Shale Gas-Published March 2012

             Last issue we showed a map of the natural gas shale basins located throughout the U.S..  It covers about half of the country.   This is also true for many other nations as well.  These shale gas reserves, and to a lesser extent shale oil, is about to change the marketplace. 

             For consumers, it could equate to savings that could last for decades.  Our local gas distributor, Fortis, announced that the average homeowner should experience a $100 cut in their annual home heating bill with the price of natural gas below $3.  With today’s price of $2.12, additional reductions should follow. 

             Unfortunately for governments, this will most likely be a  drop in tax revenue.  For the energy sector, only a few with deep pockets will remain in the gas exploration business.  Since there are huge gas reserves building, this should take pressure off rising oil prices. 

             For investors, money should be invested in those companies that build gas plants and pipelines only.  We recommend one avoid all gas shares.  Over the past month some small gas exploration companies have either cut or eliminated gas exploration due to low gas prices.  These actions make it obvious there are no profits to be made.  The next step will be to cap smaller gas fields.  Doing so will not make any difference to the growing world-wide supplies and falling prices. 

             It is estimated both China and the U.S. could have 200 years worth of reserves.  Qatar has one of the world’s biggest gas reserves, estimated to be up to 400 years.  One pool alone is expected to hold over 100 years supply.  This pool will not be touched for decades as existing fields are so huge that Qatar will not need any more gas to export. 

             Lower gas prices hurt Qatar.  Yet it should still make lots of money when prices fall to the $1.50 area within 2 years. Whether it is luck or foresight, the country has built gas plants, ocean tankers, and storage tanks in Europe.  Their infrastructure is already built and operating giving Qatar a nice competitive advantage. 

             There are huge shale gas reserves in Queensland, Australia. There is believed to be one of the world’s biggest unexplored shale gas reserves under the Mediterranean sea, between Cyprus and Israel and pockets near the Dead Sea.  Oil has been found there before, but only in tiny amounts.  If it is shale oil rock then Israel could possibly become energy self-sufficient. Eastern Europe may also be sitting on huge shale gas rock deposits. 

             If the latter is true, the political ramifications can be huge. Eastern Europe has relied on Russian gas for decades. As a result, the Russians have been blackmailing Eastern Europe for years, often slowing, if not cutting off the gas flow in the process. This will not happen anymore. In a few years time, Eastern Europe will no longer rely on Russian gas and Russia will be heading into tough times, and maybe even social unrest. Russia not only needs the foreign currency, but relies heavily on the political influence the commodity delivers. 

             Russia most likely has huge shale gas rock reserves.  Most of this will not be tapped for years for the simple reason there will not be a market to sell it. This is the case both internationally and domestically.  Natural Gas has been one of the main money earnings for the Kremlin. Now there will be little money left to bribe the Russian citizen and other countries. The Mafia is in trouble.

             China will most likely develop very little of it’s shale rock reserves in favor of cheap reserves from Australia and elsewhere. In 50 to 100 years gas prices will move up substantially as the West’s reserves are depleted. When this occurs, the West reserves will be very expensive to mine, while China will still be sitting on its cheap undeveloped shale gas rock.

             On the one hand, there are definitely some potential positives from shale. Specifically, if the auto industry can figure out how to mass produce cars using natural gas, the savings being passed onto consumers would be huge.  If this is the case, other industries will most likely follow.

             On the other hand, this gas will destroy solar and wind industries because they are not competitive with current prices. Established wind farms, such as those near Lethbridge, Alberta, off the coast of Copenhagen, and near Costa Del Sol, Spain, will survive.  But, as far as industry expansion is concerned, good luck!  It is most likely a dead industry for now.

             It will take anywhere from 3 to 7 years before the full effect of shale gas hits the marketplace.  New gas plants will have to be built, existing ones retrofitted, and more pipelines laid. Shale is going to alter many industries. We anticipate most new homes and buildings will be built utilizing gas.

             On the plus side, we are probably only 1 to 2 years away from oil prices moving below $100 and staying there for years, maybe even decades.  Similar to natural gas, there is plenty of oil available today. Currently in the U.S., there is the highest amount of surpluses since 2009 because oil production has increased by 1m b/d. The problem is that there are not enough pipelines to handle the increased production. Furthermore, no one talks about the potential of shale oil rock of which there is plenty. 

              Shale aside, both Canada and Russia are adding oil production on a monthly basis. Current supply is also being exacerbated by a massive oil field off the coast of Brazil; Iraq is producing the most oil in over 30 years; and Libya will soon do the same. If the glut was not real, Saudi Arabia would not be forced to shut in close to 4m b/d due to no buyers. Sorry Doomsayers, Peak Oil has been delayed by at least 50 years, probably much longer . 

               As more shale rock is discovered, the more downward pressure on oil will increase. We can see $70 to $80 being the new norm within 2 years, and bouts of $40 to $50 during world recessions. This is good news for the consumer because cheaper energy equals additional spending elsewhere which will also be good for stock markets. 

              The only threat to cheaper energy prices is government. Politicians might raise energy taxes to offset the falling revenue and hope the consumer will not notice. In B.C. and elsewhere, many energy taxes are based on a percentage basis, as the price rises, so does their take. Have you noticed not one government in Canada has spoken out about rising gasoline prices? Of course not. The politicians are making too much money from of it.

              If $70 to $80 is going to be the new norm it will hurt the Middle East, OPEC, and Russia. It could easily create social unrest in the latter. For China and Indonesia, this will be a bonus because  the economies will continue to grow and both will become more prosperous. If this turns out to be true, both will need Canadian and Australian resources.

              Interestingly, if Australia and Indonesia can agree on drilling in the disputed Timor Sea, which is believed to hold one of the world’s biggest untapped gas and oil reserves, it could make Indonesia self sufficient in both. Similarly, Australia can also become energy self-sufficient with shale rock.

             The only sure thing is the world will be a different place by 2015 than it is today. Energy prices will change the way many countries operate and governments will face shrinking energy taxes unless they raise them. There is no doubt about it, we are entering into interesting times.