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U.S. Companies Sense Great Opportunities in Shale Oil and Gas Boom

February 7th, 2013

by Team

of Thomas White International

Thanks to the newfound sources of energy, the U.S. is forecasted to become self-sufficient in energy by 2035.

America’s dependence on oil is well-known. Beginning in the late 1950s, the country’s hunger for energy was fueled in part by gas-guzzling sedans, and then SUVs. Soon, the energy-sufficient nation became a net importer of oil, natural gas, and coal. Currently, the world’s biggest oil consumer gobbles up no less than 19 million barrels of oil a day, which translates to about a fifth of global energy consumption. Though China has overtaken America in overall energy consumption, per capita energy usage by individuals in the U.S. is much higher than that of their Chinese counterparts.

Due to its reliance on foreign oil from regions as far as the Middle East, the United States often had to play the role of the policeman to ensure its safe passage. Big oil producers such as Saudi Arabia, Iraq, and Iran tried to corner the nation with tactics such as the Arab oil embargo of 1973, which prompted then President Richard Nixon to mull the idea of America’s energy independence. However, the lofty idea remained a topic of political rhetoric for decades.

Source for all data: U.S. Energy Information Administration

The idea now seems to be gathering pace, thanks to the humble shale rock that has proved to be rich in repositories of oil and natural gas. The Paris-based International Energy Agency (IEA) has projected that by 2020 the United States could become the biggest producer of oil, overtaking Saudi Arabia. The IEA joins the OPEC and the U.S. Energy Information Administration in coming out with forecasts for a sharp increase in domestic oil production in the years ahead. According to a WSJ report, U.S. oil production is estimated to reach 11.1 million barrels a day by 2020, with natural gas displacing oil as the single largest fuel in the domestic market by the year 2030.

Production figures also attest to the shift in energy consumption towards less-polluting fuels, with natural gas contributing to 31 percent of power generation during the first eight months of the year, compared to the year-ago figure of 24 percent.

Thanks to the newfound sources of energy, the U.S. is forecasted to become self-sufficient in energy by 2035.

DRIVERS OF THE SHALE OIL BOOM

Technology : The abundance of oil and natural gas in the domestic market is the result of two decades of painstaking research and digging, assisted by technologies such as hydraulic fracturing and horizontal drilling.

Fracturing, or “fracking,” as the process is often called, involves injecting massive amounts of a high-pressure mixture of water, sand, and chemicals into the dense shale rocks to extract natural gas and oil.

The glut in natural gas production from shale beds, which has touched 37 percent of the total U.S. gas production compared to a meager 2 percent just a decade back, has also made this process dirt-cheap.

Interestingly, it was the successful extraction of natural gas that led explorers to apply the same technology to dig out “tight oil,” which lay several layers deeper. The process, though much more expensive in the case of oil extraction, has seen U.S. oil output rising 25 percent since 2008.

Market dynamics : Fluctuating oil prices have been the bane of the domestic economy with the oil bill alone shaving off a chunk of the country’s GDP. The huge bill for imported oil also widens the U.S. current account deficit. In simple economic terms, when prices of petroleum products are high, consumers typically have to spend more of their income to meet their energy requirements such as fuel for their automobiles and electricity to keep their homes warm, leaving them little to spend on goods and services. Higher oil prices increase the input costs for producing goods and services because transportation costs go up .

Rising geopolitical uncertainties : Large oil companies are finding it difficult to operate in countries such as Russia and Venezuela, which favor government-owned companies.

This fact encouraged big energy firms to invest in shale deposits in the U.S. and Canada, which also helped facilitate faster development of unconventional energy sources in North America .

Demand for clean fuel : Traditionally, the U.S. had been dependent on polluting coal for producing electricity. With increased focus on reducing carbon emissions, natural gas produced from shale rocks has offered a cleaner alternative to generate electricity .

