massive impact" on the U.S. energy market, particularly a revival for various smart grid developments (see Shale Daily, April 24). The report predicted that shale gas will "play a key role" in the ultimate development of a smart electricity grid by facilitating various aspects of natural gas as a source of power generation.

The shale gas glut will also benefit North American engineering and construction operations, Moody's said, though some may come under pressure from their extensive work on coal-fired power generation.

Hopes for a widespread use of natural gas vehicles may be premature, Moody's said.

"Makers of automobiles and auto parts will see limited effects if any from the shale revolution. The automakers have no plans to shift production away from gasoline-powered vehicles, and consumers will not increase their demand for vehicles powered by natural gas."

ISSN © 2577-9877 | ISSN © 2158-8023
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