Shell To Explore Shale Gas In Turkey

| About: Royal Dutch (RDS.A)

Last week, Shell (NYSE:RDS.A)(NYSE:RDS.B) started exploring shale gas in Turkey. We believe this will have a significant impact on the Turkish economy, Shell's bottom line (if the exploration is successful) and Russian gas companies.

The widespread application of hydraulic fracturing and horizontal drilling in the United States has aided the country in becoming one of the largest producers of unconventional natural gas. This excess supply has made the United States an exporter of natural gas; the increased supply of unconventional natural gas is also threatening the Russian oil and gas industry, since Russia is the largest producer of natural gas in the world, with exports to Asia and Europe. The low natural gas prices have also placed the U.S. manufacturing industry at a competitive advantage.

According to geological surveys, other regions with potential shale oil and gas reserves include China, Germany, Chile, Ukraine, Thailand, Russia, Poland, France and Turkey.

Turkish Economy and Dependence on Oil and Gas Imports

The Turkish economy has seen rapid growth over the past few years; however, its surging current account deficit has been a matter of concern for the government. Turkey imports almost 90% of its oil demand and relies on its domestic sources for the remainder. The country's natural gas production is negligible as compared to its vast demand and the country imports almost 98% of its natural gas demand, with most of its imports coming from Russia.

The reliance on imports to meet almost all of its energy demand has been the major factor contributing to the surging current account deficit mentioned above.

Potential Shale Reserves

As per the analysis of the U.S. government, released in early 2011, it is estimated that Turkey has around 15 trillion cubic feet of technically recoverable shale gas in its south east and western regions.

Environmental Implications of Shale Gas Production

Since shale gas production has an adverse environmental impact, due to potential hazards including the potential pollution of underground water, many countries in Europe criticize its production methods. Turkey will most likely proceed with shale gas production, due to the encouragement of the government to increase its reliance on domestic coal and nuclear energy, in a bid to cater to its energy deficiency.

Turkish Petroleum Corporation (TPAO) Negotiating with Foreign Companies

The state-owned TPAO signed an agreement with Royal Dutch Shell for the exploration of oil and gas in the Mediterranean, and the country's southeastern region. The Turkish energy minister announced at a joint press conference with Shell's CEO that the company had begun shale gas exploration in the Saribugday 1 field in Diyarbakir province last week.

The discovery of any significant reserves will have a positive impact for Shell and the Turkish economy. Such a discovery will not only increase the profitability of the company, but also give Shell a competitive advantage, making it the first major player to explore shale gas reserves in the region.

Exxon Mobil Corporation (NYSE:XOM) has also shown interest in investing for the exploration of shale gas in Trakya (western Turkey), and has held talks with TPAO.

However, sufficient time will be required for shale gas reserves to be developed. TPAO does not have the relevant technology, and is therefore relying on foreign collaborations.

Name

P/E

EV/EBITDA

Dividend Yield

PEG

P/B

P/S

Royal Dutch Shell

N/A

4.5x

4.7%

N/A

1.2x

0.5x

Royal Dutch Shell

N/A

4.6x

5.3%

N/A

1.3x

0.5x

Exxon Mobil Corp.

10.7x

6.1x

2.6%

1.4

2.5x

0.9x

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Shell offers one of the highest dividend yields in the large cap energy stocks. To have a detailed view about Shell, please refer to our previous article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Energy Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.