Behind the energy Renaissance in the U.S. - Commonfund

Behind the energy Renaissance in the U.S. - Commonfund

y Greg Jansen

Managing Director, Commonfund Capital

Behind the energy

Renaissance in the U.S.



and Ethan Levine

Associate Director, Commonfund Capital

Technology is having major effects on the energy outlook for America. From a

situation of scarcity just a few years ago, the U.S. is experiencing an energy

Renaissance as new extraction technologies unlock oil and gas sources that were

once inaccessible or uneconomic.



ould the U.S. end its

reliance on Middle East

oil by 2035? Could

the country become a

natural gas exporter?

These questions—all but

unthinkable a few years ago—are being

contemplated these days by industry experts.

If and when these landmarks become

reality may be speculation. What isn’t is the

fact that the U.S. is in the midst of an

energy Renaissance that promises to have

lasting effects across the industry and the

economy. Consider that:

U.S. oil production has risen 25 percent

since 2008 and could increase

by 600,000 barrels per day this year.

U.S. natural gas production grew

at record levels in 2011, topped off by

production of nearly 64 billion cubic

feet per day in December, the largest yearover-year

volumetric increase in history.

This transformation signals the rise of the

Western Hemisphere as a major source of

hydrocarbons. Within the U.S., significant

new production is being tapped in North

Dakota and Texas. To the north, western

Canada has become an even more important

source of oil, while to the south huge oil

fields have been discovered off Brazil’s coast.

And while the Renaissance that began in

the late Middle Ages was principally a move -

ment of thought and culture, the current

energy Renaissance is technological.

Less than five years ago, the U.S. was still

in its energy dark ages. Over recent decades,

the U.S. imported ever-increasing quantities

of oil, and falling oil output was a given.

The same was true for natural gas; declining

production meant the U.S. would inevita-

bly import liquefied natural gas from Africa,

the Middle East and other sources.


But extraction technology changed all that.

Oil and natural gas deposits once thought

unrecoverable and/or uneconomic are

now viable long-term sources of hydrocarbons.

In the U.S., the breakthroughs were


At this natural gas

production site,

water and sand are

mixed and then

pumped into the

well thousands of

feet below the

ground at pressures

over 6,600 psi,

creating fracture


By 2020,

the U.S.



half the

crude oil it


One barrel of oil has

the energy content

of approximately

6 MMBtu of natural

gas. The burgeoning

supply of natural

gas in North America

and continued oil

demand have

resulted in a record

high price premium

for crude oil relative

to natural gas.

horizontal drilling and hydraulic fracturing.

The latter, popularly referred to as “fracking,”

is a process by which a pressurized fluid

is injected into channels in rocks to release

the oil and gas. Fracking began with the

extraction of shale gas but was shown to

work equally well to release tight oil from

dense rock (giving the name “tight oil” or

“shale oil” to these previously inaccessible

oil deposits). North Dakota’s Bakken shale

and Texas’ Barnett shale are two major

sources of tight oil and gas. Tight oil produc-

tion in the U.S. could reach more than

4 million barrels per day (mbd). In Canada,

the newer sources of oil are oil sands,

also known as tar sands, in which heavy oil

is separated from sand and clay and then

treated so that it flows through pipelines.

Canada is producing more than 1.7 mbd of

oil and targeting 3 mbd of potential

resources by 2020. Vast deposits of oil have

been discovered below Brazil’s coastal

waters, complementing but, ultimately, over-

shadowing the country’s already robust

ethanol production; estimates indicate Brazil

could be producing 4.5 mbd by 2020,

equal to half of Saudi Arabia’s daily output.

Owing to these new extraction technologies,

the U.S. Energy Information Administration

(EIA) in its 2012 Annual Energy

Outlook estimated that the U.S. had 482

trillion cubic feet of shale gas as of January

1, 2010, up from 83 trillion cubic feet on


Price Premium Ratio 1998–March 2012









the same date in 2004. On the oil side,

the EIA estimated the U.S. had 33.2 billion

barrels of tight oil on January 1, 2010,

compared with basically nil in 2004. Further,

the EIA estimates that by 2020 half of

the crude oil America consumes will be

produced domestically, while 82 percent

will come from the Western Hemisphere.

Anytime a situation changes so dra-

matically (and quickly), there are bound to

be larger implications and a range of

unanswered questions. That is surely the case

with the energy outlook for the U.S.


