I speculated recently that some of the gushing press in Australia about the US shale gas boom was being driven by BHP. This weekend's SMH has a column which indicates this theory is spot on (as the author is transparent about who was feeding him information) - Shale boom gathers pace. I think the key takeaway from this one is that shale oil is uneconomic below $80 a barrel - so there is one (starting) floor price in the new age of unconventional oil.
MY TRIP to Texas as a guest of BHP and my subsequent talks in New York with economists, analysts and investment bankers in New York about America's shale oil and gas production boom meanwhile underlined that BHP Billiton got its biggest shale deal in the US right. The growing consensus on Wall Street is also that the US shale boom is a global economic and geopolitical game-changer.
BHP's first purchase of shale gas leases in Arkansas for $US4.6 billion was fully valued at the gas price of the day, and the $US2.84 billion write-down the group announced in August was arithmetically generated as US shale gas production soared, and US gas prices plunged.
The group's subsequent $US15 billion takeover of US group Petrohawk at 65 per cent premium to Petrohawk's market price could produce an asset valuation uplift this financial year that more than compensates for the first write-down.
BHP can still earn returns of more than 20 per cent by developing gas wells in Arkansas, but it is aiming instead to increase production of oil and other liquids that are roughly four times more valuable by 15 per cent in 2012-13 by redirecting the vast bulk of its $US4 billion shale capital expenditure budget to Petrohawk's oil and liquids-rich fields in Texas.
In New York, the big bulge-bracket banks are all doing their sums on the shale boom. One estimate of the value transfer from the rest of the world to the US is already $US900 million a day as US domestic production grows and imports fall. That's an amount equal to 2.2 per cent of raw GDP, but what the US does with the income windfall is the key, as it was here during the commodities boom. To the extent that the new income finances consumption of imports, for example, domestic benefits of the boom will be lower.
The US will certainly benefit from cheap domestic gas that will deliver cost benefits to heavy industries including petrochemical plants and power stations, but the horizontal drilling and rock-fracturing technology that is freeing up shale gas and oil will ultimately generate sweeping global changes.
Shale oil can be commercially exploited at oil prices as low as $US80 a barrel, and as shale oil volumes rise, oil price spikes in response to accelerating growth in demand that work to slow demand again will be much less frequent. Shale oil, in other words, is going to raise the maximum speed limit of the global economy. I will have more about the amazing shale boom and BHP's piece of it in coming columns.