The Shale Energy Boom Continues

The Saudi princes are nervous; 92% of Saudi Arabia’s annual budget depends on oil sales. The fear is that the energy boom in the U.S. and elsewhere, driven by improved seismic technology, horizontal drilling, and fracking techniques, will diminish sales and OPEC’s dominance of global oil prices.

 Horizontal drilling involves boring a well vertically from a surface point to a subsurface reservoir location and then deviating the wellbore in a horizontal or near-horizontal direction through the oil or gas deposit. This allows greater production from a single well. While the concept is not new, it was only in the 1980s that the technique became commercially viable.

 Hydraulic fracturing (fracking) is a process that injects water, sand, and sometimes chemicals into a wellbore under high pressure to create fractures in rock or shale, allowing oil or gas to flow. Fracking techniques advanced in the late 1990s and into the 2000s, and combined with improved vertical and horizontal drilling techniques, created a renaissance in American energy production. Drilling prospects that were not viable before suddenly were. Witness the boom in North Dakota, Texas, and parts of Canada.      

The Financial Times (1/8/2013) opined that U.S. oil imports will fall to a 25-year low in 2014 as domestic production increases while demand grows slowly. As America becomes more energy self-sufficient with reduced imports, we will witness a major global geopolitical shift.

 Clean burning natural gas has environmental appeal compared to coal. The use of natural gas as a fuel in transportation fleets is growing. The Department of Energy has approved construction of liquefied natural gas (LNG) exporting facilities, positioning the U.S. as a net exporter of natural gas. The success in North Dakota’s Bakken Shale and Eagle Ford Shale in Texas has spurred the development of pipelines, processing facilities, and other energy infrastructure, increasing jobs, investment, and other economic activity that accelerates our economic recovery. Natural gas prices overseas are higher than in the U.S. Boosting exports could cause our prices to increase as prices move toward parity, but that will also spur greater production.

 Drilling activity is picking up in the Gulf Coast states and in south central U.S. Canada has vast untapped shale reserves. Mexico has significant shale deposits. Asian markets are eager for surplus North American gas. All of this potential may diminish the power of Russia and unstable Middle Eastern states as energy suppliers. 

 Over the next 5 to 6 years as technology advances further, the shale boom is likely to spread to China, Ukraine, Argentina, Australia, and Algeria, boosting oil and gas supplies and restraining prices that often jump in the face of Middle Eastern turmoil. China is eager for gas production to offset the use of coal in power plants.

 Reuters (10/5/2013) reported that China will replace four coal-burning power plants in pollution-plagued Beijing with natural gas fired facilities in an effort to clean up the capital’s notoriously dirty air. International business executives have spurned relocation to Beijing and other cities in China based on growing reports of choking pollution. Dirty coal produces about 70% of China’s power; the goal is to cut coal burning to below 65% by 2017 in the face of rising health problems from harmful particulates and citizen protests over all forms of air, water, and land pollution.

 The Kiplinger Letter (11/8/13) sees crude oil trading from $90 to $95 a barrel by year-end. Recognize, however, that energy forecasts have been somewhat unreliable.  On March 21, 2012, CNBC indicated that crude futures and oil analyst predictions suggested that Brent crude could reach $200 a barrel by the spring of 2013. On 11/16/13 Bloomberg reported oil futures at $108.50 bbl. for Brent crude and $93.84 bbl. for West Texas Intermediate (WTI) light sweet crude oil.

 Dependable and potentially lower cost energy supplies increases America’s appeal as a manufacturing and distribution hub, while expanding jobs and investment opportunities. We are a long way from the dour forecasts of recent ilk. Good news all around!

 

Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA).  Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092  ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com