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Boeckh Investment Letter

Investment and economic commentary by J.Anthony Boeckh and Robert Boeckh

Tight Oil & Gas and the Death of Peak Energy

Fracking and horizontal drilling have unlocked access to vast reserves of gas, oil and associated liquids, most notably in North America. This could represent a sudden and profound transformation of energy markets, the implications of which are only beginning to be understood. There are three primary issues:

1. The potential recoverable reserves in shale and other tight reservoirs (below, collectively called shale) are massive.

2. The global distribution of energy for have and have‐not countries is changing rapidly. 

3. The cost base and drilling cycle for shale energy is significantly different than for traditional projects, creating new winners and losers within the industry. 

Chart 1 shows the global distribution of unconventional gas resources. There is some controversy over the accuracy of estimates, as variable geology and depletion rates make the calculation of resources more imprecise than for traditional assets. Furthermore, various countries are at differing stages of exploration and development. The U.S. and Canada are particularly well endowed with proven, economic reserves, while most other countries’ shale resources are unproven and must be considered speculative.

China has substantial shale deposits; however, they are deeper and the geology is particularly tricky. At the very least, it will take 10 to 20 years before this resource can be tapped, and some analysts question whether it will ever be.

Europe has potential shale gas resources of about 580 trillion cf (about ¼ of North American reserves). Initial evaluation of these reservoirs, primarily in Poland, is underway, but the European rig count is 110 compared to 2,700 in North America. France, which holds the second most significant shale resources in Europe, has banned the use of fracking even in exploratory wells. It will take many years to ramp up production and ultimately Europe’s shale resources will not be sufficient to overcome the depletion of conventional gas supplies. Europe is forecast to become increasingly dependent on imports.

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