US Shale Gas: Demand Is The Thing

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By John Richardson

Here is one way of looking at the shale gas industry in the US from a March Oxford Economics Report:

  • While most of the companies that have made write-downs are not quitting, many players in this industry have already noted that the revolution is not as technically and financially attractive as they expected.
  • Rapid production declines and low recovery rates, despite technical improvements, remain problems in many plays and might worsen as operators move into increasingly challenging acreage.
  • Unless financial performances improve, capital markets won’t support the continuous drilling needed to sustain production from unconventional resource plays. Who can or will want to fund the drilling of millions of acres and hundreds of thousands of wells at an ongoing loss?
  • Parts of the industry will have to restructure and focus more rapidly on the most commercially sustainable areas of the plays, perhaps about 40% of the current acreage and resource estimates, possibly yielding a lower production growth in the US than is currently expected—but perhaps a more lasting one.
  • But a reorientation of the industry to more sustainable areas of product might rescue things, although the study also questions whether the industry can run a cash flow-positive business when operations are scaled-up.

This is interesting and, obviously, of key importance to the downstream petrochemicals industry.

But demand for shale gas and the things that are made out of shale gas, including, of course, petrochemicals and polymers is also the key here.

Our thinking on shale gas and all the things made out of shale gas is as follows:

  • Costs can be any number you like, but its affordability that counts.  If China is pulling back, and the wealth effect is ending, then people on today’s incomes in the US and those retiring simply cannot afford today’s prices.
  • At the end of the day, some cash is better than none if you have an interest bill to pay and so these fields will run and, potentially, keep the prices of gas and things made from gas depressed. But the problem will be selling all this stuff.

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