Shale’s allure rises as costs decrease
Hope increases for stalled work in the Karoo basin
Houston – Investors who took a hit last year when dozens of US shale producers filed for bankruptcy are already making big new bets on the industry’s resurgence.
This newly found appetite by investors could come as good news for South Africa’s shale gas development programme which had until recently hit a brick wall. Mineral Resources Minister Mosebenzi Zwane last month revealed that government has given the goahead for shale gas develop- ment in the Karoo, a region traversing the three Cape provinces of SA. Shale gas production has in recent years been responsible for the international oil oversupply which resulted in fuel prices falling.
In the first quarter, private equity funds in the US raised $19.8-billion (R264-billion) for energy ventures – nearly three times the total in the same period last year, according to financial data provider Preqin.
The quickening pace of investments from private equity, along with hedge funds and investment banks, comes even as the recovery in oil prices from an eight-year low has stalled at just over $50 (R668) per barrel amid a stubborn global supply glut. The shale sector has become increasingly attractive to investors not because of rising oil prices, but rather because producers have achieved startling cost reductions – slashing up to half the cost of pumping a barrel in the past two years.
Investors also believe the glut will dissipate as demand for oil steadily rises. That gives financiers confidence that they can squeeze increasing returns from shale fields – without price gains – as technology continues to cut costs.
“Shale funders look at the economics today and see a lot of projects that work in the $40 (R535) to $55 (R735) range” per barrel of oil, said Howard Newman of equity fund Pine Brook Road Partners.