Of the 22 main shale plays in the United States, the one with the apparent greatest concentration of gas condensates and most liquids-rich production is the Eagle Ford Shale play in South Texas. Since natural gas liquids are fetching better prices than natural gas, this has made the play particularly desirable to producers and investors.

To accommodate this increase in production of gas liquids, midstream companies are expanding gathering systems, adding new pipelines, and building new processing facilities (see facing page). However, there is growing concern that the increased supply of NGLs will create a glut in the marketplace similar to what has unfolded in natural gas markets, and this could lead to a prolonged period of depressed NGL prices.

Research by Raymond James concludes that the ability of midstream producers to process natural gas and fractionate NGLs (i.e., supply) will outpace the ability to crack NGLs (i.e., demand). RJ expects this will pressure NGL prices downward over the next 12 to 18 months.

Will this curtail drilling and wellhead production? So far low prices haven't curtailed natural gas drilling, although many E&P companies are focusing their efforts on liquids-rich areas.

Allen Brooks, managing director of Parks Paton Hoepfl & Brown, believes the longer-term outlook for gas prices is "troubling."

"If gas prices stay at current levels, a fraction of the levels that existed when gas shale investments were accelerating, something has to give," said Brooks, who asks, "Will technology bail out poor economics? Will gas shale producers become fodder for the largest oil and gas companies in the industry? Maybe producers will finally stop drilling."

He concludes, "As an investment analyst and trained to be critical, [I] can only offer words of caution at the present time."

Wood Mackenzie's latest analysis of upstream M&A activity in the US shale gas sector, released on Sept. 30, is more upbeat. M&A expenditures in US shale gas totaled $21 billion during the first half of 2010. The independent energy research firm says indicators suggest that this level of activity is set to continue over the next couple of years, with the large caps and majors continuing to dominate the market.

"M&A activity in US shale gas has evolved with its emergence, play-by-play, as a world scale source of secure, long-term gas supply," says Luke Parker, manager of Wood Mackenzie's M&A research service. "The key factor driving this has been the continued evolution and application of new technologies to unlock enormous volumes that were previously considered uncommercial."

Wood Mackenzie says this has resulted in lowered development break-even costs to a level at which the cost of shale gas is highly competitive with other domestic sources of supply – conventional and unconventional – and LNG imports. Operators have made, and continue to make, notable advances, and unit costs have fallen in spite of increasingly complex and specialized well design.

Parker goes on to highlight the impact of this structural change, "In a wider upstream oil and gas sector characterized by dwindling opportunities and increasing risks, the emergence of such an attractive resource – competitive with other global opportunities by every measure – has been a game changer."

So has the flurry of activity peaked yet? Parker doesn't think so, "The ingredients required for continued high levels of M&A activity in US shale gas remain in place. The drivers that make shale gas so attractive – world scale resource, robust economics, access opportunities and limited above-ground risk – are as strong as ever."

Expanding on how continued level of activity is set to unfold Parker explains, "There's scope for intra-play and sector-wide consolidation, facilitated by mounting pressures on existing players to evaluate and restructure their portfolios as strategic priorities evolve. Key among the various pressures that will influence the market, at least in the near-term, is the continued disconnect between oil and gas prices and a depressed Henry Hub futures market."

Therefore Wood Mackenzie suggests that gas-weighted independents with a weak balance sheet and/or hedging position are beginning to look increasingly vulnerable to larger players. In fact, the report suggests that shale gas offers a good fit for the large caps and majors, playing to their technical capability, financial strength and long-term view, all of which are pre-requisites for those looking to build a material position. Hence this peer group will continue to dominate the large-scale deal activity.

Robert Clarke, unconventional gas research manager for Wood Mackenzie adds, "The magnitude of the US Shale gas resource is extraordinary. We estimate the total resource potential of the 22 shale plays we currently analyze is approximately 650 tcfe: equivalent to a resource life of 32 years based on total US gas production in 2009. Shale gas production is set to increase from 17% in 2010 to 35% in 2020 of total US gas supply."

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Eagle Ford Shale is tops in NGLs, but production may outpace demand

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