WORLD’S ENVY, OWNER’S PRIDE

The boom in shale oil and gas production in America is hardly surprising since the country has a well-developed system of pipelines and other infrastructure such as rigs ready to be used. Most of the land is private, which can be made easily available for exploration as farmers get liberal incentives.

Source: U.S. Energy Information Administration

Well-developed financial markets ensure availability of capital for new exploration activities. Above all, the country has a highly competitive energy production industry which encourages small independent energy companies to experiment with new techniques.

BENEFITS OUTWEIGH CONCERNS?

Fracking has revolutionized the process of extracting oil and natural gas from shale rocks. While no one can deny the fact that the economy has benefited immensely from the shale gas boom, the pollution of air and ground water caused by the process has also been widely acknowledged. At the outset, it looks like a classic case of the industry versus environment debate.

The question now is whether the benefits seem to outweigh the so-called concerns regarding the process of fracking. The objections are manifold, right from the excessive water usage involved in the fracking process to the release of methane, a greenhouse gas during the process of production. An Economist report points to the IEA estimate, which said shale-gas production emits 3.5 percent more methane than conventional gas extraction.

Supporting the case for fracking, it is expected that the safety and pollution aspects of the issue will receive greater attention with the involvement of bigger and well-established companies in shale gas exploration and production. Moreover, contrary to the objection of greens, the success of fracking has in fact helped lower greenhouse gas emissions in the U.S. to the lowest levels since 1992 as lower gas prices have ensured that natural gas is increasingly replacing coal as the leading source of electricity.

SOME DOMESTIC PLAYERS

COMPANY

BUSINESS

CONTRACT/PROJECT

Chesapeake Energy

Exploration and production of natural gas and oil

The company owns leading positions in Eagle Ford, Utica, and other unconventional liquids plays, as well as in the Marcellus and Barnett unconventional natural gas shale plays

Exxon Mobil

The biggest U.S. oil producer

The oil major is on track to buy Canada’s Celtic Exploration to gain access to shale oil and gas properties in British Columbia and Alberta

Anadarko Petroleum

Independent oil exploration and production company

The Eagle Ford formation in South Texas is its main exploration area. The firm acquired rights for six shale wells in Utica in October 2011

Apache Corp.

Exploration and production of natural gas, crude oil, and natural gas liquids

The company’s main exploration areas are the Liard Basin Gas Shale in British Columbia and the Vaca Muerta (Dead Cow) Shale in Argentina

Hess Corp.

Energy company which operates in exploration and production as well as marketing and refining segments

The company acquired Marquetta Exploration LLC for $750 million in 2012, and also signed a 50 percent JV with CONSOL Energy to develop its shale assets in Utica

SOME FOREIGN PLAYERS

COMPANY

BUSINESS

COUNTRY OF LISTING

CONTRACT/PROJECT

BHP Billiton

Iron ore mining

Australia

The global mining company acquired Texas independent shale company PetroHawk Energy in 2011. The Eagle Ford shale formation and frontier Permian Basin are the company’s main operations

Petronas

Oil explorer and producer

Malaysia

This Malaysian firm acquired Progress Energy of Canada to gain access to vast reserves of shale oil and natural gas

Indian Oil Corp., Oil India Ltd.

Oil refining and marketing

India

These state-run Indian firms jointly bought a 30 percent stake in Houston-based Carrizo Oil & Gas’s Niobrara shale asset in Colorado in October 2012

Reliance Industries Ltd.

Petrochemicals, oil and gas refining

India

India’s largest listed company has stakes in three shale gas joint ventures in America

Total S.A.

Exploration and production of oil & gas and LNG

France

The French company is in a joint venture with Chesapeake Energy and EnerVest to invest in Ohio’s Utica shale

Sinopec

Oil refiner

China

The Chinese oil firm has struck a deal with Devon Energy to invest in five shale fields in the U.S.

Sources: Reuters, The Wall Street Journal, The Financial Times

This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.

FORWARD LOOKING STATEMENTS

Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.

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