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How to reap the rewards of the shale gas boom

The increased role for natural gas consumption is obvious, Warren writes. Smart government policies can play a positive role so society benefits from this once-in-a-century boon.

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The fortunate producers with their claims already staked in plays shifted as early as 2009 to complementary oil extraction in Texas’ Eagle Ford formations and then North Dakota’s Bakken, owing to better prices for oil production. Pricing has been more economically beneficial for the shale producers in the markets for oil and natural gas liquids (NGL) relative to natural gas. While the rig count has declined in natural gas production in some areas, owing to low prices, the future looks better for producing firms for several reasons:

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• Prices will rise. Policy, ie., regulation that addresses environmental and social impacts, is expected to increase costs of production by 7%, according to a OECD/IEA World Energy Outlook report of 2012. The costs of producing have also increased with demand from oil and gas services firms rising steadily upward.

• Growth and energy demand in the developing world will continue, and inflation across many commodities will follow.

• Advanced economies will continue to use more natural gas in their energy mixes in power generation and transportation. Developing countries will leverage their capacities to increase the use of natural gas as well. The price of carbon could also incentivize movement towards natural gas consumption and switching from more carbon-intensive energy sources. Industrial firms and power generation firms will be more sensitive to the evolution of carbon pricing.

• Traditional ‘regional’ pricing differentials across the globe will narrow slightly. Even though gas is priced differently in the U.S., Asia, and Europe, there is mounting evidence for U.S. natural gas prices to influence the others. This has already occurred with Japan seeking supply alternatives from its higher-cost trading partners. Demand from heavy gas importers (liquified natural gas) such as Japan and China are navigating and approaching the LNG market differently in this gassy environment. China has a large natural gas resource base it will be exploiting in the years ahead.

In this current energy meta-narrative, the increased role for natural gas consumption is obvious. How the economics for gas production plays out is another story for another day. Smart government policies can play a positive role so society benefits from this once-in-a-century boon. Financial players and firms need proper signals to make the most sensible investments. As a society with other outsized problems like fiscal, political and environmental challenges, we really cannot afford to miss this opportunity offered by an abundant resource that provides multiple solutions. The production of natural gas can be done with respectful consideration of all stakeholders.

Source: How the Winds Are Blowing the Shale Gas Gale

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