Shell: Shale gas is an investment for tortoises rather than hares. With gas prices moribund, Royal Dutch Shell shareholders cannot expect a quick return from the $4.7 billion purchase of East Resources. But, the travails of US deepwater drilling underscore the difficulty Big Oil faces in replacing energy reserves, and perhaps explain the Anglo-Dutch energy giant’s motivation.
The dash for gas has already been costly for the energy majors. In theory, the dismal outlook for gas should have enabled them to scoop up assets at bargain basement prices. The new mining techniques known as “fracking” that have brought around 616 trillion cubic feet of gas within reach have also depressed prices. At just over $4 per million British thermal units, gas is still trading at a third its 2005 peak. If futures traders are to be believed, gas will continue to hover below $6 in coming years.
Even so, the frantic desire of the supermajors to migrate back to the political safety of the United States means there is no shortage of rival bidders for gas-producing assets. So, the roughly $4,500 per acre that Shell is paying for East's territory in the Marcellus Shale is within the broad range of recent deals, but no steal. Just three years ago when shale technology was in its infancy the land could have been had for as little as $100 an acre, according to IHS Herold.
That said, Shell has bought quality goods. The Marcellus Shale in Pennsylvania and New York is on the doorstep of the huge East Coast energy market. Shell has also picked up land in the Eagle Ford Shale of Texas, seen as the future King Kong of US shale.
The continued appeal of shale reflects a poverty of options. With governments and national oil companies hogging much of the world’s oil, private oil companies have been forced to scavenge in deep waters and oil sands. The Obama administration’s decision to call a temporary halt on deepwater drilling in the Gulf of Mexico following the BP fiasco closes off another promising avenue at least for the time being.
Shell has been way ahead of the pack when it comes to replenishing its resources, replacing 288 per cent of reserves in 2009 compared to 124 per cent for the sector, Barclays Capital estimates. But, with so many avenues to hydrocarbon bliss increasingly closing off, neither Shell nor its rivals can afford to be as picky as they might like.
