Wednesday, December 9, 2009

Talisman to Focus More on Shale

Yet another natural gas producer has taken steps to narrow its focus on shale gas.  Calgary-based Talisman Energy has restructured the company's North American business to spend fewer resources on conventional natural gas drilling and more on developing its shale leases. The move led to about 200 layoffs in Calgary, which sent shivers down the spine of the Alberta energy industry, which might see some dark days ahead.  Talisman is a big player in the Marcellus Shale and has interests in other Canadian shale plays.

Talisman is part of a growing list of companies that are adapting their business strategies to concentrate on the lower cost, higher production shale plays.  For Talisman, it comes at the expense of conventional drilling.  For Devon, it came at the expense of Gulf of Mexico and international properties. 

Moves like these seem to be a response to the belief that natural gas prices will remain relatively low for the next five to ten years as supply trumps demand.  As a result, exploration and production in higher cost fields might not be economical for a while.  Even if these fields are economical, this kind of production will not be attractive to large publicly held gas producers whose shareholders demand higher returns. 

But it might also be a bet on the longer term value of natural gas.  Assuming gas becomes a favored fuel source over the next decade, controlling large swaths of high yielding gas fields is an attractive proposition.

I keep wondering how this changing landscape impacts the small independents that built the North American natural gas industry.  Are they going to be squeezed out by shale, or can they make a living on the scraps in the conventional fields?  Perhaps it creates new opportunities as big players can't be bothered with marginal fields.  There certainly is precedent, as the shallow water Gulf of Mexico leases shed by the majors have provided many smaller companies with steady business.

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