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The US' heady hopes and dreams for shale gas

Are advancing plans for US LNG exports the next stage of the shale gas revolution, or is it a sign that these huge unconventional resources are simply uneconomic?

Shale gas is the biggest thing to hit the US since the invention of the light bulb. A heady claim from the industry that underscores the promise, and bluster, of North America's unconventional-resource revolution.

With typical braggadocio, Chesapeake chief executive Aubrey McClendon told the World Shale Gas conference in Houston this week that his company's entry into the Utica shale is "as important as the plough" to Ohio. His claim reflects a giddy optimism about US energy security, but borders on hyperbole.

There's no question that US producers such as Chesapeake have unlocked a treasure trove of new natural gas resources in just five years, a resource which has the potential to dramatically transform the national economy. But whether those reserves have added any value, to shareholders or the nation, is open for debate. In the absence of any uptick in natural gas demand, value destruction is a more appropriate description of the billions of dollars poured into developing unconventional-gas resources.

Uneconomic for years to come

Even with intensive drilling, nobody really knows how much gas there really is – lots and lots seems to be the conservative estimate – or even what to do with it. One could be forgiven for growing weary of hearing the US' new gas reality being described as "revolutionary"  and "a paradigm shift", especially when persistently low prices mean that many shale-gas deposits remain uneconomic to develop – now and for years to come.

With Nymex natural gas futures under $4/million British thermal units (Btu) heading into the peak winter demand season, it's not certain any of these shale plays will ever be profitable. Most agree prices will rise in the medium-term, but that seems to be an equally vague measurement – anywhere from nine months to five years.

McClendon said the "demand revolution" – the large-scale advent of natural-gas-powered vehicles and a switch to gas-fired power generation – is probably two to three years away. That also seems overly optimistic, even as Chesapeake leverages its balance sheet to continue drilling in the face of a growing supply glut. By McClendon's own estimates, Chesapeake alone is responsible for 43% of the US gas-production increase in the past five years.

Self-fulfilling prophecy

In many ways, it's a self-fulfilling prophecy: the more successful companies such as Chesapeake are increasing production and reserves, the lower gas prices fall. It seems the words of Jonathan Maynard Keynes never rang more true: the markets can stay irrational longer than investors, or gas producers, can stay solvent.

But that hasn't stopped drillers from pushing North American rig counts to their highest levels in decades. According to Baker Hughes, onshore drilling is up by 23% over last year, reflecting an almost unrealistic optimism in the face of bulging inventories for both oil and gas.

It's a conundrum that has producers desperately seeking new markets. BG Group last month signed up for liquefied natural gas (LNG) exports from a planned Texas plant, marking the complete reversal of fortunes for the US LNG business – the country imported 431 billion cubic feet (cf) last year, according to government data, utilising just 8.5% of capacity, and some of those volumes were re-exported.

David Thames, president of Cheniere Marketing, said the BG deal is "a real shot in the arm" for the unconventional-gas industry. Cheniere operates the Sabine Pass import terminal and is planning a 16 million tonnes a year (t/y), or 780 billion cf/y, liquefaction plant. Construction is expected to start in 2012, with first exports in 2015. And a further three Gulf coast import facilities are planning exports, "driven by the overwhelming belief that there's a lot of gas in the US", Thames said.

Double-edged sword

That much is true, but it's a double-edged sword: natural gas's proponents point to US exports as confirmation of the shale-gas revolution, but the reality is that there's nowhere else for the gas to go, despite the US being the largest, most liquid gas market in the world. That producers in the US, and Canada, are rushing to build LNG-export plants is the result of lack of domestic demand.

But Thames admitted that the global LNG market is "arbitrary and inefficient" and based on assumptions of scarcity of supply in regions such as Asia, which are contracting cargoes from Sabine Pass for delivery through the Panama Canal.

But that, too, could be a temporary fix if the shale revolution spreads to other parts of the world. Discoveries in Poland, Ukraine and the UK already threaten the viability of large-scale North American gas exports (the combined capacity of the four planned projects is more than 50 million t/y).

Who wears the shale-gas crown?

The US may claim the shale-gas crown for now, but other countries may boast even larger resources – the Energy Information Administration puts China's recoverable resources at 1,275 trillion cf, greater than North America's combined 1,250 trillion cf. Meanwhile, John Hattenberger, president and managing director of Gazprom Marketing and Trading USA, claimed Russia's conventional gas reserves are roughly equal to all the shale gas discovered in the US – and it hasn't even begun to delineate its own unconventional resources.

What does that mean for consumers? A secure and steady supply of cheap, affordable natural gas has immediate benefits. According to Larry Borgard, first vice-chairman of the American Gas Association, low prices have resulted in hundreds of millions in savings for Americans' gas bills, even as low prices punish producers.

Clear benefits to a gas switch

Given that oil is 25 times more expensive than natural gas on an energy-equivalent basis, there are clear and substantial benefits to making a shift to a cleaner burning, more efficient fuel. Chesapeake's McClendon bragged that his natural-gas-powered car costs about $0.50 a gallon to fill, compared will a national average of about $4/USG for conventional motor fuels.

That price disconnect will inevitably narrow as players scramble to take advantage of the disparity. Already, the first petrochemicals plants in decades are being planned for Ohio and Pennsylvania, which are benefiting from an in-flight of capital after years of de-industrialisation. For now, low natural gas prices are allowing those expansions to take place.

Some, including McClendon, suggest shales will allow the US to "reclaim its position as Number 1 oil producer in the world". A potent claim, but it may all prove to be a dream.

Despite low natural gas prices, McClendon insisted the benefits of shale-gas production outweigh the short-term hardships, even as investors fret over his company's high debt. "It's time to quit despairing about natural gas prices," he declared, "the best is yet to come." Time will tell.

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