Both shale gas and shale oil transactions were popular in the City in London and Wall Street at the start of the decade. According to KPMG shale mergers accounted for $46.5 billion of activity in 2011. As one can imagine, as the price of hydrocarbons has dropped shale no longer occupies that coveted position. Market sentiment remains for shale plays, albeit with alternative financing structures increasing popular in nature. The situation is by no means rosy, but the shale industry continues to finds the funds it needs.
Challenges faced by shale gas
Shale gas plays have a different financing structure to conventional hydrocarbon deals. If one were to look at the conventional sector there is more of a focus on megadeals: technically extremely difficult, complex and possibly in a high-risk jurisdiction. These projects would typically take years of planning, would have a long return of working capital, and risk would normally be shared out between a number of parties. Conventional hydrocarbon fields also have a relatively slow drop off production curve, anything between 2-8% per annum (Please see Figure I for a sample production profile).
Thus when financing a typical hydrocarbons venture, the capital markets would look at the price of the underlying commodity over a relatively long period of time. In addition, in a typical hydrocarbon well (or indeed many types of venture) there would be a high fixed cost. This fixed cost would cover the well and capital costs.
The full article, along with all maps and graphs, is available in Issue 2 of Shale Gas International Magazine and can be found on page 29.