Forget oil, shale gas just gets sexier | FT Alphaville

Forget oil, shale gas just gets sexier

As BP’s oil leak disaster adds to concerns about growing regulatory and safety risks of oil, coal and other conventional energy sources, shale gas is burnishing its reputation as the sexy new energy play.

While the complex process of extracting gas from shale rock has drawn criticism about its environmental impact, the magnitude of BP’s Gulf of Mexico oil disaster might overshadow those concerns.

In the realm of mega-shale gas deals, ExxonMobil led the way with its $41bn deal late last year to buy XTO Energy, the shale specialist. And while the big projects are concentrated in the US, European energy companies including BP, Statoil and Total have been investing in US shale for some time.

Since then, US shale has attracted an extraordinary range of investors, from US buy-out groups  to Asian sovereign wealth funds (China, South Korea, Singapore) and Indian congolomerates (Reliance Industries).

It has also drawn enthusiastic endorsements from analysts including in a recent Credit Suisse research note, cited by the FT’s Energy Source blog, saying BP’s oil spill should encourage US lawmakers to “give natural gas a chance”. The note continues :

The combination of the oil spill and the Masey coal accident should further shine a light on gas. The administration HAS to think more about incentivizing use of clean, available, domestic natural gas, given the identification of massive shale resources in recent years.

The FT’s Gideon Rachman, meanwhile, highlighted growing expectations that shale gas could help solve “one of the most vexatious problems in foreign and economic policy – energy security”. Lofty expectations indeed.

Some have questioned the yields from the wells themselves, which tend to peak very quickly. But investors are not put off.

KKR for example has just sealed its second big shale gas deal this year – an agreement to invest $400m in a joint venture with Hilcorp Energy to develop the Eagle Ford Shale in South Texas.

As Bloomberg reported on Monday, the deal comes just two weeks after the US buy-out firm announced huge profits on an earlier natural-gas investment, after Royal Dutch Shell agreed to buy East Resources, a US natural-gas explorer, for $4.7bn; KKR had paid $325m for a one-third stake in East Resources only one year ago.

Not a bad for a year’s investment. Marc Lipschultz, global head of KKR’s energy and infrastructure business,  summed up the buy-out industry’s view of such deals when he told Bloomberg: “In some respects, it is classic private-equity investment and in other ways it is not”.

“The investment is a great model for us because we are matching a sector that has enormous needs for capital and the potential for large future cash flows with the necessary capital and operating support it needs today.”

Reliance Industry, meanwhile, India’s largest private sector oil refining and production group, is also following up on a recent deal, coming back for a second bite of the US shale gas pie.

All very well.  But, asks Energy Source, are both critics and enthusiasts jumping the gun on shale gas? Factors to watch include a big review being  undertaken by the US Environmental Protection Agency, as well as questions raised in the US Congress earlier this year. US gas prices, meanwhile, remain low while drilling continues apace.

Meanwhile, beyond the fast-growing world of shale-gas dealmaking, an interesting one to watch is Chevron, one of the few energy giants to voice strong caution. In fact, the energy giant’s CEO John Watson recently remarked that the “price tag is too high” for shale-gas projects to warrant the investment.

As Watson, who only took the top job at Chevron earlier this year,  told the FT last month: “We haven’t yet seen the returns [from shale-gas projects]”.

Related links:
Analysis: A foot on the gas – FT
Get ready for more US shale oil – FT Energy Source
PetroChina’s $1.5bn gas investment – BeyondBrics
KKR to invest $400m to develop shale gas in Texas – WSJ