Shale gas now accounts for more than 30% of US gas supply, and it has been named as a key pillar in the re-industrialisation of the US. According to the US Energy Information Administration, by 2040 over 50% of natural gas produced in the US will come from shales, equivalent to almost 15% of the world’s total (see chart below).
Moreover, the ‘new’ extraction techniques of natural gas or oil trapped in shale have been lauded as the greatest energy innovation of the past 20 years.
A brief history
Shale rocks that contain hydrocarbons (gas and oil) have been used as fuel since prehistoric times, since they burn without any processing. It is believed that modern industrial mining of oil shale began in the late 1830s in Autun, France, followed by exploitation in several other countries. Shale mining peaked in 1981 and then declined, not owing to diminishing supplies of oil shale but because oil shale could not compete with conventional petroleum.
In 1982, Exxon cancelled its $5bn (€3.7bn) Colony Shale Oil Project in Colorado and by 1991 the largest experimental mining and retorting facility in the US was closed. 
Interest in oil and gas shale re-emerged following the Energy Policy Act of 2005, in which the US authorities introduced a commercial leasing programme permitting the extraction of oil shale on federal lands.
Today, the significant uptick in natural gas production has had a negative impact on natural gas prices in the US. In 2012, Henry Hub spot prices went below $3/MMBtu, a level not seen in more than ten years (see chart below).
Why drilling continues
Apart from low gas prices and high service intensity, what have been the other consequences of shale gas and oil? Despite gas prices melting, US producers kept on drilling.
This was the result of several reasons. First, producers maintained numerous hedges, signed at relatively high legacy prices of 2008-09. Second, producers signed a number of leaseholding agreements that forced them to keep on drilling if they were to keep their leases. Third, joint ventures were formed with major international players, which provided finance for developing the leases. Then, unit costs began to decrease and it became cheaper to contract for oil and gas services.
But perhaps the main reason why gas producers continued to drill was that in addition to natural gas, several of the gas shales also produce oil or oil-type material as by-product. In many cases this oil component is sufficient to make the development of certain shales economical. The gas produced became a by-product, sold at dumping prices.
Impact of extraction
Cheap gas extracted from shales is reshaping the US market, which in turn can have broader repercussions for the global energy scene.
First, the US is developing a massive market for its domestic gas use. Coalfired power plants are being scrapped, and replaced with CCGT (combined cycle gas turbines). Second, the US will become a liquefied natural gas (LNG) exporter owing to arbitrage opportunities. The Sabine Pass LNG terminal is on track and the first LNG cargo is expected in 2015-16. Third, manufacturing petrochemicals and fertilizers is becoming cheaper in the US than any other part of the world.
As for oil, the US could become fully independent by the early ’20s if two conditions are met. Domestic production increases by 5% to 6% pa partly thanks to shale oil, and oil demand decreases by 1.5% to 1.75% pa thanks to efficiency gains. In the meantime, world demand for oil continues to increase by more than 1% pa, meaning that shale oil would be crucial to compensate for that increase.
Needless to say, shale oil extraction needs more intense services than shale gas, hence the amount of services needed to make that possible would be significant.
Who benefits?
In the future, shale gas production in the US is expected to grow at 6% to 8% pa. This is the reason why, in addition to exploration, deep-water production and LNG – shale oil and gas is currently a theme which deserves special attention.
In addition to benefiting landowners, caterers and accommodation providers, there are myriad companies that play a role in the business of gas or oil production from shale and will benefit from the growing trend. These can be divided into three major groups: the producers, the oilfield service firms that provide services to resource or producing companies and the midstream (treatment, transport and storage of gas once it has been produced). 
The first group, producers, are in charge of exploring and producing oil and gas. These companies have made shale their key focus; however, most of them also produce oil and gas from non-shale rocks. These companies are growing production faster, at shorter lead times and lower unit costs. We distinguish two types of producers: integrated and independent.
The integrated producers operate oil and gas fields, refineries and distribution stations. They include companies such as Chevron and Exxon. The latter has become the leading US natural gas producer, while the former has just announced it has taken the lead of the Kitimat LNG project in Canada. European companies that have taken sizeable positions in US shales include Statoil, Shell, BG Group and Total.
Other operators
The independent producers have no refining or distribution activities. These would be more dependent on commodity prices but also prone to M&A activity.
The first tier includes companies with shale operations in the US but also involved in conventional operations elsewhere. The second tier includes companies operating solely in North America. It includes Chesapeake and EOG in the large-cap space, and myriad smaller companies with increased M&A appeal including EQT, National Fuel Gas and Oasis Petroleum.
Second, suppliers and oilfield services; because of geological considerations, shale gas and oil production means higher drilling and increased service intensity, which drives higher top-line for the oilfield industry. Few exceptions offer 100% exposure to the shales, barred from sand and ‘proppant’ providers such as CarboCeramics. Other services companies provide services to hydrocarbon producers in general.
Finally, the third group includes mid-stream companies, generally pipeline and infrastructure operators in charge of the conditioning, treating, transporting and the storage of natural gas.
The future of the sector
Thanks to a well-understood process, extraction processes consisting of horizontal drilling and hydraulic fracturing, today the future of shale gas and oil in the US looks bright.
Elsewhere the picture is less clear. There are few places in the world, bar China, Poland and Argentina, where there is real political will to develop this resource. China has already held two licensing rounds in shale permits but a lack of infrastructure, water needs and renewed environmental concerns could put a brake on the development of this resource.
While shale gas and oil take an increasing place in the wider energy scene, global demand for gas and oil continues to grow, respectively at 3% to 4% and 1% to 1.5% pa, whereas a 4% to 6% decline in production must be fought every year. This should be the main driver for energy and energy infrastructure investments.
