Having pumped about $25 billion in unconventional plays, Shell has little to show for it by way of success and its investments in North American unconventional gas have soured. Already, there are reports the company is looking to flog off its 50% stake in the Haynesville shale play to private equity group Blackstone.
While such write downs and asset sales by big oil have become commonplace, investment in shale is at an all-time high with valuations still running high. Industry analysts say investments in the Wolfcamp tight oil play in the Permian Basin is expected to reach $12 billion this year.
Mergers and acquisitions activity in the North American upstream sector is at an accelerated pace registering an average of $300-$325 million.
While the US has been atop the shale leaderboard with heavy investment inflow, other countries with potential shale plays also appear attractive to investors. In fact, even countries with poor investment regimes and little rule of law hold considerable appeal.
Industry analysts point out that it is far easier to limit political risks with shale plays given the cash flow profile of shale projects compared with multi-billion dollar super projects such as those in the deep water off Brazil or even the Kashagan project in the Caspian Sea.
With lead times counted in years, conventional projects make themselves vulnerable to the vagaries of political and economic uncertainties, which could affect cash flows. In contrast, shale plays usually have a return horizon of around 12-18 months.
Although shale prospects require more wells to be drilled – compared to conventional onshore wells – and tend to be more expensive, they are still cheaper than wells drilled in deep and ultra-deep water.
Perhaps the biggest criticism of shale is also its greatest advantage. As shale wells usually have front-heavy production with high initial flow rates, followed by steep declines, investor costs are recouped much faster.
That said, shale plays also have a long wagging tail and despite flow rate reductions, tend to remain in production for a long time. This gives shale drilling more favourable economics with higher overall return over the life of the project.
Advances in drilling technology notwithstanding, what perhaps differentiates shale plays from conventionals is the ability of sponsors to scale up or down projects in response to changing political and economic risks.
As shale production involves continuous drilling of wells to keep up economic production, unlike conventional projects, there are fewer sunk costs and less chance of fiscal regimes being altered half-way into production.
Though shale drilling is not without risks, with the shale revolution is still catching on, it could be a game changer in an increasingly volatile geopolitical environment.