As already pointed out in our previous special reports, we believe that shale gas is on one hand one of the most important factors of our future energy supply and on the other hand one of the most attractive investment opportunities. Geologists believe unconventional gas to exceed the conventional reserves by a factor of 10. We believe that whatever is deemed "unconventional" gas today will soon be "conventional" gas due to technological progress20. We are also convinced that the European energy and gas market will undergo dramatic changes in the coming years, and that the dependence on Russian gas will be a thing of the past. Currently we seem to see the beginning of this transformation process.

If shale gas can really gain a foothold in (Eastern) Europe on a sustainable basis, this would come with extensive effects for Europe. On the one hand the frequent threats by Russia to suspend deliveries would become obsolete, and on the other hand the prices should take their cues from the market prices in the future. At the moment the gas prices in Central Europe are about 100% higher than in America.

In contrast to oil and other commodities, there is no global market for natural gas. The gas market is still local and thus not globally integrated. The oversupply of natural gas and the success of LNG (liquefied natural gas21) will keep the pressure on the gas exporters and thus the pegging to the oil price may soon be a thing of the past. Also, the long-term contracts - a customary form of contract in Europe - are now subject to gradual adjustment. For example Gazprom and E.On agreed to peg the prices a least partially to the spot prices. We regard this as an important development, which should continue to pick up momentum.

Gazprom has recently mentioned the rising influence of unconventional gas in Poland, after its earlier (mostly) negative campaigns. The fact that Gazprom feels threatened by the shale boom is also exemplified by the company's plans to suspend the development of the Shtokman gas field by another three years. Gazprom now expects the field to become operative by 2018. And the fields of the Yamal peninsula should commence production later than anticipated as well, especially since the costs of both projects have risen dramatically and are now hardly profitable at current gas prices. The following chart illustrates the enormous dependence of many European countries on the Russian gas supplies.

Eoin Treacy's view One of the other reports Ronald-Peter Stoeferle refers to above was posted in Comment of the Day on March 9th 2010, focuses on shale gas and is one of the best I have seen on the subject and is no less relevant today.

Subscribers will be aware that we wholeheartedly agree with Ronald-Peter Stoeferle's view that unconventional gas is a game changer for the energy sector. However, I am uncomfortable with his estimate that Brent crude will average $124 this year. This assumes a significant deterioration in the supply situation which is my no means certain.

Brent crude oil prices consolidated mostly below $80 for the better part of a year and broke successfully back above that level in September. It hit a new recovery high in December and has since rallied to test the $120. If one were to strip out geopolitical concerns, then prices are overextended relative to the 200-day MA and the possibility of a reversion towards the mean has increased. That means a pullback towards $100 could not be ruled out.

The report David posted last night argues for a pull back towards $70 which is an interesting contrast with that above. Prices would need to sustain a move back below $100 to indicate that a medium-term peak has been reached and question scope for some additional upside.

Prices rose so quickly because of uncertainty and the political environment remains volatile. By definition any opinion on how the situation develops is conjecture. At present, Saudi Arabia does not look like it is going to deteriorate into chaos. It might but I am unwilling to predict it.
Fullermoney has long defined peak oil as a rising cost of production. As more conventional oil fields reach peak production, the cost of maintaining supply rises. New discoveries have typically been in deep water such as in Brazil or off the northern tip of Russia. In Saudi Arabia's case, new supply is of a much heavier grade and will require expensive refinery capacity. The rising cost of marginal production has helped to support oil prices.

However while shale gas is a game changer for the energy industry so is shale oil. (Also see Comment of the Day on February 10th). If companies such as Devon Energy, Chesapeake Oil and Anadarko Petroleum can successfully extract oil from shale at a competitive price, as appears likely over the medium-term, then US energy independence becomes a realistic possibility provided an integrated energy policy is implemented.

The question remains as to how fast the very real technological advances currently being implemented across North America can bring new supply to market. At a minimum this is a medium-term prospect but despite the recent surge in oil prices, it could be enough to derail some of the most bullish forecasts for crude oil prices.