North American shale gas is attracting considerable international investment – as companies look to offset LNG risk with shale gas profits, export valuable fracking expertise abroad or simply secure minority partnerships in a growth industry. Energy consultant Donald Hertzmark analyzes international interest in North American shale as well as the potential for other countries to replicate recent successes.

Shale gas, the hot North American energy source of the moment, has developed tremendous interest from abroad, with international investors, ranging from oil supermajors to sovereign investment funds, clamoring to get a piece of the North American shale gas action. There are four key reasons why shale investments are so attractive to international investors at the present time: (i) defensive – shale gas is ruining my LNG business and I need to offset my LNG risk with shale profits; (ii) technology – we can learn how to frack the shale structures based on someone else’s experience and expertise, and then take this knowledge to the more protected home market and make lots of money; (iii) security of cash flows – the customers in the US pay real money for the gas and there is no price regulation at the wellhead; (iv) better than investments in mortgage-backed securities (MBS) – for investors looking to put surplus dollars in the USA, this shale play looks a lot better than the housing market.

Why the US Shale Market Has Proved a Fertile Field for Investors

For many years the production of gas from shale deposits was limited to one formation in Texas, underneath Forth Worth.  There was not yet a generalized understanding of the geological similarities to other shale formations in North America and an understanding of responses to hydro fracturing.  So naturally, production stayed mostly with the local players.  These small and medium-sized companies could act quickly with regard to investment decisions and individual drilling programs were within their financial capabilities.

It is not a coincidence that the first shale gas production came from Texas and Arkansas, two states entirely familiar with the gas industry and possessing infrastructure (rigs, manpower) and financial institutions similarly used by oil and gas operations.  The drillers were able to ramp up their operations quickly using the vast upstream infrastructure present in that region of the US.  As we now bask in the success of the shale gas industry, we forget that not everyone was able to produce gas in commercial quantities: some companies suffered technical failures, while others were unable to obtain sufficient financing and had to sell out to rivals.

Once it became clear that shale was for real and the opportunities almost limitless, the small companies that pioneered US shale gas production ran up against the reality of their limited financial and human resources – fewer rigs and skilled labor, suspicious regulators, NIMBY land owners – all factors that make development take longer and cost more, and which pose potentially substantial risks to smaller upstream companies than they do to larger, better capitalized integrated producers.  

See full article here.