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Shell but not Shale: The Natural Gas Revolution

February 28, 2012 by · Leave a Comment everybody is complaining about rising oil prices. Some are even getting ahead of themselves and calling this the North American energy renaissance. What is certain is that big names have been making a lot of noise in the natural gas industry of late, and none bigger than the U.S. subsidiary of Royal Dutch Shell (NYSE: RDS.A, Stock Forum). They are currently contemplating the location of their next major operation, and can sit comfortably in knowing that West Virginia, Pennsylvania and Ohio are engrossed in a bidding war to win their approval. But the real eye-catcher lies in the subject of the deal itself. Shell are not interested in oil or gas this time around. Their eyes are fixed on constructing a cracking plant that extracts ethane, a necessary ingredient used in the production of plastics.

Director of ethylene studies at HIS Chemical in Houston, John Stekla “liken[s] it to a treasure chest that had two locks – natural gas and natural gas liquids”. Natural gas liquids happen to be the lucky by-products of natural gas production in the sense that natural gas liquids can be found in the same deposits as oil and gas. Having said that, there are many shale and natural gas deposits that are void of any natural gas liquids, thus making location critical. With regards to ethane, the real treasure trove lies within a type of shale called Marcellus. It comes as no surprise then, that the Marcellus shale sits in abundance in all three of the US states mentioned above.

Shell is leading a number of companies who are all seemingly engaged in taking advantage of deposits offering natural gas that is complimented by the presence of natural gas liquids. These companies are essentially killing two birds with one stone. Where Shell might be a forerunner, having already built several facilities, there are many other companies interested in a range of other natural gas liquids. Encana Oil and Gas, for instance, is looking to extract methane as a by-product. But what attracts particular attention is the scale with which these companies are exploring in order to gain from such lucrative deposits. The recent success of Calgary based Calfrac Well Services Ltd., which offers drilling services for gas and oil producers, provides a strong indication of the growing demand. The company has reported record fourth quarter sales that have boosted revenues by 82 percent to $490 million, with Calfrac also announcing that net income had more than quadrupled.

The past few months in particular have seen vast increases in the number of companies displaying an interest in building facilities. This has been largely attributed to rising oil prices. But what does oil have to do with it? David Ludlam, director of the Western Slope Colorado Oil and Gas Association, argued that “under current market conditions, [oil]…draws a higher price than methane (natural gas). For this reason, companies…are seeking to maximize their production of liquids (as well as petroleum) given the low commodity price of natural gas”. With natural gas prices close to hitting bottom and oil prices continuing to skyrocket, the associated costs of turning ethane into ethylene or methane into fuel will continue to remain substantially lower than at any other moment in recent history.

And so with current market conditions persisting, the future increasingly looks like one in which North America continues to lessen its reliance on oil by producing methane as an alternative. Combine that with extremely low natural gas prices, and there are increasingly fewer reasons for investors not to be turned by North America’s energy game-changers.

Jason Staeck

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