US Shale Boom To Hit A Snag On Lower Prices, Oversupply

Michael Teague  |

Despite all the hype this year about the US’s future as the world’s largest producer and exporter of oil and natural gas, there are growing indications that oil firms are pulling back on their investment in shale drilling and exploration.

On Aug. 7, Australia’s BHP Billiton (BHP) , the world’s largest publicly-traded mining company, announced that it would be upping its involvement in state-side shale drilling beyond the $20 billion it has already spent on projects in the US. But on Monday, Bloomberg reported that oil and gas deals in North America that include shale drilling dropped by over half to $26 billion during the first six months of 2013, from the prior-year period’s total of $54 billion. Energy companies spent a total of $461 billion on the continent’s shale assets between 2009 and 2012.

Just a few short years into the new millennium, improved drilling and exploration technology led to discoveries of potentially massive reserves of oil and natural gas in shale formations far below the earth’s surface in states such as North Dakota, New York, Pennsylvania, and Ohio, among others. Subsequently, analysts have speculated the ensuing boom in production would propel the US to the top spot in terms of output and exports, which would entail a seismic shift in the global energy economy.

By 2012, however, prices dropped to a 10-year low as a massive influx of investment led to oversupply.

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A significant number of wells ended up producing far less oil and gas than had originally been expected. Royal Dutch Shell ($RDS-A), one of the world’s top integrated oil and gas firms, was forced to write down its North American projects by over $2 billion during the recently-ended quarter. Shell released a disappointing quarterly earnings report earlier in the month that showed the company’s bottom line suffering a great deal from lower gas prices throughout the period, though other factors such as continued and increasing violence affecting Nigerian operations contributed significantly to the losses as well.

Other companies such as Chesapeake Energy ($CHK) have had to liquidate assets purchased during the frenzied buy-up of previous years at a significant loss. Oil firms took on significant debt in the rush to get their hands on what was being hyped as the holy grail of energy discoveries, and are now stuck holding the bag as many of the assets have turned out to be worth far less than was originally expected.

For the time being, this should put a clamp on acquisitions as well as downward pressure on output. In the long term, however, companies that have overshot the mark are still likely to find themselves well positioned after shedding underperforming assets, though it could take a number of years for this situation to play out fully.

[Image: Aerial view of the Burgess Shale in Yoho National Park, British Columbia, Canada. Courtesy of Wikimedia Commons]

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