Once primarily the province of under-capitalized independent producers who refined horizontal drilling and hydraulic fracturing technology to tap into the once-marginal tight gas reservoirs in Appalachia, the Central U.S., and Western Canada, the massive reserve has now sparked attention from the major industry players. ExxonMobil, through its acquisition of XTO Energy in 2010, other supermajors, and a host of gas-short Asian players have since taken positions in the U.S. and Canadian shale gas play, with total capital commitments exceeding $100 billion.

While the long term strategic merits of this massive inflow of capital remain unclear, the short-term effects have been profound. The focus of North American natural gas production has shifted to developing shale gas resources at a frenetic pace, with U.S. shale gas output growing from 1.5 TCF in 2007 to 7.8 TCF in 2011, inflicting massive change on the landscape of the North American gas industry.

And this is only the beginning…

Interesting facts about the shale boom:

  • The U.S. Energy Department forecasts shale gas production alone will grow to nearly 13 TCF by 2025, becoming 45% of total U.S. supply, with tight sands adding another 23%. From a global market perspective, U.S. net gas imports peaked at 3.6 TCF in 2007 and have declined steadily, to 1.5 TCF in 2012. However, the DOE projects that the United States will become a net exporter of natural gas by 2020, directly as a result of shale gas commercialization.
  • Natural gas transportation infrastructure - Today, 13 LNG terminals are operating in North America, and as the focus turns to exporting, several import facilities are adding liquefaction capacity to reverse their originally-intended use.
  • Pricing - Historically high differentials now exist between oil products and natural gas. Given the large volume of potential gas supply that has been shut-in or undeveloped in North America due to weakness in pricing, the high spread between oil and gas prices is expected to become the industry norm until longer-term, demand-side response can bring some equilibrium to the market.
  • GTL plants, which require a large and sustainable premium between oil and gas prices, are perhaps the most salient indicator of the changing North American gas paradigm. A secondary consideration of GTL plant design lies in the potential to channel some portion of paraffinic wax produced from Fischer-Tropsch (F-T) condensation toward the production of very high quality (Group III) lubricant base stocks. If GTL becomes embedded in the mainstream refined products supply as a function of sustained high oil/natural gas price differentials and a learning curve reduction in new facility capital-intensity, GTL plants will begin to put pressure on conventional refinery margins…

The growth in GTL base stocks supply will ensure that this product will emerge from the shadows of an internally-captive supply to one with a rapidly-growing merchant market where it will compete directly with conventional oil-based Group II and Group III base stocks. Key players who may take advantage of this source of new supply are large lubricant marketers who are not significantly backward-integrated into base stock supply, such as BP/Castrol, Fuchs, and Ashland/Valvoline, as well as large NOCs who wish to lead advanced lubricant formulations in their home markets, but do not wish to assume the costs and risks associated with GTL investments.

To learn more about Kline’s perspective on how the shale gas boom is shifting natural gas conversion and lubricant base stock manufacturing, download the white paper by visiting: http://www.klinegroup.com/articles/shale_gas_overview.asp

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