On Tuesday, September 17th, I attended a luncheon with the Denver Association of Business Economists (DABE) to hear Garret Nülle, an expert in Oil and Gas Economics speak. Mr. Nülle presented us with a comprehensive overview of the field, including projections of where fracking will go in the future. A few days later, I met with David Tameron, Senior Analyst for Wells Fargo Securities, regarding the role of fracking in the economy. The following post is the product of these conversations.
The popular term for Shale Drilling or Hydraulic Fracturing, “Fracking”, polarizes as many groups of people as other hot-button topics. But, like it or not, the energy investment community sees shale drilling as a permanent part of our energy source. The US has actually used fracking since the 1940s; as a part of oil and natural gas resources for the last 60-odd years, about 35,000 wells use the hydraulic fracturing method. An estimated 80% of natural gas is estimated to require hydraulic fracturing for extraction in the next decade. So, the number of rigs currently involved in production and the US market should continue as the most established for the next two decades.
Prerequisites for Successful Shale Drilling
Fracking involves the use of water pressure to create fractures in rock that allow the oil and natural gas it contains to escape and flow out of a well. Let’s get this straight: these wells are massive. And in some cases, they can walk (see below)!
Here are the main factors involved in successful shale drilling ventures:
- Size of reserves available for shale drilling.
- Fiscal conditions – Shale drilling requires deep capital markets to get started.
- Governance structure – Legislation must provide drilling companies and landowners with acceptable and reliable terms of agreement.
- Infrastructure – how much of the area around the drilling requires development.
The Future of Shale Drilling
If you want to keep an eye on shale market growth internationally, the shale markets to watch (in addition to the United States) include:
- Australia
Map of shale reserves courtesy of Mr. Nülle’s presentation slides - South Africa
- The Russian Federation
- Poland
- Indonesia
- Argentina
- Brazil
- China
- Mexico
Of potential alternatives to the United States, some of these countries face regulatory challenges and issues of effective governance. South Africa, for example, faces challenges with mining laborers in well-established mining industries and the country’s ineffective governance of mining areas makes the investment riskier there than in the US. Aside from Labor cooperation, there can also be domestic market obligations. Mining in Indonesia, for instance, could be very lucrative – but the government requires that 25% or more of the shale market be kept within the country.
What does all this mean? The US shale production is currently dominant, but there are other countries like China and Australia that increasingly use hydraulic fracturing. Legal authority is strong and capital markets are deep in these countries. We may see a spike in shale processing worldwide – if renewable energy doesn’t step up, that is. In the wild-west industry of oil drilling, the future may yet be the petrol we’ve come to know.
Do you have questions on or expertise to add to this conversation? What do you hope to hear about? Add to the conversation on LinkedIn or email me directly. We believe that as investment advisors, we should have an ongoing discussion about the economy – both of our research, and of your understanding.
Katherine Brown, Castle Rock’s Research Associate, holds a Master of Arts in Global Finance, Trade and Economic Integration from the Josef Korbel School of International Studies at the University of Denver.