The U.S. Shale Revolution: Global Rebalancing?

Group 2

Anshul Gadgil, Garima Tulsyan, Jayesh Sharma,

Manish Kumar, Shashwat Mishra, Tashwita Ghatpande
Case Facts

Background Shale Revolution

• US DOE approved 10 projects to export
LNG to non FTA countries (10.5 bcf/d)
• 26 applications still pending, amounting to
total export capacity of 27 bcf/d
• Only 4/10 were approved by FERC to
construct export terminals
• Question mark on DOE, FERC actions on
remaining applications!
• US had been a net importer of gas until technology led
47% increase in accessibility by inclusion of shale
• Game changer: EIA estimated 100 years of supply
• Production, 2014: Gas (85 bcf/d), Crude oil (7.5 m bpd)
• Abundant supply, lowest prices in US (arbitrage)
• Several concerns raised over gas exports

Shale Gas and Tight Oil Production History

• Shale gas resides in low permeability rocks, economically • 1st commercial prod.
producible from specific geological formations from shale (1821)
• Impermeability had rendered extraction of gas unviable • Experimental
fracking (1947)
• Hydraulic Fracturing (Fracking) involves vertical and • DOE funding,
horizontal drilling of well in which slurry is injected at high support
pressures; high pressure fractures the brittle shale while
slurry widens and opens up the fractures • George Mitchell

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An Arbitrage Opportunity?

▪ Natural gas markets are highly regionalized due to high cost of transferring LNG
▪ Overseas trade requires substantial capital investments: liquefaction plants, cargo ships, re-gasification units
▪ After NAFTA, continent wide trade in natural gas dictated by market forces, prices linked to “Henry Hub”
▪ In most other countries, long term contracts with state owned firms dominated the market, prices indexed to oil
▪ Natural gas abundance pushed down prices in US, drop not observed elsewhere as markets are regionalized
▪ Arbitrage opportunity existed due to difference in costs; 1.2% of GDP/ year as estimated by Goldman Sachs
▪ Export required huge infrastructural investments; ability to export to non-FTA countries was a must for viability
▪ Firms had to seek approval from DOE for exporting natural gas to ensure “public interest” is not violated
▪ License for export to non FTA countries: additional consideration by DOE, FERC permit, NEPA clearance
Price Impact
▪ Exports will reduce the price differential between markets, but the quantum of price increase was debatable
▪ Global transition to market driven prices by elimination of oil-indexed contracts and pegging at Henry Hub prices
Japanese Perspective: Strong demand for cheaper energy; largest trade deficits around that period
▪ US exports will lead to direct economic benefit to world’s largest importers, lowering their trade deficits

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Macroeconomic Impact in the US
Impact of Shale
• Shale would contribute around $380 to $690
billion per year to GDP
• Addition of 1 to 1.7 million jobs in direct or
indirect industries
• Household incomes would have a net savings of
~ $3500 by 2025 due to lower prices
Foreign Investments
• French firm, Total SA, invested $2.32 billion in
Chesapeake Energy Corp
• Chinese oil company, Sinopec, invested $2.2
billion in Devon Energy Corp
• These investments were motivated by
knowledge acquisition than resource acquisition
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Geopolitical Impact

• US production of shale has the potential to influence prices across the globe
• US suppliers undercutting the Australian gas contracts would mean that
North America becoming the
Australian export prices would have to drop by 25%
new Middle East • The US would undergo a manufacturing renaissance as the cost advantage of
manufacturing abroad will diminish

• North America heading towards self sufficiency will translate into less
involvement of the US in events in the Gulf
• Shale production and subsequent reduction in oil imports by the US would
Impact on OPEC completely change the fiscal budgets and social spending of countries like
Saudi Arabia, UAE etc
• Reduction in US imports has the potential to cause political unrest in African
countries like Nigeria and Algeria

• If the US were to cut itself from world market and price fluctuations, it would
have to prohibit private firms from trading
Free Trade Agreement • It would result in a violation of WTO’s GATT, which US was a strong proponent
of when China restricted exports of rare metals
• Energy independence is neither likely nor desirable

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Increased Competition : Global Effects

▪ Two major risks for natural gas exporters: price erosion and supply displacements
▪ Russia was the world’s largest exporter, followed by Qatar and Canada and with US in the 8th position
▪ Russia was expected to face the biggest trade competition with the U.S, so started finding new LPG projects
▪ The success of the US in shale gas formation led other countries to follow its path

• Government lifted ban on
hydraulic fracturing
instituted in 2011
• Lack of financing of
research required for
economical drilling
techniques
• Restricted by less
favorable geology,
restrictive land rights and
a strong environmental
movement
• High hopes, > 40 wells • Proposal to liberalize the
drilled, but no firm has state- owned oil company
been able to get Polish • Allowed private and foreign
gas to flow companies to produce oil
• Several firms withdrew domestically
operations due to • Planned to create a
geological constraints, company to produce gas
failure to find commercial and oil in collaboration with
levels of hydrocarbons foreign firms in US
• Unsupportive govt. • Steps taken to make
regulations and corruption Pemex internationally
competitive
• In 2012, China set a goal • Slow in releasing a
of producing 60 billion regulatory framework to
cubic meters of shale gas develop its own resources
by 2020 • Announcement to allow
• Difficulties in mining and state oil companies to drill
so the target was reduced for shale
by half in 2014 • Lack of favorable geology
• Lack of favorable geology and water supply which
and water supply which hindered the use of
hindered the use of fracking techniques
fracking techniques

Unlikely for any other nation to catch up with U.S. shale production in the near future
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Insights and Recommendations

