Dave Forest and I are philosophically aligned. Dave writes "Pierce Points" everyday (and I read it every day) and he is a former Casey Energy newsletter editor. We've started sharing ideas and a key one for both of us is that we see huge shareholder wealth being created for oil and gas investors as the new technologies now used in North America - horizontal drilling and fracking - get exported around the world. Of course these technologies are 40 years old, but only in the last decade have they been perfected so they can get oil and gas out of shale rock.
Being able to make an economic hydrocarbon discovery in rock as opposed to the regular loose sands is about as simple as I can make the opportunity. It opens up the probability of billions of new barrels of oil to be discovered over the coming decade or two. Where is the next Saudi Arabia sized shale oil deposit?
I think we could find out in the next decade. These technologies were first perfected in the Barnett shale in Texas over a decade ago, and has now become the big growth engine of oil and gas production from Louisiana to northern British Columbia. Literally tens of billions of dollars in stock values have been created for oil and gas investors by North American oil and gas plays like the Barnett, the Haynesville gas shale, and the Bakken and Cardium oil formations.
But the question for investors is now - what's next for shale oil or shale gas? Where will the industry create billions in value next?
Dave is much more technical than I am - he's a geologist, I'm a journalist - so I asked him to share with readers where he sees the next big opportunities in shale oil and gas, for investors. "These technologies are quickly going to move around the world," he said. "Foreign companies are scrambling to learn the tricks and "take the show on the road". We've seen a slew of farm-in deals from companies like Total on shale gas acreage in Texas, and other foreign companies in other basins. More than production, these companies are looking to learn from their North American partners, and use this to unlock new basins abroad."
So which shale basins do you think will get developed next?
"Well, before I answer that, it's important to know that economic shale gas is about more than just geology. There are a lot of gas-bearing shales around the world. But making money cracking shales is a tough game. You need high-quality services at a reasonable cost. China is cheap but probably not good, and the UK is good but well costs can run 2 to 3 times the cost for a comparable well in Texas. That blows your profitability."
OK, sssoooo….how will investors know what the next big international shale play?
"Money will be made in overseas shale gas. But it will take places with
1) a strong gas market, and decent pricing,
2) lots of services competition, and
3) basins with good history of conventional production, where geologic data is readily available.
Poland and the Czech Republic have been held up as examples of countries where all these goals might be achieved. Perhaps more interesting is the shale gas activity that's starting to pick up in southeast Asia, e.g. northern Thailand. One angle here may be access to affordable, high-quality services from Japan. Combined with a strong southeast Asian gas market, shale gas projects might be economic here."
In our next story, Dave will help us understand how market economics in the gas industry in Europe is changing, and how that could affect shale gas plays there. Dave Forest's analysis on the natural resources sector has been featured on BNN, Kitco.com, Financial Sense and the Daily Reckoning. He is a professional geologist and formerly advised a worldwide client base on oil/gas, mining and renewable energy at Casey Research LLC. Dave currently serves as managing director of Notela Resource Advisors Ltd. and writes the daily e-letter Pierce Points, on natural resources and the macro-economics that drive the sector.