US to lead shale gas revolution...for now

The much vaunted shale gas revolution is well and truly under way, helping drive US oil production to a 20-year high in 2012.

Data released by the US Energy Information Administration (EIA) this month revealed US wells pumped out more than seven million barrels a day on average, with much of the increase coming from huge rises in production from the shale formations of North Dakota and onshore Texas.

Oil production in the Lone Star State has doubled over three years, reversing a decline that reached back into the 1980s. Combined with the Texan Eagle Ford Shale and North Dakota Bakken fields this accounted for 43% of total US production in December.

Underpinning the US energy boom, last week’s revised EIA data also revealed that US natural production rose to a record high last year, up 4.5% on 2011 output, helping to take inflation-adjusted prices to a 17-year low.

So how do investors play what is becoming an ever more complex energy market?

WTI crude prices have traded within a reasonably narrow band of $87 and $97 a barrel over the past eight months, with the EIA forecasting it will average $92.81 a barrel over the course of the year, suggesting little upside from the current price of $91.83 a barrel.

Natural gas prices, meanwhile, have been a friend to short sellers in recent times, slumping from $12 per million British thermal units (mmBtu) in 2008 to under $4mmBtu currently, and few are expecting a significant rise in the short term, despite its appeal as a cleaner energy source.

Harvard University professor Niall Ferguson believes the way to profit from the shale revolution is more straightforward.

‘I am long the US dollar,’ he said. ‘The benefits of the shale gas-type oil revolution are still being underestimated by most observers and I think there’s a lot more upside to come in the US than most people anticipate.’

However, M&G fund manager Nicolo Carpaneda views shale gas as a much broader story than just the US. He points out that China is estimated to have 50% higher reserves than the US and that there are 32 countries with more than six times the recoverable shale gas around the world in total.