One of the key drivers of the US economic recovery in recent years has been the so-called ‘energy revolution’, as new technology and improved ‘fracking’ techniques have allowed access to unconventional energy reserves.
This boom in energy production in the past few years has had a number of effects, both within the US and the wider energy market. It has also meant the idea of ‘energy independence’ for the country could eventually become a reality.
In its latest Medium-Term Oil Market Report 2014, the International Energy Agency (IEA) points out: “Less than 10 years ago, the US was the world’s largest importer of refined products, with 2.5 million barrels a day (mb/d) of product inflows in 2005. Today it has become the world’s largest liquids producer, ahead of Saudi Arabia and Russia, as well as its largest product exporter. By the end of the decade, North America as a whole will have achieved energy ‘independence’ and have become a net oil exporter with net crude imports projected at 2.6 mb/d and potential net product exports of around 3.5 mb/d.”
In that sense the outlook for the US energy market seems appealing, and the boom in both gas and oil in recent years has helped to offset the volatility seen in traditional energy markets, such as the Middle East, where supply has been disrupted by events such as the Arab Spring and the civil war in Syria.
But the problem with exploring these ‘unconventional’ sources of oil and gas is that it is difficult to know not only how much there is, but also where it is, with many wells being drilled with little reward.
That said, in 2011 an index specifically targeting unconventional oil and gas stocks was launched: the Market Vectors (MV) Global Unconventional Oil & Gas index. It has 61 components, 40 of which are from the US and 21 from Canada, with all the companies generating at least 50 per cent of their revenues from unconventional oil and gas, defined as coal bed methane, coal seam gas, shale oil, shale gas, tight natural gas, tight oil and tight sands.
Charles Whall, portfolio manager on Investec Asset Management’s energy portfolios, agrees that the energy revolution in the US has been “hugely important” in suppressing oil prices globally, while the associated activity and additional benefits of lower natural gas prices have been important drivers for the US economy.
But he adds: “The oft-expressed goal of ‘energy independence’ will remain elusive, as the US still imports 7.7 mb/d of crude oil.”
Mr Whall points out that while the boom in unconventional energy exploration is a relatively short-term phenomenon for oil, it will have a lasting legacy for natural gas in North America.
“The resource base for unconventional natural gas is much greater than for unconventional oil, due to the burial history of the geology. Even with the highest case for liquid natural gas exports, North American gas prices will remain lower than European and Asian markets.”
It seems, over the long term, oil is unlikely to be the saviour of the US economy, with the IEA noting “that is not to say US tight oil supply growth will go on forever”. It states that even as US supply reaches unprecedented levels, output growth is expected to slow and “a production plateau may be in sight” that could see costs associated with this type of energy production start to rise once again.
The gas side of the market, however, seems to be more optimistic, with Mr Whall pointing out the “energy revolution” is providing opportunities for investors, with the relative period of stability in the crude oil price helping energy demand and resulting in better investment returns after a period of underperformance.
For example, in the 12 months to July 30 2014, the Bloomberg WTI Crude Oil Sub index has struggled with a loss of 5.41 per cent, but the FTSE 350 Index Oil & Gas Producers delivered a more palatable 9.15 per cent, while the MV Global Unconventional Oil & Gas index trumped them all with a return of 13.25 per cent, according to FE Analytics data.
Mr Whall says: “North American oil producers and oilfield service companies have been the major beneficiaries. The easy momentum trade has led to some companies becoming fully valued, but significant value remains. Investors are now having to become much more aware of the relative geology and routes to market. The best way to invest at this stage is to have a detailed understanding of the geologies and technologies.”
Nyree Stewart is features editor at Investment Adviser
