Fracking: all shale the chief


Taking Stock has previously discussed the topic of shale gas and the controversial extraction process of fracking to break deeply buried and impermeable rocks to enable gas to be recovered at surface.

Fracking is a controversial process that has been questioned by many who live off the land.

Now regardless of your view on fracking it is undeniable that the success in commercialising shale oil and gas has become a game changer for the US, rapidly moving the country towards energy self-sufficiency.

Over the past few weeks a number of articles have been written that indicate that the term 'peak oil' - which has been touted in the past decade in relation to both the world's oil supply and the expected price increase as these supplies dry up - will become a distant memory.

It is believed that the US has more gas than the Middle East has oil. So much so, that the US has the potential to become the world's largest gas and oil producer, and in time a significant hydrocarbons exporter. This has the potential to keep a lid on global oil and gas prices in the future.

If the US is headed this way it would mark a significant difference between how the US coped with its debt situation compared to Europe, which has no significant growth industry to save it.

The entrance of the US as a potential major low-cost energy supplier could also threaten Australia's growth opportunities in the liquefied natural gas (LNG) space.

Barely a week goes by without a major international oil company commenting on the very high cost of doing business in Australia (due to the high cost of labour and high Australian dollar, for example).

Last week we heard speculation of a $20 billion or almost 50 per cent cost blowout to Chevron's Gorgon LNG development.

This declining international competitiveness is not a good sign for the Australian economy which is relying on new investment to stretch out the mining boom beyond the iron ore and coal cycle.

Cheap oil and gas will also put pressure the uranium and renewable energy sectors.

And although Australia too has significant quantities of shale hydrocarbon resources - most notably in the Cooper, Canning and Perth basins - and the companies in those areas continue to have success which has and is likely to see them perform well on the stock market, the main problem is that they are five to 10 years behind the US in terms of producing large quantities of hydrocarbons from these fields.

At this point it is worth mentioning BHP-Billiton's Marius Kloppers and Michael Yeager for their foresight to move into this sector, even though they were ridiculed after purchasing large US shale assets only to see the price of gas halve. This led to large asset write downs and the two opting out of their yearly bonuses.

However it is now expected valuation improvements will offset those impairment charges and the company believes that over the medium to long term these assets will be very profitable to BHP.


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_Information contained in this article does not consider your personal circumstances. You should consult a stockbroking professional before making any investment decisions. Sentinel may hold positions in stocks discussed from time to time. _

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