The future of shale: capital challenges and opportunities

Ernst & Young LLP

For US producers, shale success amid lower oil prices is increasingly dependent on the basin and operator, panelists explained during EY Oil & Gas Center’s Energy Executive Insight Session (EEIS) on Thursday, 9 October, in Houston. In the longer term, continued improvements in technology, cost efficiency and productivity will drive shale sustainability and economic returns.

“The longevity of shale, and whether or not it is a phenomenon that will encompass the world, is an issue at the forefront of the industry,” said Deborah Byers, the Oil & Gas Leader for Ernst & Young LLP in the US. “While we often hear of shale success stories, the disappointments and challenges are not as frequently discussed.”

Already dramatic increases in US oil production over the last three years, and sharply rising US refined product exports, have combined to dramatically reduce net US oil imports. Panelists noted that US refiners have been adapting their systems to take more of the light sweet crude and condensates being produced domestically, but there may be some limits on how much they can use economically.

As a result of the increases in production and related pressures, more and more attention is being paid to the idea of removing the long-held ban on exporting crude oil and condensates. The US Department of Commerce recently allowed the limited export of some condensates that have undergone specific types of processing, but a full lifting of the export ban will require a change in policy.

With a morning keynote from US Energy Information Administration administrator Adam Sieminski, EY’s EEIS also included discussions of the global opportunities and big bets for oil and gas investment going forward.

“North American shale investment continues to grow as companies strive for and shareholders expect relatively quick and high returns,” said Dale Nijoka, EY Global Oil & Gas Leader. “However, companies are also increasingly demonstrating the value of a well-balanced investment strategy.”

While panelists were primarily positive about US shale expectations, they expressed bearish views for shale development globally. Although US challenges include supply-side logistics and infrastructure issues, factors such as land ownership, infrastructure, water and land access are expected to impede global development.

With regard to choosing which countries generally to invest in, panelists mentioned both Mexico and Africa as having bright futures. Panelists also discussed the economic viability for US LNG exports and the impact of US shale gas on the global market.

“As part of the current geopolitical tensions especially with regard to Russia and China, the success of US LNG exports could be impacted by three questions,” said Alexandre Oliveira, EY Oil & Gas Emerging Markets Leader. “Can the country produce enough to export, will US LNG be competitive with Russian gas, and what will the impact be to other countries’ gas exports?”

Generally, panelists agreed there is plenty of shale gas in the US to export. Despite a declining amount of natural gas-directed rigs, US production continues to grow. However, panelists also referenced the importance for US projects to be able to compete in a global market and some argued the need for US gas may be a temporary trend — set to end when countries like China invest in their own gas projects. Either way, US LNG exports are expected to impact other LNG projects from countries like Australia.

The EEIS session concluded with a discussion by Tim Urban of Washington Council, Ernst & Young LLP, on US energy policy and the potential impacts of the midterm elections. In-depth analysis after the midterms will be available in a Nov. 6, 2014 webcast by Urban: Post-election analysis: impacts on US energy policy.

Moderated by Byers and Nijoka, EEIS panelists included: Fraser McKay, Principal Analyst, Wood Mackenzie; Alexandre Oliveira, Oil & Gas Emerging Markets Leader, EY; Michael Maher, Senior Program Advisor, Center for Energy Studies, Rice University; and Jonathan Lewis, Senior Vice President, Completion & Production Division at Halliburton.

 

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