• Low refining capacity for light oil in US, more refineries have technology for refining
heavy oil (heavy oil imported from Canada is refined and exported)
Crude Oil Trade to be
• Big oil companies pocket most of the profits, leaving nothing for shale oil extractors
Liberalized • Exporting tight oil, will reduce world-wide demand for heavy oil, resulting in drop in
prices thereby reducing the trade deficit in oil (40% of oil requirement is imports)

• Infrastructure for regasification, which is already in place, can be cheaply

converted into liquefaction infrastructure
• Impact on domestic prices, although debatable, should be <10%; benefits from
LNG exports shouldn’t be
exports outweigh the increase in prices
capped • Bilateral relations with major gas importers will significantly improve
• Global oil and gas prices would be market driven and not at the whims of OPEC
(oil) and Qatar, Australia (gas)

WTO compliance and US • Karen Harbert: “Export restraints not only violate the letter of US trade law and
international trade agreements but also their spirit”
commitment to Free Trade • Export restraints could be emulated by other countries limiting US’ access to key
should continue natural resources undermining US competitiveness

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Industry Challenges

Environmental Concerns Other Risks

• Danger of directing investments away from • Uncertainty about the economical

the development of cleaner energy sources recovery of reserves
due to emphasis in natural gas
• Uncertainty about the long- term
• Estimation that increased use of cheap productivity of drilled wells
shale gas and oil, rather than renewable
• Speculation about the ceasing of granting
energy sources, was leading to release of
approvals to the firms to export gas
more greenhouse gases
• Large investments required upfront which
• Environmental and health consequences
was risky because of unexpected
due to release of high level of methane
changes such as new regulation, drop in
during fracturing process
prices, etc.
• Possibility of mini- earthquakes due to
injection of chemical mixtures into the earth • Lack of infrastructure among the tight oil
producers to process the light crude oil
• Other issues such as use of large amount of
water, increase in truck activity, reduction in • Dilemma of using the oil for domestic
air quality and deterioration in infrastructure purposes or exporting it

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Critical Challenges
Oil price war
• Cost of Saudi production is between $10 to $15 per barrel while many
USA shale fracking operations have costs approaching $60-$70 per
barrel
• Falling oil prices reduced profitability of oil extraction
• Two-thirds of US shale oil rigs shutdown by early 2016
• As long as OPEC holds the cost advantage, they will be able to dictate
global oil prices
• Japan is by far the largest importer of natural gas (122bn m3)
• The country has seen an increased focus on renewable resources of
energy
• Installed solar power capacity increased by more than 400% between
2012 & 2015
• Non-fossil energy's share of this primary supply is expected to
increase on the expansion of renewable energy and the restart of
nuclear power reactors
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America’s shale-energy industry has a future. Many shale firms do not

• Natural gas production from shale gas plays is expected to increase through 2040
• Eagle ford, Bakken shale and Marcellus shale account for 40% of US shale gas production
• Bakken oil production cost has seen an incredible fall with costs as low as $15 per barrel and falling, the cost
advantage enjoyed by OPEC seems to be diminishing
• Adaption in wake of tough times through efficiency in operational, use of latest technology to put focus on best
prospects resulting in cost cutting by 30%
• Funding still alive and at lower cost due to recent rise in oil price
• EIA January – 17 estimates oil production to rise from 8.9 mn b/d in 2016 to 9.3 mn b/d in 2018 mostly on back of
shale oil in Permian, eagle Ford in Texas
• Exuberant when oil prices were high and resilient when they are low, the shale industry appears unbeatable
• Till now Oil price shock countered through proper derivative hedge but going forward things are a bit tough

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Stakeholders Analysis
Core Domestic Industries
Chemical, Automotive, Steel
• Expectation of low input cost due
to cheaper energy prices
• Committing new capital
investments
• Against large scale export to
other countries
Oil and Gas players/companies
• Want to have maximum return for
investment
• Betting for large scale export to
other countries to get better
share of pie
• Portfolio balancing by existing
companies
US Government (DOE, FARC)
• To ensure maximum welfare of
country as a whole, energy
security
• Respecting trade treaties with
other nation, trade diplomacy
benefit
• To ensure commitment to
environmental treaties are
respected
Other Gas importing/exporting
Countries, OPEC
• OPEC may no longer a swing
player
• Japan and other importing nations
eying for import leading to low
energy costs, low trade deficit
• Russia and other exporting
countries losing bargaining power
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The way ahead

- The US shale industry has proved its entrepreneurial spirit and its skill in both geological and financial
engineering; and its new investments are likely to earn better returns than past ones
- All depends on oil prices, other energy sources prospects and environmental agenda- But it seems Shale
energy is here to stay
- Will recent cut by OPEC and Russia continue if Shale oil production further rise, what will be the role of
other players
- OPEC losing its swing producer role may be a realty soon
- Former oil industry veteran now part of Trump administration – further drive keeping environmental issues
at back front
- Who should make most out of the windfall – oil firms or the manufacturing, chemical and transport
industry and how much the same will impacted by Trump’s policies
- Henry Hub prices went down to ~$1.7/MMbtu in 2016. Again upward trend as of now.
- ~45 bcf/day of shale as of now but price will determine the production
- U.S. shale industry is "much leaner and fitter" following a massive slump in oil prices last year, according
to the International Energy Agency, no of rigs and productivity again on rise
- Impact of battery backed electric powered transportation revolution on the shale industry

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Learnings/Takeaways
• Energy market is more globalised than ever before – any disruptive/innovative event in any part of
value chain has immediate effect through out the whole ecosystem as also visible in the ripples
created by solar and batteries
• The interdependency between different energy resource is getting more complex day by day
• Rise of protectionist measures/resource nationalism in case of shale energy resources can change
the larger economic power equations existing in the world
•

• Shale technology export

• Natural gas producers
• OPEC response

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Thank You

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