Article Capitalizing on shale gas trading

Capitalizing on shale gas trading

One of the most remarkable phenomena in the global energy business since the early 2000s has been the stellar growth of shale gas and oil production in the United States. A combination of advanced technologies — notably hydraulic fracturing ("fracking") and horizontal drilling — has enabled producers to acquire huge volumes of natural gas and oil from reluctant shale rock. This has led to a growing need for effective and efficient management of the entire gas value chain which has highlighted the benefits of sophisticated energy trading and risk management (ETRM) software.

Unintended consequences

The rise of shale gas and oil production has transformed global energy markets. The U.S. has become the world's largest producer of both natural gas and oil, according to the Energy Information Administration (EIA). Its ban on crude oil exports has been lifted. Gas is now so plentiful that the nation is becoming one of the world's top exporters of liquefied natural gas (LNG), along with Qatar and Australia, as noted by Business Insider.

However, not all the consequences were intended. The rise of shale oil in the U.S. contributed to 2014's oil price crash. Meanwhile, U.S. gas prices have defied expectations, remaining lower than anticipated, despite LNG exports. According to the EIA, it expects "Henry Hub natural gas spot prices to average $2.99/million British Thermal units (MMBtu) in 2018 and $3.07/MMBtu in 2019."

These price trends have put severe competitive pressures on the exploration and production (E&P) companies involved in the production of shale gas and oil. They've been striving to reduce the break-even price of production, with impressive results.

According to the International Energy Agency (IEA), the U.S. "will increase gas production more than any other country over the next five years, accounting for almost 40 percent of global output growth." The main factor will be "the ability of U.S. gas drillers to counter the effect of lower prices by improving efficiency and producing more gas with fewer rigs."

Even through price downturns, this resilience has largely sustained shale gas production volumes. Today, as prices trend upwards, there are new opportunities to drive profitability.

Holistic and integrated trading and processes

For those companies in the vanguard of the shale gas revolution, improving production efficiency is only part of the story. There are also opportunities to be exploited when it comes to streamlining trading, business processes and value chain management — and doing so in a holistic and integrated way.

There are significant drawbacks of manually controlling information in spreadsheet-based systems for business processes and commodity trading. They tend to be time-consuming. Information stored in multiple locations may not always be updated correctly. Transaction capture can take much longer than when using a purpose-built system.

While enterprise resource planning (ERP) systems may be superior for accounting, they are generally not designed for trading commodities or flexibly managing commodity scheduling. A lack of integration and real-time market information can make it difficult to generate the market insight that an integrated and holistic system can bring.

All of these drawbacks can be addressed with an ETRM solution. Information needs to be entered or updated only once, and a well-designed system will provide real-time position reporting — aiding risk management and decision-making.

While understanding real-time positions is always important, it's especially important when production is growing faster than infrastructure, leading to a constrained market. For example, will there be sufficient pipeline capacity to get shale gas out to a market where it can be sold?

The trend today is for an ETRM system to be cloud-based, delivering the same advanced capabilities as a traditional on-premise ETRM system, but allowing for enhanced scalability, speed, enterprise security and efficiencies.

Handling end-to-end value chains

In the context of shale gas trading, the latest ETRM systems have particular attractions for companies needing to manage end-to-end value chains. The most advanced systems can handle the complete E&P value chain: upstream assets such as oil and gas wells, crude oil and natural gas production, production forecasts, gas processing, liquefaction, shipping and the eventual sale of the commodities to downstream customers.

The shale gas boom has been characterized by the entry of many new companies to the industry, alongside the established E&P companies with conventional operations. For new entrants, purchasing an entire ETRM solution could prove a convenient and affordable shortcut to getting all the required business systems up and running.

Established E&P companies, with a history of conventional production, are likely to find the dynamics of shale gas production call for greater system capabilities because of the nature of the industry. Production profiles are different, heating values vary and shale gas generally requires more wells to be drilled than conventional gas fields.

The future of shale gas

Since the shale gas revolution in the U.S., there's been speculation over how quickly it could spread to other countries. There have also been questions about how long the U.S. shale gas boom might last.

In its latest World Energy Outlook, the IEA asserts that these two questions are related. For many reasons, the U.S. is particularly suited to shale gas development. Already the U.S. shale boom has hindered shale gas development in Canada and Mexico because gas abundance in North America has led to persistently low prices. Growing LNG exports from the U.S. may mean "that the very success of U.S. shale may ultimately serve to hold back the prospects for successful shale development elsewhere."

While the world will see the growth of shale gas in countries like China, Argentina and Australia, it likely won't be on the scale of what is happening in the U.S. The "resilient revolution" of the U.S. shale gas boom still has decades to run. Technology — be it advances in production methods or ETRM solutions — will continue to play a growing role in that success.

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