A prediction: Shale oil plays will grow for decades

The head of an energy-focused investment bank predicts opportunities will grow for decades in unconventional shale plays, with the United States on track to potentially become the world’s top oil producer by 2035.

But Bobby Tudor, CEO of Houston-based Tudor, Pickering, Holt & Co. was less optimistic about short-term natural gas prices when he spoke to reporters at a media tour hosted by BHP Billiton Petroleum last week.

“The gas prices we are at today are not sustainable,” Tudor said.

Big companies, including ExxonMobil and BHP Billiton, can continue to produce natural gas because they believe prices will eventually go back up and can afford to wait, he said. But smaller companies are leaving the business, often shifting to oil production.

BHP Billiton entered the U.S. shale fields last year with the $12.1 billion acquisition of Petrohawk Energy and remains in the Fayetteville Shale in Arkansas and the Haynesville Shale in East Texas and Louisiana. But it has shifted emphasis to the Eagle Ford Shale, which produces natural gas liquids and oil, and the oil-rich Permian Basin.

Michael Yeager, chief executive for BHP Billiton Petroleum, said the company would return more aggressively to dry gas production when prices are “comfortably” above $3.50 per million British thermal units.  Natural gas was trading at $3.51 per million Btu Monday morning, up 20 cents from Friday.

Tudor suggested $6 per British thermal unit is a realistic price for production to pay off in most production basins.

The Marcellus shale could be profitable at $3, Tudor said, partially because it is “great rock” with virtually no geologic risk and close to East Coast markets. Haynesville and parts of the Eagle Ford are almost as economically viable, he said.

Tudor did not offer a timeline on when prices might go up, and he held out little hope that natural gas exports will provide an easy solution.

Oil, especially the unconventional shale oil plays, are another matter, he said, noting that the movement is still growing.

He did provide a few caveats: “It takes a lot of money to develop a big shale play,” he said, and most companies still consume more cash than they generate.
Tudor predicted more consolidation of companies is coming, and said continued growth will depend, in part, on developing economies, including those in China, India and Brazil, remaining relatively robust.

That’s partly because their growing economies drive demand but also because of the foreign investment that has poured into energy projects — $31 billion in 2011 and the first two months of 2012, according to Tudor.

While some foreign investors simply want to be passive investors, Tudor said others, including those from China, are interested in gaining access to technology they can use in developing shale plays elsewhere in the world.

Shale oil and gas isn’t limited to the United States —and development has begun in Argentina, China and a handful of other countries — but Tudor said it’s likely to take off more slowly elsewhere.