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July 22, 2012Natural Gas
New technology for drilling Natural Gas in Shale Formations in America has brought a paradigm change in the Energy Market at least in North America. The price of natural gas has fallen precipitously even as its price proxy Crude Oil continues to remain in 3 digits.While there are a number of skeptics about the new Shale Gas Technology, the Oil and Gas Industry has made massive new investments into Shale Gas. Companies in China and India, are acquiring smaller companies in North America, to gain the new technology which can be used in the domestic markets. The new technology has led the estimates of natural gas to almost double in the last few years, as there are estimates of trillions of new cubic feet of gas in countries, where there were no major reserves a few years ago.
The Economist has a good info-graphic on the natural gas reserves of both the natural and shale gas types. With vast new reserves and production, electricity companies are converting their plants to run on natural gas which is both cheap and considered to be less polluting (though there are doubts about that). The one major side effect of all this, is that renewable energy is getting pushed back, as now natural gas is expected to last 200 years up from around 60 years. While prices of green energy have fallen quite a bit, cheap gas is pushing back the deployment of clean energy.
Read About the Advantages & Disadvantages of Natural Gas.
Because of those hefty transport costs, gas does not behave like a commodity. Only one-third of all gas is traded across borders, compared with two-thirds of oil. Other commodities fetch roughly the same price the world over, but gas has no global price. In America, as well as in Britain and Australia, it is traded freely and prices are set through competition. In continental Europe traded gas markets are gaining a foothold, but most gas is delivered through pipelines and sold on long-term contracts linked to the price of oil, for which it used to be seen as a substitute. Gas-poor Asia relies heavily on imports of liquefied natural gas (LNG). “Stranded gas”, too far from its markets to go down a pipe, can be turned into a liquid by cooling it to -162°C, shipped in specialist tankers and turned back into gas at its destination. But the huge plants needed to do the job at both ends are very costly.
Global reserves have been steadily increasing for at least 30 years. According to a report from the Massachusetts Institute of Technology (MIT), published last year, world production has grown significantly too, rising by two-fifths between 1990 and 2009, twice as fast as that of oil. Only half a decade ago it looked as though the world might have only 50 or 60 years-worth of gas. Now shale and other unconventional as well as new conventional gas finds have increased that period to 200 years or more, by some estimates.
The unconventional-gas bonanza has roughly doubled the gas resource base, a measure of the total gas in the ground rather than what might be economically recoverable. In 2009 the IEA estimated the “long-term global recoverable gas resource base” at 850 trillion cubic meters (tcm), against 400tcm only a year earlier. The main reason for the rethink was shale gas and other unconventionals. Not just America but parts of Europe, China, Argentina, Brazil, Mexico, Canada and several African countries, among others, sit atop as yet unknown quantities of gas that could transform their energy outlook.
Reliance’s Strategy in Acquiring Shale Gas Assets is to Assimilate Extraction Technology
Reliance Industries which is India’s largest privately owned company has already acquired equity stakes in Shale Gas Assets. Reliance Industries had diversified into upstream production of Crude Oil and Gas after India’s opening up of the Exploration Sector to private participation. The company has a massive Free Cash Flow being generated every year which it is looking to invest through Green Field Expansion. The company has already spent a massive amount in investing in India’s Broadband Wireless Sector.
The company has already spent almost $3.5 Billion on Shale Gas Asset Buys in USA. Two of the Acquisitions have rights to Extract Shale Gas from the Marcellus Field which is North America’s Largest. Note Reliance Industries has been looking to grow its footprint but the economic recovery soured its dream of doubling its size through the acquisition of Petrochemicals Giant LyondellBasell. Now Reliance is going berserk in acquiring this “New Fossil Fuel” in order to gain a first mover advantage. Its biggest Shale Gas Buy was a 40% stake of Marcellus Block owned by Atlas Energy. Under the deal, Reliance will spend $1.7 Billion over the next 5-7 years which can increase to $5 Billion depending on the growth of the business. The company also acquired a 45% stake in a Texas Field for a total payment of $1.35 Billion. Reliance’s overall commitment to Shale Gas pales in front of Exxon Mobil’s $31 Billion Acquisition of Shale Gas Company XTO Energy.
Reliance will look to quickly assimilate the technology of Shale Gas Extraction which it can leverage in other parts of the world. The Technology is relatively new and most advanced in USA. This is the reason behind acquiring small stakes with different partners. Reliance’s Strategy in Shale Gas makes a lot of sense. The Technology is but new and unproven on a long time scale. There have been concerns about the Environment Impact of Shale Gas Extraction. Also low Gas Prices due to the GFC has made the industry growth slowdown.