Report Shows How Shale Transforming Industry

On the heels of record-low natural gas prices, a new report has focused on how the shale gas activity will affect North American companies and the economy. The report, from RBC Capital Markets and the Economist Intelligence Unit, examines how the surge in unconventional gas production is transforming sectors such as energy and transportation. It is based on a survey of industry executives and investors.

“We are entering a paradigm shift in the way that businesses and national governments look at energy, particularly as it relates to underlying market drivers, business models, risks and economic impact stemming from the shale gas boom,” said Marc Harris, co-head of RBC Capital Markets global research.

"The coming years will be transformative for companies, particularly those in the energy, infrastructure, manufacturing and transportation sectors, which will, in turn, create opportunities for both investors and corporations," added co-head Richard Talbot.

According to the findings, most exploration and production market participants believe shale gas prices have bottomed out:

  • The vast majority (87%) of survey respondents predict natural gas prices will stay the same or rise over the next two years. In fact, 73% of respondents anticipate a price increase of 10% or more in the next five years. Until then, E&P companies are moving away from dry gas and focusing instead on liquids-rich plays, such as wet gas and shale oil.

The shale gas boom is making U.S. companies think twice:

  • Companies in energy, manufacturing and transportation are reassessing underlying market drivers, business models and risks as a result of the shale gas produced. On an economywide level, respondents expect that shale gas will improve country competitiveness in both the United States (52%) and in Canada (48%).

The shale gas boom is affecting industries differently -- consider manufacturing and transportation:

  • Low cost shale gas will be especially beneficial to companies that rely on feedstock or direct energy use to compete on a global level. In industries such as petrochemicals and fertilizers, where feedstock or energy inputs can account for up to 90% of total production costs, low- priced shale gas will be a game changer. The effect on the transportation industry will be more subtle. Rather than a complete transformation to gas-based use, diversification will likely take place across the industry.

Effect on the U.S. economy:

  • According to 54% of those surveyed, shale gas could lead to natural gas becoming a significant U.S. export in the medium term. However, revenues generated from natural gas exports will not necessarily have a significant positive effect on the overall health of the U.S. economy. The implications on job creation will be positive, but energy security and environmental concerns could limit the scale of natural gas exports in the United States.

Lack of transparency remains an obstacle to investment:

  • A lack of transparency on chemicals used in fracking is a deterrent to gas-related investments, according to 25% of institutional investors who responded. While the industry does engage in some reporting on the topic, some of it remains incomplete or inaccurate and presents an issue for potential and existing investors. Improved transparency, increased environmental risk management and implementation of best practices will help the industry maintain its license to operate while at the same time capturing the benefit of production currently lost to fugitive emissions.

Infrastructure will be challenged to keep up with demand:

  • While sourcing infrastructure investment capital is unlikely to be a major bottleneck to the growth of the gas industry, regulatory risks remain prevalent. Regional pipeline supply dynamics are rapidly changing in response to changing demand. Notably, an increase in NGL demand production has created an infrastructure bottleneck in some regions, for example, in the northeastern United States.