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2 Answers to The Most Profitable Question in Energy

There’s one question that’s on the minds of energy investors the world over. Where will be the next place for shale gas and oil?

It’s worth pondering. The profits won from pioneering shale developments in the U.S. have revolutionized the energy world. Rapidly creating a host of new plays—nearly from scratch.

The question is becoming especially important these days. With exploration and development costs rising around the world, big oil has made a concerted push of late to focus on shale. An arena where the huge scale of development provides enough upside to be high-impact—even for the world’s largest E&Ps.

There have been a lot of enticing geological assessments on the global potential for similar shale developments. Indeed, such oil- and gas-bearing rocks are common in many parts of the globe. With assessed potential running in the trillions of cubic feet, and billions of barrels.

But answering the question of shale’s next big find requires more than just good geology. It also takes the right people, equipment and know-how to get the petroleum out of the ground. And make a profit in the process.

That’s been easier said than done outside of the U.S to date. Shale drilling has been tried in places like China, Chile and Europe. In some the cases, the technical results have even been on par with initial production rates and reserves potential in U.S. plays.

But the killer problem has been costs. In most other parts of the world, the unconventional drilling sector just isn’t developed enough to make an economic go of things. This is an industry where time is of the essence—bad technique means slow drilling, which means day-rate linked well costs go through the roof.

In many cases, well costs in emerging shale plays are running several times higher than they would for identical wells in America. Crushing play economics, and making the whole exercise more science project than start-up plan.

But a couple of data points the last few weeks suggest that tide may be turning—in a few key parts of the world. Vaulting these spots into the lead when it comes to places to watch for the next shale riches.

The first is Argentina. Where political officials said this week that they will likely let natural gas prices rise—removing government subsidies that have kept prices depressed around $2.50/mcf since 2002.

The move comes as Argentina is attempting to spur its domestic gas production. Which has plummeted without good economic incentives for drilling.

Argentina is one place where unconventional drilling has made headway. With good results being achieved in the oil sector, in plays like the Vaca Muerta.

That’s driving development of a decent services industry there. And a rising natgas price might be just the thing to push this start-up package into high gear.

The other spot with potential is Australia. Which has also been developing an unconventional services sector—based mainly around coal seam gas development.

There were encouraging signs from that business this week. With reports suggesting that the under-construction Ichthys LNG project of Inpex/Total is now half-completed—and has come in on budget.

That’s quite an achievement in Australia. Where cost overruns have been the order of the day for most big petro-projects. Driven by bottlenecks in services and supplies.

But the good news from Ichthys suggests the services sector has now matured. To the point where costs are becoming manageable. This might be the first step in a more full-blown development of unconventional resources here.

Keep an eye on these spots over the coming months.    

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