Monday, February 8, 2010

International Shale Prospects

I read some interesting comments about prospects for international shale gas made by Chesapeake Energy CEO Aubrey McClendon at an investor conference last week. When speaking about the prospects for major oil companies successfully exploiting shale gas assets in other countries, he said, "they will have a hard time over there at the end of the day."  Chesapeake has been involved in international scouting with its Marcellus Shale partner Statoil ASA, and he said that most international prospects lack the basic fundamentals for production and the quality of the shale formations is below what he has seen in the  U.S. 

Though the article noted above doesn't get into many specifics, success depends on having exploration and production infrastructure, from tools and equipment to skilled personnel to gathering and processing infrastructure.  Also important is a strong demand for the use of natural gas in a target country as well as a supportive business and political climate. 

Many of these are chicken-and-egg problems, but they are reflective of why the U.S. is a worldwide leader in natural gas production and the development of new technology.  Success here came not from major oil companies sinking billions of dollars into huge projects but from small businesses patiently developing resources, infrastructure and demand. 

Outside of the political and business climates, most of the concerns McClendon cites can be solved with patient investment and a long-term time horizon, but that's not how multinational oil companies operate.  Of course, nothing can overcome poor geologic circumstances, but I doubt much of that raw data will become public any time soon, so we'll just have to depend on hearsay for now.

One thing is clear:  major oil companies mostly missed the boat on U.S. shale gas.  McClendon has the right for a little "nanny-nanny-boo-boo" action.  If the majors want to be part of the shale gas boom, and I think they do, it will either come from international development or by buying a large domestic independent (like Exxon's purchase of XTO).  It was interesting to see that during the past year when gas prices cratered there were no "distressed" sales of major consequence.  It will be interesting to see if there are any big acquisitions on the upswing (if the market indeed swings upward).

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