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Shale Industry Ripe for Consolidation, Study Concludes
Trends that surfaced last year indicate “a continued preference for crude oil and liquids-rich gas development over dry gas options,” and are likely to reduce — and possibly reverse — recent domestic dry gas production growth rates, according to a new report from Pace Global.
The report by researchers for Pace Global, which has some major anti-shale gas clients, concluded that “the current state of affairs in the shale industry is unsustainable, even over the medium term.” Other studies have come down on both sides of the question of shale gas prospects.
“Pace Global 2012 Shale Gas Insider: The Numbers vs. The Hype,” is a study of financial reports and other information focusing on the 10 most prominent shale developers of 2010.
Those companies “have consistently spent considerably more on shale prospect acquisition and development…than they generated in terms of cash flow from oil and gas sales from these investments,” Pace said. “These cash shortfalls were covered by the sale of corporate debt and equity, prospects deemed less promising, partnership interests in active and prospective development programs, non-core assets (e.g., gas gathering and processing facilities) and future production for lump-sum payments. In fact, the race to secure future value from shale production has led to sustained operating losses for most of the past six years among the sample set of producers (excluding proceeds from the fund raising efforts listed above).”
With companies overextended and natural gas prices remaining relatively low, the industry is poised for consolidation, according to Pace. Such consolidation would “rein in and align development activity with anticipated future demand and commodity values, rather than narrowly focus on shorter-term value maximization based on cash flow pressures and increasingly depressed forward price expectations,” Pace said.
And Pace said shale development around the world will not follow the same arc as it has in the United States over the past few years. “There will be no comparable ‘boom’ of shale development in China, Great Britain, Argentina, Poland of other similarly situated countries,” according to the report. Those countries don’t have the combination of resource and technology scale, expertise, resource growth potential and capital access available in the United States, and in some cases oil and gas mineral rights are under exclusive control of the government.
That echoes the findings of a report last year from Ernst and Young Global Ltd. that concluded if Europe develops its shale gas resources, it will be an “evolution” slowed by uncertain geology, limited infrastructure, competing supply sources, public skepticism about the safety of shale and regulatory standards (see Shale Daily, Dec. 6, 2011).
But an analysis by Douglas-Westwood last year concluded that while the United States accounts for more than 90% of global shale gas and coalbed methane production, “rapid development is set to occur in Europe, Asia and Australasia, with China and Australia leading the growth” (see Shale Daily, Oct. 7, 2011). The study relied on intelligence gathered from the firm’s clients, including national oil companies, international oil companies, drillers and oilfield service providers.
One of Pace’s most prominent clients, Russian natural gas giant OAO Gazprom, has repeatedly questioned the environmental and economic viability of the shale gas industry that has overhauled North American markets (see Shale Daily, Dec. 1, 2011). The Russian company is a major gas supplier by pipeline to Europe and is heavily invested in exporting liquid natural gas (LNG) around the world, both areas that would be threatened by widespread development of shale gas.
Gazprom’s board at the end of 2011 argued that land ownership, water rights and population density could challenge European shale, and it claimed that shale could be twice as expensive to develop in Europe as in North America because of a dearth of equipment on the continent.
Other prominent Pace clients include Alpha Natural Resources, one of America’s leading producers of coal, and Green Mountain Energy, a leader in renewable energy. Alpha recently said it would curtail coal mining operations in its northern and southern Kentucky business units, and it reduced its production guidance for 2012 “in the face of declining thermal coal demand, mostly due to the mild winter and a wave of electric utilities switching from thermal coal to cheap natural gas to generate their power.”
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