Thoughts on US shale space, global gas mar­kets

Arab News - - Business - CORNELIA MEYER

On Sunday, Ch­e­sa­peake En­ergy, the pi­o­neer shale gas pro­ducer based in Ok­la­homa City, filed for Chap­ter 11 US (fi­nan­cial re­or­ga­ni­za­tion) bank­ruptcy pro­tec­tion. It would be wrong to draw too many con­clu­sions from Ch­e­sa­peake and the US shale space to gas mar­kets in the rest of the world. Other than LNG (liq­ue­fied nat­u­ral gas), gas mar­kets are in­her­ently lo­cal which is why one has to look at gas through a dif­fer­ent prism in North Amer­ica, Asia, Europe, or the rest of the world. As for the US, Ch­e­sa­peake was one of the lead­ers in the shale break­through more than a decade ago. Its fate high­lights the woes of that space.

Com­pa­nies such as Ch­e­sa­peake turned the for­tunes on the US hy­dro­car­bon sec­tor around, pro­pel­ling the coun­try into a dom­i­nant global en­ergy player. Ch­e­sa­peake was for a time the sec­ond-largest gas pro­ducer in Amer­ica. The ready avail­abil­ity of rel­a­tively in­ex­pen­sive gas ush­ered in a new era for US in­dus­try and its pro­duc­tiv­ity.

For­tunes started to turn for shale oil and gas pro­duc­ers when OPEC opened the taps and for a time abol­ished quo­tas in 2014. Oil prices fell, which was bad news for shale pro­duc­ers, which have a higher cost of pro­duc­tion and have huge needs for liq­uid­ity, be­cause frack­ing is not cheap and wells have a short life span ne­ces­si­tat­ing con­stant drilling of new wells a few miles over.

In re­sponse, en­tre­pre­neur­ial shale pro­duc­ers adapted and low­ered pro­duc­tion costs ev­ery month un­til the shale space be­came com­pet­i­tive again.

The coro­n­avirus dis­ease (COVID-19) pan­demic and the col­lapse in de­mand for oil and gas again led to a price de­te­ri­o­ra­tion. Few will for­get April 19 when the price of West Texas In­ter­me­di­ate (WTI) briefly fell to mi­nus $37 per bar­rel — a deeply trau­matic mo­ment for any oil pro­ducer.

Ch­e­sa­peake’s share price is a good ex­am­ple of the state of the shale space. It briefly flirted with $13,000 in the sum­mer of 2008. It now trades at $11.25. There was a lot of volatil­ity be­tween then and now.

Ch­e­sa­peake’s fil­ing for Chap­ter 11 may open the flood­gates for other com­pa­nies to fol­low. The sec­tor as a whole faces $300 bil­lion worth of write-downs this year, ac­cord­ing to Deloitte. Many more com­pa­nies are in deep trou­ble, es­pe­cially as they tend to be highly lever­aged and can­not af­ford to ser­vice their debt.

The cur­rent sit­u­a­tion will not hail the end of the US oil and gas shale space. Bank­rupt­cies will lead to con­sol­i­da­tion. Big oil and gas will be among the win­ners, be­cause they have the bal­ance sheets to stem ac­qui­si­tions. Other play­ers will also gain more promi­nence and new com­pa­nies will emerge.

So much for the US. As gas is a re­gional player, how about the rest of the world?

When look­ing at the global de­mand pic­ture, gas was not as heav­ily im­pacted as oil by the COVID-19 lock­down, but it was far from im­mune. Ac­cord­ing to the In­ter­na­tional En­ergy Agency, global gas de­mand will fall by 4 per­cent in 2020, the deep­est de­cline on record. A hot sum­mer in the US will be good news for gas de­mand. Else­where things may look less op­ti­mistic. The head­winds for gas are grow­ing for dif­fer­ent rea­sons.

Gas has ben­e­fit­ted from global sub­sti­tu­tion ef­forts for coal. It saw a par­tic­u­lar in­crease in China when the cen­tral gov­ern­ment wanted to clean up the en­vi­ron­ment.

There is a dan­ger that lo­cal gov­ern­ments in China will in­vest again in new coal power pro­duc­tion be­cause it is easy to do so and rel­a­tively cheap. The same holds true in some other coun­tries such as In­dia, Viet­nam, and In­done­sia. This does not mean that gas is out, just that there is com­pe­ti­tion to build­ing new gas-fired pow­er­plants, both from coal as well as from re­new­ables such as so­lar and wind. The lat­ter have a lower car­bon foot­print than gas and are quickly es­tab­lish­ing them­selves as a low-cost al­ter­na­tive.

Par­tic­u­larly in Europe, gas is in­creas­ingly com­ing un­der fire from en­vi­ron­men­tal lob­bies, which pre­fer re­new­ables. This is ev­i­denced by the EU’s “green deal,” a ma­jor in­vest­ment project which also fo­cuses heav­ily on re­new­ables.

The con­trac­tion of gas de­mand due to the COVID-19 out­break and the un­cer­tainty over fu­ture growth pro­jec­tions do not con­sti­tute the end of gas, but the in­dus­try will change and the cli­mate will be­come in­creas­ingly dif­fi­cult as more coun­tries tighten their reg­u­la­tions on CO2 emis­sions.

Ch­e­sa­peake is a good ex­am­ple of the woes in the US shale space. Gas mar­kets in other parts of the world face is­sues too, but they are dif­fer­ent. One size does not fit all.


We re­ally want to build back bet­ter, to do things dif­fer­ently. Boris John­son Prime min­is­ter of Bri­tain Bri­tain’s Prime Min­is­ter Boris John­son vis­its the con­struc­tion site of Eal­ing Fields High School in Lon­don on Mon­day.

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