Investors in BHP Billiton know a lot more about the group's US shale gas play after petroleum boss Mike Yeager's three-hour briefing on Tuesday night, but the $US70 billion question remains: will BHP get the US domestic gas price it needs to hit a home run?
BHP has spent $US20 billion buying into the shale, $US15 billion of it in the takeover of US-listed Petrohawk halfway through this year. It will spend another $US50 billion over more than a decade developing the resource. The plan is to more than double production from the shale by 2015, and to triple it by 2020, with higher-value liquids that could earn a return of more than 100 per cent for each well, accounting for about 10 per cent of production this year, and 20 per cent of the expanded production in 2015.
Yeager says BHP expects to generate a 25 per cent return overall, and that's going to depend on the price BHP gets for the gas it sells in America.
US domestic gas is priced at the Henry hub, an intersection of nine interstate and four national pipelines located in the small town of Erath, in southern Louisiana. And the Henry hub price is misbehaving. It was $US14 per thousand cubic feet in 2005, was down to $US4.27 by July this year, when BHP announced that it would pay 65 per cent over the market price for Petrohawk, and is now about $US3.55.
That's partly because the US economic growth was hammered by the global crisis. But it's also because of the shale gas development boom that BHP has joined.
In his presentation, Yeager referred to the NYMEX futures price, which has US gas rising back up to $US6 per thousand cubic feet by 2018. The price rise will happen if domestic gas supplies stay in balance, and that in turn depends on how aggressively the shale is developed by majors that, like BHP, are buying out mid-tier operators such as Petrohawk with a view to ramping up production, and extracting economies of scale.
There's just a lot of gas around. So much that in its 2009 World Energy Outlook published last year, the International Energy Agency warned of ''an acute glut of gas supply in the next few years'' after a sharp drop in global consumption during the global financial crisis.
Its 2010 outlook, released earlier this month, is less gloomy. In a breakout report on gas, the IEA says primary gas demand could reach 5.1 trillion cubic metres by 2035 - 1.5 trillion cubic metres more than today, and 0.6 trillion more than its base case outlook. That assumes the push against global warming results in gas being used more widely in transport, and on China adopting policies that more aggressively favour gas, and also assumes that the world relies less on nuclear power and more on gas power in the wake of Japan's Fukushima reactor meltdown.
The dimensions of the glut decreased last year, the IEA says. And it says its ''Golden Age for Gas'' scenario has rising demand pulling capacity utilisation rates back up to pre-global crisis levels by 2015.
But, even on the IEA's ''Golden Age'' demand scenario, global natural gas resources won't exactly be stretched. Conventional recoverable resources are the equivalent of more than 120 years of present global consumption. And, when fast-developing unconventional gas resources including shale gas, tight gas and coal seam gas are included, recoverable resources are good for about 250 years.
''Our analysis suggests that plentiful volumes can be produced at costs similar to those in North America,'' the IEA says. And as Macquarie Equities notes in its report on Yeager's briefing, technological breakthroughs that allow larger volumes of unconventional gas to be tapped at a lower cost create gains that will inevitably be shared - by producers such as BHP but also by customers, in the form of gas prices that are lower than they would otherwise be.
An additional issue for BHP investors is that there are several benchmark prices for gas, and the Henry hub price is by far the lowest. Using thermal power as a measure, liquefied natural gas is more than four times as expensive, and natural gas in Europe is about three times more expensive.
The theory is that, as gas usage rises and gas trade expands, prices will converge. There will be a blended global price, based on the calorific content of gas and its derivative, LNG, and it will be higher than the Henry hub price. But it is international trade in gas that drives the convergence. And the IEA says the North American market may be an exception that is ''largely self-sufficient and therefore likely to be essentially isolated from regional trade''. Yeager says that, as US gas supplies continue to rise, exports from the US should rise, too. But it's a possibility, not a reality.
The Maiden family owns BHP shares