Managers prospect for shale returns
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Philippa Yelland is a journalist with InvestorDaily, a Morningstar publication.
Fund managers are bullish on shale oil and gas, but an economist has warned that Australia risks underestimating its contribution to climate change if it fails to adequately measure fugitive emissions from coal seam gas wellheads.
David Whitten, 90 West Asset Management executive chair and portfolio manager, said oil and gas extraction from shale source rock was a "specific sub-sector in energy that we are excited about".
Fidelity Worldwide investment director Tom Stevenson agreed shale oil and gas producers and service industries were leading the energy revolution, especially in the US.
However, The Australia Institute's senior economist Matt Grudnoff said while "concerns have been raised about the environmental impact of coal seam gas (CSG), in particular the impact of the fracking process on the water supply, very little research has been done into the broader effects of CSG extraction".
Fracking is short for "hydraulic fracturing" in which large amounts of water are pumped into shale layers to fracture the reservoir rock and allow gas to escape. Shale oil is also released, but development on this front has been slower than for shale gas.
Stevenson said that in the next few years, the US would be only country with the ideal mix of factors to make large-scale shale gas production possible.
"The US is ideally positioned to leverage its sizeable existing natural gas market, large pipeline infrastructure, technical know-how, ample water resources and favourable tax and regulation regimes," he said.
In contrast, China's very large recoverable reserves were restricted by water shortages and technological and infrastructure deficits. In Europe, policy restrictions were a key stumbling block.
Both Whitten and Stevenson said investment opportunities were not confined to the upstream oil and gas production and exploration sector.
"The mid-stream energy sector - particularly selective US and Canadian energy pipeline companies - offers fertile stock-picking opportunities to invest in outstanding, consistently growing businesses, in some cases with relatively low commodity price exposure risk," Whitten said.
Stevenson added two types of companies would benefit most directly from shale energy: those in the extraction process and/or distribution of shale products, and those which gained a competitive advantage from cheaper energy.
Environmental impact is perhaps the single biggest constraint and potential stumbling block for the global shale energy industry.
The main concern has been water pollution because of the very large amounts of water used, around 100,000 barrels for a typical well, and the various chemicals used in the fracturing process.
However, according to producers, drilling occurred so deep in the ground, up to 4700m and well below ground water levels, contamination should be limited.
Regarding the charge of excessive water consumption, BHP Billiton (BHP) has argued that on a per-unit of energy basis, the amount of water used in shale extraction was lower than coal production and corn ethanol production.
But, in Grudnoff's report, "Measuring fugitive emissions: is coal seam gas a viable bridging fuel?," he estimated that Australia was underestimating coal seam gas fugitive emissions by around 62 million tonnes over three years.
"Gas is increasingly being seen by some as a 'bridging fuel' in the fight against climate change, yet because we don't accurately measure the amount of leakage at wellheads we have no way of knowing if we're actually reducing our emissions by switching from coal to coal seam gas," he said.
Stevenson countered that "all the potential environmental issues also need to be considered in a holistic context of shale-derived gas and oil being relatively clean fuels that produce far fewer carbon emissions than coal for example".
Whitten said the increasing population, prosperity and urbanisation of Asian and other emerging countries was "the standout investment story for the past decade".
"This has led to increasing global consumption of natural resource minerals, energy and food. These long-term demand drivers, combined with constrained supply for some commodities, provide a favourable investment climate, particularly in selective, high-quality mining, energy and agriculture shares," he said.