Investing in a Global Shale Boom

Brian Hicks

Written By Brian Hicks

Posted September 18, 2013

A report by information company IHS reported that a shale awakening could be on the horizon in the next decade, as more countries will have the technological means to develop tight oil from shale formations.

shale gas 19The study identifies shale hotspots such as the Vaca Muerta of Argentina, the Silurian Shale fields of North Africa, and the Bazhenov Shale of Siberia as ones that could surpass oil production from the Bakken of North Dakota and the Eagle Ford of Texas. Together, these areas hold 175 billion barrels of recoverable oil versus the 43 billion barrels in North America.

All of these countries could become major shale producers after 2020, adding as many as 5 million barrels per day to the oil market – more than Iraq and Canada, according to Financial Times.

IHS studied a total of 148 sites around the world, comprising a total of 300 billion barrels of tight oil.

This is great news for you as an investor because it means long-term shale investments should U.S. oil production reach a peak. And many of these countries will not be able to develop their own shale resources without international investment and assistance from foreign companies.

This is good news for international investors, but it’s not so good news for those banking on U.S. oil exports and a rise in WTI’s status on the world energy market. If the U.S. chooses to engage in oil exports in the future, this could be mean much more competition should other countries join the shale energy boom and enter the exporting realm.

But overall, other countries developing their own resources are not likely to have a huge impact on North American production; the only entity that should truly be nervous is OPEC. Saudi Arabia and its fellow OPEC nations have already cut oil production due to inside turmoil and declining demand stemming from the North American energy boom.

If other nations around the world like China begin a vast campaign of domestic production, this would forever change the makeup of OPEC exports.

But before we get ahead of ourselves, there are issues these shale countries would have to overcome.

Shale Barriers

One of the most prolific problems around the world is the lacking fracking technology available to governments and local companies, which is why there will be a necessity for more outside investment. According to experts, it will take years for countries to catch up with Canada and the U.S. regarding fracking technology – not to mention the issue of property rights and the years of exploration it will take to ensue drilling operations.

One of the reasons North America has seen a surge in production is the lax fracking laws in states like Texas and North Dakota, which has spurred more investment in drilling technology. Other places around the world, especially Europe, still have stringent laws and local opposition to fracking.

Another thing that will prevent fracking is a lack of water. China is one of the most likely to join the shale production craze, but it may be held back due to drying rivers and a lack of drinkable water among provinces. North Africa may have the same problem, since water in that region is very scarce, and many North African countries have been fighting over water rights for years.

This will be a problem, since fracking normally requires millions of gallons of water for successful extraction.

And there is the issue of infrastructure, especially in North Africa, where social unrest tends to do massive damage to existing infrastructure, placing a halt on operations.

Another lingering problem will be cost.

Costs to develop shale resources abroad are significantly higher than in North America. Oil prices would have to be higher than current levels to spur the type of investment activity for shale oil drilling in other countries.

However, due to current unrest in parts of the Middle East, we could very well see a scenario where higher oil prices become the norm. This could be just the boost these countries need to begin production.

But the U.S. has faced these same types of problems – especially in regards to water shortages in South Texas and landholder rights across the country – and operations have been fine.

Despite the hurdles, these countries stand a good chance of joining North America in shale energy production.

World Shale Reserves

According to information from the Energy Information Administration, Russia currently holds the world’s largest shale oil formations, with 75 billion barrels of technically recoverable oil. The U.S. has 58 billion barrels, and China has 32 billion barrels. For shale gas, Russia still falls in the top ten, with 285 trillion cubic feet of natural gas reserves.

Although Russia will not admit it outright, it will eventually need outside investment help. Local companies to keep an eye on in Russia are Novatek OAO (MM: NVTK), Gazprom OAO (MM: GAZP), and Rosneft OAO (MM: ROSN).

Energy giants such as Royal Dutch Shell (NYSE: RDS-A) and Exxon Mobil (NYSE: XOM) are partnering with Russian companies in Arctic exploration, and a deal between Exxon and Rosneft will lend the Russian company the necessary expertise and knowledge in developing shale resources.

Russia may not be the top in shale gas reserves, but its ally China takes that spot with 1,115 trillion cubic feet of technically recoverable gas reserves, with Argentina in second place at 802 tcf and Algeria with 707 trillion cubic feet.

China suffered a recent setback after failing to spur enough investment for shale gas exploration – something that will set back the country’s goal of fostering shale production by 2015. Local companies that have been engaged in shale drilling in China are PetroChina (NYSE: PTR) and Sinopec (NYSE: SHI).

Both of these Chinese companies would have to spend over $20 billion on 1,800 wells to develop shale resources by 2015, and neither company has the appetite to embark on such heavy campaigns. For now at least, shale gas aspirations in China are on hold as other companies focus on other shale oil and gas projects in the region.

For the first time, China may be willing to allow outside investment to begin shale production, so the Middle Kingdom is definitely worth keeping an eye on.

Argentina is another country that plans to bring in international investment for its Vaca Muerta oil field.

Chevron (NYSE: CVX) signed a $1.5 billion deal with state company YPF (NYSE: YPF) for shale development. As part of a new investment plan to draw in more outside investors, companies like Chevron will be able to export 20 percent of energy resources without paying taxes, and they will be exempted from the country’s tight control over its currency.

Overall, China, Russia, and Argentina are the top three countries to keep on your radar. Major oil and gas companies have signed long-term commitments with governments and local companies, and these countries have some of the largest oil and gas reserves in the world.

Algeria is the third largest holder of shale gas reserves, but with civil unrest and lack of infrastructure, it will be a while before the country develops its shale resources.

Nevertheless, Algeria and the aforementioned companies can surprise the world by generating shale resources sooner than anticipated.


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