Fracking floors energy giants

The US shale gas market is imploding as the price hits a 10-year low, badly hurting the major players. Tom Bawden reports

BHP Billiton is about to become the next victim of the latest asset bubble to burst – US shale gas, the rock-based hydrocarbon that is released via the controversial process of fracking.

A fortnight after writing $2.84bn (£1.84bn) off the value of its Fayetteville shale gas business in Arkansas, BHP is poised to reveal on Wednesday that the charge helped push down its profits by a massive 40 per cent – to $14.2bn – in the year to June 30.

The FTSE 100 mining giant was forced into the writedown after a decade-long stampede into the brave new world of US shale gas produced so much of the stuff that its price tumbled to 10-year lows, taking the value of its producers with them.

"Put simply, the surge in shale gas production has caused a massive near-term oversupply which has caused the gas price to plunge," said Glynn Williams, a partner at oil and gas services investment firm Epi-V.

"The problem is exacerbated because the minerals leasing system in the US obliges lessees to drill fairly quickly or relinquish their drilling rights," he added.

BHP's chief executive Marius Kloppers and Mike Yeager, the group's petroleum head, will forgo their bonuses as retribution for paying $4.75bn for the Fayetteville assets in February 2011. Just 18 months later, the business had lost more than half its value as the US gas price fell from $3.88 per thousand cubic feet when the deal was struck to as little as $1.91 in April, before recovering slightly to now hover around $2.75.

Today's mildly-improved US gas price is well below its peak of $14 per thousand cubic feet in 2005 when US looked set to become a major importer and the shale industry was in its infancy. Meanwhile, it's only about a quarter of the price in Europe and about an eighth of what the Japanese will pay – but for now, these markets are off-limits for America which doesn't have the liquefied natural gas (LNG) plants needed to liquefy the gas at minus 160C, shrinking it to 1/600th of its original size so that it can be shipped overseas.

Ill-timed as BHP's acquisition undoubtedly was, Kloppers and Yeager are by no means alone in overpaying for assets at the top of the market. On the last Friday of July, BG, the former exploration arm of British Gas, took a $1.3bn exceptional US fracking-related hit, and on the same day the Canadian giant Encana announced a $1.7bn writedown, largely on the back of its US business. A few days later, BP announced it would also take $2.1bn worth of, largely US fracking-related, writedowns.

Fracking, or hydraulic fracturing – which blasts gas from the rock with a mixture of water, sand and chemicals – has become increasingly popular in recent years as technological developments have made the rock-based reserves cheaper and easier to access.

The practice is far more advanced in the US, where it has caused a huge deal of controversy amid allegations that it causes earthquakes and pollutes ground water. Some countries, such as France and Switzerland have banned it, others, such as Poland and China are in the early stages of development, while Britain is still working out whether to allow it to continue and, if so, on what terms.

But while protests in the US have largely failed to curb the shale gas industry's development, the plummeting gas price is now doing the job for them. The number of shale gas rigs operating in the US has tumbled by 44 per cent in the past year to stand at about 300 now, according to industry estimates.

Take Chesapeake, the world's biggest shale gas producer. It's in the process of cutting its gas drilling activities by about two-thirds this year in a move that will reduce production by about 7 per cent next year – it's first decline in 23 years.

Although America's shale gas producers have suffered a collective shock to the system in recent months, their medium to long-term future actually looks quite promising – thanks initially to the vast amounts of oil which the rocks contain, which has traditionally taken second place to the gas deposits.

Hydrocarbon producers such as Chesapeake and BHP are furiously switching their fracking resources from gas to oil, which is unlikely to suffer the same depression in its price as gas as the US has the infrastructure in place to export much of the additional oil it produces from shale. As a result, the number of shale oil rigs has leapt by 35 per cent to about 860 in the past year.

In the longer term, frackers will also benefit as falling gas production pushes up prices, with experts at the analyst Raymond James forecasting that gas will roughly double to about $5 per thousand cubic feet in the next 18 months or so.

Furthermore, as an expected flurry of LNG export terminals begin to come onstream in about three years, fracking companies will have a valuable further outlet for their gas – the relatively lucrative European and Asian markets.

The US government may choose to veto some of these LNG plants pending a study due in the next few months into their impact on the US price. However, with one project – from Cheniere Energy Partners – already given the green light, experts are hopeful that there could be more such facilities to come.

Not that any of this is likely to have much of a bearing on the UK's fledgling shale gas industry. Activity here is on hold pending a  Government decision on whether to ban the practice after it was found to have caused as many as 50 earthquakes in the Blackpool area last spring. A Department of Energy and Climate Change inquiry into the earthquakes concluded that fracking can be done safely and the Government is expected to give the industry the green light in the autumn.

But given the relative scarcity of Britain's estimated recoverable shale gas reserves, compared to the US, and the need to make up for the energy shortfall left by dwindling supplies of North Sea oil, such a move would be unlikely to herald an age of exceptionally low gas prices in the UK.

Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Life & Style
life
VIDEO
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Arts & Entertainment
Ian Anderson, the leader of British rock band Jethro Tull, (right) and British guitar player Martin Barre (left) perform on stage
musicJethro Tull frontman leads ‘prog rock’ revival
Arts & Entertainment
Back in the suit: There are only so many variations you can spin on the lives or adventures of Peter Parker
filmReview: Almost every sequence and set-up in The Amazing Spider-Man 2 seems familiar from some earlier superhero film
Life & Style
Father and son: Michael Williams with son Edmund
lifeAs his son’s bar mitzvah approaches, CofE-raised Michael Williams describes the unexpected joys he’s experienced in learning about his family’s other faith
Sport
Gareth Bale dribbled from inside his own half and finished calmly late in the final to hand Real a 2-1 win at the Mestalla in Valencia
sport
Arts & Entertainment
Who laughs lass: Jenny Collier on stage
comedy... writes Jenny Collier, the comedian whose recent show was cancelled because there were 'too many women' on the bill
News
House proud: keeping up with the Joneses now extends to children's playhouses
newsLuxury playhouses now on the market for as much as £800
News
news
Life & Style
Stir it up: the writer gets a lichen masterclass from executive chef Vivek Singh of the Cinnamon restaurants
food + drinkLichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines
Extras
indybest
Arts & Entertainment
Ken Loach (left) and Mike Leigh who will be going head to head for one of cinema's most coveted prizes at this year's Cannes Film Festival
filmKen Loach and Mike Leigh to fight it out for the Palme d'Or
News
The academic, Annamaria Testa, has set out on her website a list of 300 English words that she says Italians ought to stop using
newsAcademic speaks out against 'Italianglo' - the use of English words in Italian language
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit