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1、,1989,1990,1991,1992,1993,1994,1995,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,Curr.,2,12,14,16,Equity ResearchFortnightly Thoughts,March 16,2012Editor:Directors of Research:,Hugo Scott-GallRichard Tufft|Goldman Sachs International|John Sawtell|Goldman Sachs Inte
2、rnational,Issue 28,On the shale trailFrom the editor:In this edition we seek to understand the potential of a new,plentiful energysource coming on-stream in the US.Recognising the breadth of its possible impact,we havecontributions from our global oil,commodities and chemical analysts,alongside inte
3、rviews withAubrey McClendon,CEO of Chesapeake,and energy expert Daniel Yergin.,Shale gas has been 30 years incoming since George P.Mitchellthought it possible to extract gas fromrocks beneath the ground by fracturingthem with high pressure water.It nowaccounts for 30%of gas consumptionin the US,from
4、 just 1%in 2000;gasitself now fuels 27%of the USs power,up from 17%10 years ago.So,shale,have some deflationary effects,bylowering direct and indirect energycosts for industries and consumers,especially as there is embeddedenergy in the vast majority of goodssold.What does it mean for the rest ofthe
5、 world?Each barrel of oil no longerneeded by the US could find its wayonto the world market.Furthermore,cost differentials matter might reshapein the USs favour.But perhaps mostsignificant will be the disparate searchfor and extraction of shale elsewherein the world,as shale becomes a keypart of the
6、 battle to resolve energyconstraints.We highlight the best waysto play this theme,both in the US andin Europe.,matters in lots of ways.First,it couldWhere the pressure isUS dollars per million Btu$25,some industries,where even smallWhats insideOn the shale trail:our lead article on thebroader implic
7、ations of shale gas.,$20$15,Japan LNGUS Natural Gas,EU Natural GasOECD Crude oil,Unconventional reservoirs:know the drill:Michael Rae on their remarkable growth.An interview with.Aubrey McClendon:,58,CEO of Chesapeake.,$10,An interview with Daniel Yergin:Chairman,10,IHS Cambridge Energy Research Ass
8、ociates.$5The scale of shale:Jeff Currie on who isready for the shale revolution.$0Shifting cost curves:Richard Logan on the,Note:2011 and current prices are approximate.Source:BP Statistical Review,Bloomberg,Datastream.,input cost imbalances within chemicals.,Hugo Scott-Gallhugo.scott-+44(20)7774 1
9、917Goldman Sachs International,Sumana M+44(20)7051 9677Goldman Sachs International,Views from the US:Steve Song on whatshale means for US industrials.,The Goldman Sachs Group,Inc.does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that t
10、he firm may have a conflict of interest that could affect the objectivity of this report.Investorsshould consider this report as only a single factor in making their investment decision.For Reg AC certification,see the endof the text.Other important disclosures follow the Reg AC certification,or go
11、to Analystsemployed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.,The Goldman Sachs Group,Inc.,Goldman Sachs Global Investment Research,4,500,0.0,2,Equity Research:Fortnightly ThoughtsOn the shale trailShale,the holy grail?North Americas gas reserves a
12、re estimated at c.3,000 tn cubic feet(The Quest),equivalent to c.75 years of US oil consumption ormore than 100 years of its oil imports at current usage rates.Whilethat is an intimidating calculation,the real impact of the shalerevolution will be felt only once the US industrial complex embracesgas
13、 more fully.Power generation is already moving towards gasand away from coal.Coals contribution to US power generation at40%fell to its lowest level in more than 60 years in 2011.If moreUS coal comes to the global market,then other large exporters(Australia,Indonesia and Russia)will have to rely on
14、higher Indianand Chinese demand.Major US coal producers are feeling theimpact of this demand substitution-Consol is delaying itsoperations and idling its long wall unit at its Buchanan mine,whileAlpha recently announced that its reducing its Appalachian coalproduction.The spread between Atlantic and
15、 Pacific thermal coalprices has widened to a significant US$21/tonne,from a 4-yearaverage of US$10.US industrial unit power costs have mostlystayed flat over the last three years,compared to an average 6%surge in the last 5 years.In the EU,power prices have movedhigher by 2.3%and 7%on average,over t
16、hose time periods.Power playsUS power production(bn kilowatthours),by sources of energy,Issue 28volume driven industries.Richard Logan on page 14 discussescompetitive ripples and tremors in the chemical sector.If you reflecton the relative improvement in the US economy versus Europe,their lower ener
17、gy price could well be an explanationatory factor.It is a similar story for the US consumer.An average US householdsaved US$1,300 in 2005,when gas prices were at US$9/MMBtu,versus US$4,760 in 2011 when prices averaged US$4.Clearlythere were other external factors,but the average householdsutility bi
18、ll is 2%of its post-tax income.Provided gas prices remainclose to US$3,then cheaper electricity and heating alone couldsave a household an additional 7%.If the transportation andautomotive industry adapted themselves to natural gas,this couldadd a further 10%as the average household spends much onga
19、soline.If todays gas price(US$2.15/MMBtu)continued,andcoaxed substitution across the industries we mentioned above,incremental savings could be more than US$1,600 pa for eachhousehold.And we need to incorporate the indirect benefits too.Higher job creation would mean a rise in aggregate wages,whilec
20、heaper domestically produced goods would bring down the cost ofliving more broadly.Together this would imply close to US$2,000more to spend for each family,in line with Aubrey McClendonscomments on page 8.Perhaps the best way to think of this is as atax or interest rate cut.Of course,for this to com
21、e through,ourassumptions on sustained low prices and immediate and absolutefuel substitution are needed.While the scale and the timing of thistransition is extremely uncertain(and our calculations are of coursebroad-brush),the potential upside to consumption must be kept in,4,0003,5003,0002,5002,000
22、,OtherRenewableHydroNuclearNatural GasPetrolCoal,mind.The watching gameTechnically recoverable shale gas vs.conventional gas reserves,1,500,Canada,1.811.0,Poland0.2,47.5NA,Russia,United 7.7,5.3,1,000,States 14.2,Qatar25.4,3.036.1,China,5000,NA,1951,1956,1961,1966,1971,1976,1981,1986,1991,1996,2001,2
23、006,2011,Source:US Energy Information Administration.For the rest of the industrial fabric to incorporate natural gas as itsprimary fuel source,confidence in the longer-term sustainability of,Gas reserves(tn cubic metres)0.0 Conventional gas reservesTechnically recoverableshale-gas resources,Argenti
24、na0.421.9,187.1,WorldTotal,South AfricaNA13.7,Australia3.111.2,shale gas is essential.Moving transportation infrastructure tonatural gas seems an obvious thing to do,but in reality it will be alengthy and complex transition.These are capital-intensivebusinesses with long life assets;and there is als
25、o a chicken andegg aspect redesigning vehicles and building an extensiverefuelling infrastructure requires mutual progress,trust and alsocommitment(and probably capital)from the government.Chrysler(majority owned by Fiat)is aiming to start selling natural gas-powered pickups in the US by the end of
26、the year.Other parts ofthe industrial complex will need extensive investment in new assetsto switch;for example power,and coal,in particular are significantcosts for the commodities sector and further substitution could helpreduce cost curves.Energy accounts for 8%of total input costs inthe US,but n
27、atural gas accounts for only 14%of those energy-related expenses vs.gasoline and coal products at 50%.A fastersubstitution combined with sustained low natural gas prices couldmeaningfully improve margins,which may mean that UScompanies take share in global industries.The obvious industriesare those
28、where pricing is set off costs,i.e.low value added,Goldman Sachs Global Investment Research,Source:US Energy Information Administration,The EconomistThis of course has substantial implications for the rest of the world.The presence of shale gas is not limited to the US(and Canada),recent studies hav
29、e suggested that reserves exist around the world,particularly in China and South America.But the existence of thesereserves is insufficient.The US can leverage its existing natural gasmarket,pipeline infrastructure,services availability,water resourcesand favourable taxes and regulations.In Europe,p
30、olicy restrictions(most notably in France and Bulgaria)are set to limit any explosionin discoveries or extraction.Infrastructure remains a key concern inthe lesser developed parts of the world too.In China,shale gas isestimated to be 4%of gas supply by 2015,but there is tensionbetween demand for wat
31、er and retrieving shale resources,especially in the more arid northwestern regions.So the rest of theworld has lots of shale potential but it may well prove to be muchharder to exploit than in the US.Indirectly,the read-across to therest of the world implies a balance between competitive issues andd
32、eflationary benefits.Each barrel of oil not imported by the US will,3,Equity Research:Fortnightly Thoughtsprovide a cheaper resource for someone else.As we mentioned,the impact of the US beginning to export coal is already being felt.The most interesting consequence could well be for natural gasitse
33、lf.Expecting shortages of natural gas in the domestic market,US services companies built LNG import terminals over the lastdecade.But several of them,like Sempra(Cameron facility)andDominion(Cove Point port)are looking to develop export terminals,providing a significant value-creation opportunity.Ch
34、eniere Energyis already set to build the first natural gas export facility in the lowerstates at Sabine Pass,Louisiana in the near future.Africaneconomies like Nigeria and Egypt,as well as Norway are big LNGexporters to the US,and may have to find new markets to sell to.But overall,if the US becomes
35、 a bigger exporter of energy(if not anet exporter at some point),fuel prices should see significantdownside,aiding energy-intensive economies across the world.The US energy consumption box,2010Source:US Energy Information Administration,UN Comtrade.The second-order effect is that goods made in the U
36、S,whereenergy have embedded in them,can become cheaper too.Ifmargins stayed the same,this would be a welcome deflationaryeffect(the sort of productivity surge the mature economies of theworld need).It would be very brave to say precisely what thebenefits would be,so we wont,but we do see that a boos
37、t to theUS economy would logically increase the USs share of revenuesand volumes,particularly in industries where energy costs relativeto selling prices are meaningful,or where market share can shiftquickly.This then has implications for the USs terms of trade andthe US dollar(it imports 22%of its e
38、nergy).It also has positiveimplications for jobs and employment,not just within the oil and gasindustry(see chart 4 on page 4),but also in the broader economy,the much talked about rise in US manufacturing jobs.If shale proves to be a mostly US phenomenon then Europe willhave to counter it with extr
39、a innovation.Shale may just be anotherchapter in the USs relentless innovation cycle,but it throws downthe gauntlet to Europe and Asia which have a different energy tradeprofile.There will be further effects in the geopolitical space,butthis is not the place to discuss what increased self-sufficienc
40、y mightmean for the Middle East or the US defense budget.TheGoldman Sachs Global Investment Research,Issue 28productivity surge that came from harnessing energy for the firsttime in the industrial revolution defined economic growth and thepecking order for years afterwards.It could be that shale,inc
41、onjunction with other technological leaps in the battle to defeatenergy constraints,leads to another surge.The criticsCritics of the phenomenon have been as vocal as shale advocatesas drilling activity has picked up.The primary environmentalconcern has been water pollution,focusing on the quantity o
42、f waterthat is required(c.100,000 barrels of fresh water for a typical well),the chemicals that are used in hydraulic fracturing,contamination ofaquifers and the treatment and disposal of treated water.Producersargue that shale gas is drilled a long distance below ground waterlevels and hence the re
43、ported contamination cannot be proved.BHP has also said that on a per unit of energy basis,water used forshale operations is much lesser than coal or corn ethanol.Improving technology and stricter regulations could also helpresolve this conflict in the US.The EPA is looking to close thefamed Hallibu
44、rton Loophole,which may or may not work in theindustrys favour.Air and noise pollution is also an area of concern.But shale does produce lower carbon emissions than coal,whichshould work in its favour.Opinion remains divided on whether theseconcerns will be overtaken by the benefits of the US being
45、lessexport-reliant for its energy needs,and also on the associatedbenefits of better job creation,higher income and as a result highertax revenues too.The coming months will be critical inunderstanding the future of shale gas production,as there will bemore regulatory clarity in the US and in other
46、parts of the world.What could go wrong?The biggest unknown is the equilibrium price,i.e.one that is lowenough for the economy to see sufficient tangible benefits to shift togas,but high enough for producers to drill for more gas.In practisemany land lease holders have use it or lose it clauses which
47、 specifythey have to drill within a certain period of time.As there aresignificant hurdles to LNG exports from the US on a mass scale(owing to broader energy policies),the domestic demand andsupply equation becomes paramount to estimate the scale of thebenefits to the US economy or US gas providers.
48、Our commodityanalysts also expect gas prices to be driven a little less by supplyand little more by policy-induced demand,particularly from 2013onwards.Maximum Available Control Technology(MACT)andCross-State Air Pollution Rules(CSAPR)are not only driving coalplant retirements,they are in effect rai
49、sing the natural gas price atwhich producers are induced to shift from coal to gas.Concurrently,producers are also looking to moderate production,to wait out theoversupplied phase.Together,this may push gas prices a notchhigher in the medium term.Hopefully,as has become clear,there are multiple laye
50、rs to thistheme,some of them not so immediately visible.Obvious,firstorder beneficiaries,are in the supply chain which is why wehighlight Weir,Hunting and Schoeller Bleckman,and at risk ofrepeating ourselves we would urge consideration of industrieswhere US companies could be set to take share or ce
