Ronald-Peter StÃ¶ferle: "Nothing to spare" - Oil Outlook 2012
The development of unconventional natural gas resources has not exactly come a long way outside of the US. Due to the current dependence on Russian gas imports the development of shale gas would be highly relevant for most of the European countries to secure their future supply. This would suggest sound political backing, which, however, has not come around so far.
With the exception of Norway, all European countries are net importers of natural gas. This means that the development of unconventional gas resources would crucially improve the future security of supply. The following chart illustrates how enormously dependent many European countries are on Russian gas deliveries.
Environmental concerns are currently the biggest obstacle to the further development of shale gas in Europe. For example, France and Bulgaria have already banned hydraulic fracking. There is a moratorium on unconventional gas production in North Rhine-Westphalia, and the protests in the UK have been picking up as well.
The high water consumption and the fear of contaminated groundwater are the central arguments against unconventional gas production. However, we believe that is simply fear mongering. Shale gas tends to be found in depths of several kilometres, whereas ground water tends to be close to the surface (up to maximum depths of 300 metres).
In a 414-page study by the University of Texas45, many concerns are invalidated. According to the study, there is no direct link between fracking and contaminated groundwater. The biggest risks are associated with sloppy drilling, leaking sewage at the surface, and broken concrete linings of the drill holes that allow drilling fluid to contaminate the groundwater. But conventional production methods harbour the same risks46. If the cementation and lining of the drill hole are done properly, there is no risk to the ground water. This is where the producers have learnt from their initial mistakes.
Moreover, the study authors analysed the print, broadcast and online coverage of fracking in the United States. They found that the media mentioned shale gas production and especially fracking mostly in a negative context. Two thirds of national media painted a damaging picture, and in the local media, that share increased to more than 75%. Only a fraction of the media reports based their coverage on scientific facts and studies. Accidents and cases of contamination are highlighted, thus creating an extremely negative public perception.
The often-criticised water consumption involved in the fracking procedure is a case of over-dramatisation as well. The comparison with industrial sites, agriculture, mining companies, or the energy sector puts the high water consumption into perspective. An average drill hole requires about 15mn litres of water. An 18-hole golf course for example needs the same amount of water in two to three weeks47. On top of that the water management technologies are constantly progressing, leading to a significant decline in water consumption.
The next generation: "Clean Fracking"
The three leading oil service providers Baker Hughes ("DirectConnect"), Schlumberger ("HiWay"), and Halliburton ("RapidFrac") are currently testing the next generation of fracking technologies. The idea is to minimise environmental hazards, to increase the yield, and thus to make the production of shale gas altogether more efficient, cleaner, and less costly. On the one hand the new methods permit a better concentration of the pressure of the drilling fluid in order to reach deposits in deeper regions; on the other hand it significantly cuts down on water consumption. Currently, some 10-20% of any shale gas deposit is exploited, whereas that yield is often 80% for conventional natural gas. Estimates suggest that superfracking technologies could help reduce drilling costs by more than 70%, from USD 2.5mn to less than USD 750,000.
In addition, numerous methods are currently under scrutiny that do not require any chemicals or biocides. For example, the Austrian energy producer OMV stated, that they will not be using any chemicals for its planned test drilling in the substantial shale gas deposits in the Northern Weinviertel48 region. Instead, the company will resort exclusively to water, bauxite sand, and cornstarch, i.e. ecologically acceptable substances49. According to ExxonMobil, fracking will be possible without the use of any chemicals within two years from now.
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Fullermoney maintains that this is the second of two difficult decades in terms of tight oil and gas supplies for most countries currently dependent on imports of these essential commodities. However, we also remain confident that shale gas and shale oil are 'game changers' which will considerably lower the cost of these two commodities in real (inflation adjusted) terms during the next decade. This has already happened in the USA thanks to its innovation in the development of fracking.
What are the best ways for investors to profit from shale gas and shale oil?
I favour at least an average portfolio weighting in the energy sector, provided these shares show credible performance relative to broad market indices and also trade reasonable consistently above their 200-day moving averages. Conservative plays are among the high-yielding majors such as Royal Dutch Shell (monthly, weekly & daily). It remains the second largest holding in my personal long-term investment portfolio and the B-shares currently yield 4.79%, having approached its mean represented by the MA. I prefer to buy RDSB when its yield moves above 5% and we may see that before the overall upward trend resumes.
However, the biggest long-term beneficiaries of the coming shale gas and shale oil boom may be the economies which develop their domestic supplies, plus the industries which gain most from cheaper energy in future decades.