It is the source of the largest boom in new oil production in years and now the impact can be seen from space according to the Financial Times. The explosion in shale oil extraction has been enabled by new technology that uses the controversial hydraulic fracturing (fracking) process to extract oil from shale rock formations — a far cry from the days when oil was squeezed from whales to power our lamps.
One company doing well out of the shale boom is Beach Energy Limited (ASX: BPT). Last week the company announced it expects a 17% increase in underlying net profit after tax (NPAT) for the first half of FY2013, a result attributed to record oil sales.
Beach Energy is involved in a number of shale-related exploration and joint venture projects around Queensland and South Australia. The joint venture strategy helps the company to finance and spread the risk of the operations. The strategy also allows it to trade out of the positions for a profit, which has been a factor in the company’s success to date.
Last year, the company turned its performance around growing oil production 16% to 7.2 million barrels of oil equivalent (mmboe) and the company expects to increase that production again in FY13 by 18-25% to between 8.5 and 9.0 million barrels.
But the potential supply increase from the large number of newly discovered shale reserves raises questions about the future pricing of oil and gas. Shale oil reserves often hold large pockets of natural gas, the burn off (or flaring) of which is sometimes seen as more economical than capturing and transporting it for sale. It’s this flaring that has been picked up by NASA imaging. However the increase in supply, especially out of the U.S., has raised suggestions that the flood from shale sources could force prices down. One study conducted by PricewaterhouseCoopers claims that even with only modest growth in shale production, oil prices could fall by between 24-40% by 2035.
That would mean lower revenue for companies like Beach Energy, as well as producers Santos Limited (ASX: STO) and Origin Energy Limited (ASX: ORG). That would be bad news for Origin — a significant shareholder in the $23 billion APLNG project to harvest coal seam gas which is potentially a major driver of future earnings growth for the company.
Time will tell if the forecasts are accurate. In the meantime the best move for investors may be to pay heed to the outlook guidance provided by directors of companies like Santos, Origin, and Woodside Petroleum Limited (ASX: WPL) as results are released over the coming weeks. These will no doubt convey valuable industry sentiment on where the future lies.
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