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Shale-gas M&A market over-inflated

Low natural gas prices in North America suggest bubble

Wood Mackenzie has called for an overhaul of what it believes is an overinflated market for shale-gas mergers and acquisitions (M&A). The Edinburgh-based consultancy argues that US shale-gas production levels are unsustainable with such low natural gas prices in North America, making investment in all but the top-tier plays uneconomic.

Neal Anderson, Wood Mackenzie’s global head of consulting, claimed that, in the short term, M&A transactions will transform the US shale-gas arena from a sellers’ to a buyers’ market.

In an article titled, "Is the Shale Gas M&A Market Ripe for a Correction?" Anderson said: “The emergence of shale-gas plays has driven a more and more frantic M&A market as new entrants seek to gain access at prices that appear to be disconnected with present – and likely future – market fundamentals.”

Wood Mackenzie has previously predicted that shale-gas will comprise 35% of US natural gas production by 2020. Output has soared from just 1.2 trillion cubic feet (cf) in 2007, about 6% of US gas production, to about 17% last year, according to the Energy Information Administration (EIA).

But gas prices in North America have halved over the past decade, to levels under $4/million British thermal units (Btu), partly because of the growing shale gas output and resources, but also the 2008 global financial crash.

Lower gas demand during the financial crisis and an abundance of liquefied natural gas, which lost market share to an increasing volume of shale gas, caused a gas glut, which the International Energy Agency believes may affect the market until 2035.

New, willing investors

Anderson said the real effects of this economic imbalance have been postponed by an abundance of new, willing investors and the ability of operators to produce shale gas at prices as low as $3/million Btu. But companies are finding it increasingly difficult to produce shale gas at such low prices. The premise that shale-gas plays offered limited to no finding risk is questionable, he said. “Being able to produce them commercially remains a challenge.”

And the large number of operators that enter shale-gas markets through joint ventures is not helping, Anderson added. “Access transactions at the time were typically structured as joint ventures, with new entrants usually funding a promoted share of future costs, exacerbating the over-supply situation.”

The EIA reckons there could be 6,622 trillion cf of recoverable shale gas across 32 countries, with 862 trillion cf of that in the US alone. With such a wealth of potential resources available, it seems unlikely that interest in developing shale-gas plays will diminish in the short term.

But only top-tier gas plays will remain a viable growth area, Anderson said, and they will require continual capital investment. Liquids-rich plays, such as the Eagle Ford, will continue to be successful, however, because high oil prices make it economically viable to produce from them.

“Only the very best shale-gas plays have a long-term future,” claimed Anderson. “The ultimate winners will be those companies that proactively screen shale-gas opportunities, await the coming market correction and execute the best deals.”

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