According to a new report from research firm IHS Global Insights, the world may be on the verge of a shale energy boom. But before investors get too excited, it's important to remember that oil and gas drilling will depend more on market forces than what's in the ground.
There's big potential...
There's a lot of excitement as to whether North America's shale energy boom could be replicated internationally. New drilling techniques like hydraulic fracturing and horizontal drilling techniques have unlocked vast quantities of hydrocarbons. Explosive growth from formations like the Texas Eagle Ford and the North Dakota Bakken has driven U.S. oil production to its highest level since May, 1989. Previous studies by IHS have shown North America has about 43 billion barrels of commercially recoverable tight oil.
But the group's latest report suggests that shale formations outside of North America potentially hold seven times this amount. The study identified 143 global shale plays that have a combined 300 billion barrels of technically recoverable oil. The report makes it clear: the potential for shale oil globally is huge.
And the IHS isn't the only research outfit praising shale's international promise. In June the EIA echoed a similar sentiment when it reported that shale makes up 30% of the world's technically recoverable natural gas and 10% of the world's crude oil.
...but don't pop the cork yet...
But these impressive figures above come with an asterisk. The report indicates potential for international shale oil and gas, but the extent to which these technically recoverable reserves will be profitability exploited remains unclear. Already, hype surrounding shale plays outside of the United States have failed to materialized.
Five years ago there was lots of excitement surrounding Poland's vast natural gas deposits. Companies like ExxonMobil (NYSE:XOM), Chevron, ConocoPhillips, and Marathon Oil (NYSE:MRO) flocked to the country after the government started offering incentives to attract foreign investment.
But no boom materialized. Last year, ExxonMobil pulled the plug on its exploration program in the country after two pilot wells failed to yield commercial results. The company is looking to sell its stakes in four shale concessions there. In May, Marathon Oil announced that it was pulling out of Poland as well. The company is looking for options to dispose its 11 licences after the search failed to produced commercial quantities.
China's shale potential is also exciting. The country has 1.1 trillion cubic feet of shale gas-nearly double the size of reserves in the United States. But there too, no boom has occurred.
PetroChina (NYSE:PTR), Asia's largest energy producer, has plans to drill 400 shale wells in the country over the next few years. But management only expects to drill 20 pilot wells by year-end. It wants to see production results before committing to a full-scale program.
In China the problem is cost. Of the 130 shale gas wells drilled in the country, only a few are producing over 40,000 cubic feet per day. At $13 million to $16 million to complete each well, this is the production figure needed just to break-even.
...because drilling for shale is a tough business.
But these problems aren't limited to China and Poland. Shale plays elsewhere will face the same issues as well for a couple of reasons.
First, the biggest issue preventing a global shale boom is cost. According to The Financial Times, the IHS study estimates the cost of the average shale well inside North America at $5.6 million versus with $8 million outside North America.
Second, environmentalist will also play a role in the global shale development. Politicians in Texas and North Dakota may be less concerned about the environmental consequences of shale drilling, but you can be sure their counterparts in other nations won't be. Fracking has already been banned in France and will likely face opposition in other countries as companies look to tap new shale plays.
And finally, the pace of global development would hinge on many above-ground issues as well. Government policies-such as regulation, land access constraints, and taxation-could slow development.
Foolish bottom line
Investors should be skeptical about headlines proclaiming a global shale energy boom. At the moment, it remains an entirely a U.S. phenomenon. Just because the resource is in the ground doesn't mean you can extract it profitability.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.