Shale gas set to have limited impact on global market over the next 3 years, according to Deloitte report

Published: 20 June 2013

Shale gas is set to remain a largely regional resource over the next one to three years with an uncertain global impact due to the increased technical challenges and higher development costs of the resource. This is according to the Deloitte Touche Tohmatsu Limited (DTTL) 2013 Oil and Gas Reality Check report. The study focuses on the primary challenges facing the oil and gas industry including: shale gas, liquefied natural gas (LNG) pricing, resource nationalism, national oil company (NOC) expansion, and market complexity.

“Despite considerable market changes, increased complexities, current challenges and new resource opportunities, there is a need to return to industry fundamentals – namely supply, demand, macroeconomic, regulatory, cost price and competitive behaviour factors – in order to understand the future direction of the oil and gas sector,” said Adi Karev, DTTL Global Leader, Oil and Gas.

Highlights from the report include:

Shale gas – A global or regional resource? The success of North American shale gas has spurred interest in duplicating the results in other countries. However, according to the report these countries still have a long road ahead before they can begin to see the gas volumes and supporting infrastructure needed to dramatically lower domestic natural gas prices and create export opportunities. Given the greater technical challenge of shale gas and higher development costs, exploitation of shale resources is not easily replicable in other markets.  While some countries are making progress, over the next one to three years it will remain a largely regional resource with an uncertain impact on the global market past this timeframe.

LNG pricing - The end of oil indexation? Oil indexation will be one of several pricing approaches for LNG long-term contracts in Asia Pacific. As diverse supplies enter the LNG market over the next 12 months through to 2017, the dynamics of supply competition will drive transition away from contracts purely indexed to oil prices and at high oil price parity in the Asia Pacific region. A future mixture of contract pricing approaches: prices set lower from oil price parity, hybrid indexation, and full gas hub indexation.

Resource nationalism - Entering a period of low tide? In the short term, resource nationalism will recede as new resource-rich countries seek to attract investment and access technology. Investors and global oil and gas companies view resource nationalism as an unmanageable risk. In the long term, resource nationalism will rise as countries progress through the stages of resource development and gain technological expertise.

NOCs - Capturing the playing field NOCs are evolving their global expansion by competing for complex barrels. While the global expansion of NOCs is not a new story, the fact that expansion strategies differ between oil and gas is a recent and important development. NOCs have evolved from players focused on production in domestic oil resources to becoming interested in more complex barrels in unconventional oil, and are also pursuing gas.

Managing market complexity The direction in which U.S. medium-size integrated companies, supermajors, and NOCs have evolved shows that vertical integration, as the winning business model in the oil sector is far from becoming a market certainty. Instead, vertical integration largely depends on aligning company strengths and strategy with local and global market conditions. Deloitte’s analysis indicates that uncertainty is very much the order of the day. How companies react to and deal with this uncertainty is changing the notion of a singular business model and giving rise to different business models.

“The industry has evolved to a point where market complexity is best managed through diversification of companies, partnerships, and flexible business models. As we look towards the next three to five years, what previously seemed more certain will become less so,” said Karev.

“In fact, even the decade's primary game-changer- shale gas- will likely have less of a definitive global impact and become a more regional resource, with certain countries able to export surplus gas via LNG. LNG pricing will become more complex using various pricing models; and the impact of LNG exports on the global market will depend on countries' resource policies, which ebbs and flows as production increases, making NOC and IOC partnerships grow in importance,” he said.

Commenting on the specific condition in the Chinese Mainland, Deloitte China Energy & Resources Leader Charles Yeung said substantive efforts have been put to create an investment environment conductive to shale gas development, but it is highly unlikely that China will emerge as a shale exporter as a result of rising domestic demand and exploration challenges.  

"When it comes to resource nationalism, China will continue to open their newly found resources to foreign oil and gas companies in order to access technology and technical expertise. Over the long term, however, China is likely to change contracting terms to extract a higher share from their resources as new technologies mature and infrastructure is built," Charles added.