Rest Of World Shale Gas Potential Plunges

by: Stone Fox Capital

As the US shale boom produces a bounty of dry gas and now even oil, the promises of a shale gas revolution in Europe and China is fading quickly. It may still happen, but it might take a decade to develop different techniques as the methods that worked in the US clearly aren't going to work in places such as Poland where population density and harder rocks make it a more complex and costly endeavor.

The shale boom had great promise in helping Poland and the rest of Europe lessen dependence on expensive Russian supplies. Instead, the Polish Geological Institute recently cut the estimated gas reserves by 85 percent.

Now before even starting, major US corporations like Exxon Mobil (NYSE:XOM), Chevron Corp (NYSE:CVX) and ConocoPhillips (NYSE:COP) are faced with doubts about whether the drilling will ever be feasible even if the gas does exist. This is a far cry from the scenario in the US where the technologies have already proven.

What is noticeable is the presence of the major US producers in Poland while being conspicuously absent in the major US shales. Naturally, Exxon is now present, due to the buyout of XTO, but it was largely absent in the discovery and initial drilling process.

This report from Bloomberg highlights the plethora of issues with drilling in Poland. The issues are as follows:

  • Poland needs to be build the infrastructure to process and handle the produced natural gas.
  • The greater population density reduces the areas that can be drilled.
  • Government already plans to announce taxes on natural gas production even prior to exploration success, crimping potential investments.
  • Explorers face multiple challenges getting rigs to new drill sites with most country roads not built for 1,500 ton machinery. This causes transport times to increase from days to weeks.
  • Rock formations are different than the US, requiring the industry to spend a considerable amount of time to derive the right drilling techniques and equipment.

All of these issues are adding up to well costs nearly 3x that of similar wells in the US.

Exxon is also hinting at issues in China that match Poland, not to mention that the country faces major challenges with the vast water needs for fracturing. Without new techniques, it seems implausible that China could support a robust shale drilling industry, as the vast population already faces water issues.

This lack of success outside the US makes me wonder if the US majors fail to understand or grasp an industry most of them largely missed in the US. Would a Chesapeake Energy (NYSE:CHK) or Devon Energy (NYSE:DVN) or Range Resources (NYSE:RRC) have better success? Or did these companies smartly avoid shales outside the US knowing the lack of exploratory wells and infrastructure would hamper drilling success?

While the story is still early, these latest developments are adding up to the US shale industry having a much more attractive asset than feared, as shale hopes popped up around the world.

Now if Western Europe and Japan want access to cheap gas, the countries are more and more likely going to push for US LNG exports. An IPO provides a potential opportunity to benefit from the failure of shale plays such as the one in Poland.

GasLog (NYSE:GLOG) plans to go public. It operates 14 carriers for natural gas shipping, and will be a big beneficiary of LNG exports out of the US, if it ever happens. The company will raise $400M in order to fund new carriers.

It may still be too early to pull the trigger on an investment in Chesapeake Energy or GasLog. Expanded industry use in the US will take a while and US exports aren't slated to ramp up until 2014 at the earliest. The recent news suggests that an investment point will occur maybe later this year as natural gas demand continues to expand while supplies outside the US aren't expanding.

Disclosure: I am long (COP).

Disclaimer: Please consult your financial advisor before making any investment decisions.