Implication of the shale revolution

Abstract

As U.S. natural gas declined below $2/mmBtu in April, 2012, with ample natural gas supplies, many Japanese got excited that they will soon be able to receive LNG from U.S. at significantly reduced costs. However, $2 natural gas could not have achieved only with abundant shale gas production but also with demand destruction in residential/commercial sectors under unseasonably warm 2011-12 winter weather. Such low natural gas prices had negative impacts on shale gas production as the price level dropped well below shale gas development/production costs, which have hampered producers' activities and instead, producers have sifted their focuses on tight oil development and production. To cover shale gas costs, U.S. natural gas prices are thought to rise to $5-5.5/mmBtu in mid 2020s. On the other hand, due to U.S. oil supply increase with steady growth of tight oil production, crude oil futures market participants expect that U.S. oil prices, which is around $100/bbl will weaken to $80s. Under such circumstances, price differentials between natural gas and crude oil will narrow, which implies that Japanese energy cost reduction with importing U.S. LNG will be limited. We should make further efforts to reduce energy costs, including ones through energy conservations. exploration, development, and liquefaction projects, carried out by Japanese companies.