Closer ties with Canada can be expected as

that country evolves into a major energy

ally. Similar ties can be expected with trading

partners in Latin America, particularly

Brazil. Beyond our own hemisphere, there

are likely to be major changes in global

hydrocarbon trade flows. Much less oil

is likely to flow to the Western Hemisphere

from the Middle East, while more Middle

Eastern oil will likely flow to Asia. China is

already the Persian Gulf States’ largest

customer. Shale oil and gas deposits are not

exclusive to this side of the Atlantic,

so Eastern European nations—long dependent

on Russia’s natural gas—can be

expected to step up their own high-tech

extraction efforts.

On the home front, a range of economic

issues awaits. The greater supply is a

net positive but not one that is completely

6:1 Energy Equivalent

98 99 00 01 02 03 04 05


06 07 08 09 10 11


Source: Bloomberg

unalloyed. One challenge is near-record

low natural gas prices in the U.S., which are

also the lowest prices in the world. The

combination of dramatically increased supply

and lower demand owing to a soft economy

dealt a double blow to the domestic

natural gas industry. According to figures

from Baker Hughes, the natural gas rig count

fell to 534 at the end of June 2012, down

from a 2011 high of 936 in mid-October and

the lowest rig count since 1999. The rig

count peaked at 1,606 in 2008. Another indi-

cator of slack natural gas demand: a record

high in the price premium for crude

oil relative to natural gas, as shown in the

chart on the opposite page.


More to the positive side, domestic energy

production involves long supply chains and

those chains create jobs. According to the

World Economic Forum, in 2010 the shale

gas industry directly contributed $76.8

billion to U.S. GDP and supported more than

600,000 jobs. This figure is expected to

grow to 870,000 jobs in 2015 and to more

than 1.6 million by 2035. Moreover, incremental

growth in energy production can be

a boon for countries where energy is a

relatively small part of the economy, such

as it is in the U.S. In addition, energy

production requires a skilled and well-paid


Bcfe per Day 1990–2011









workforce, not to mention substantial

capital expenditures. In these ways, the

multiplier effect from expanded energy

output can ripple throughout the economy.

Lower energy costs are also good for

manufacturing, and there is mounting

evidence that some manufacturing jobs are

slowly returning to the U.S. It also makes

U.S.-made goods more competitive in global

markets. Of course, lower energy prices

give U.S. consumers—whose spending

accounts for about 70 percent of the domestic

economy—a big boost, whether it’s at the

pump or the thermostat. And the increase in

output is fortuitous as it comes at a time

when demand is increasing among many devel-

oping countries as they seek to raise living

standards and build consumer economies. Yet

another promising development is the

emergence of the U.S. as a low-cost provider

of energy-intensive feedstocks, such as

petro chemicals and fertilizers.

Another question revolves around the

potential environmental impact of fracking.

It is important to note an increase in

concerns about possible environmental

damage stemming from newer drilling and

completion techniques, exemplified by

the recent drilling ban in portions of the

Marcellus shale in the eastern U.S. In

some cases, we expect increased regulation

to impact compliance costs, but it may

also create opportunities for oilfield services

and manu facturing firms offering next-

generation solutions to mitigate these risks.

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Domestic Conventional Gas and Imports

Domestic Tight/Shale Gas All Domestic Oil




sources of

domestic gas have


domestic conven-

tional gas and

imports. Additionally,

oil, once on

the decline, has seen

increases in the

past few years.

Today, workers drill

using horizontal

drilling and hydraulic

fracturing, or

“fracking,” to coax

out oil and gas

that previously were


or uneconomic.



All of this takes place at the same time that

alternative sources of energy (biomass,

hydropower, geothermal, wind and solar)

seek to gain more than a toehold share

of the U.S. energy industry. These sources

accounted for just 7.7 percent of U.S.

energy consumption in 2011. Clean energy

is one of the fastest growing segments of

the U.S. electrical generation market, driven

by state-based renewable portfolio standards

(RPS) and utilities’ desire for non-fossil

fuel diversification. Still, there are challenges.

Cheaper oil and gas come with a

price tag attached. If prices go too low,

exploration and production are discouraged,

as are the incentives to invest in alternative

energy sources. To that point, after growing

12 percent in 2011, the EIA estimates that

total renewable energy supply will decline by

2 percent in 2012.

Finally, for Insight readers, there is the

question of investment opportunities and

risks. Commonfund Capital’s view regarding

the disparity between oil/liquids and

natural gas pricing in North America has

driven the shift of capital expenditures

to favor oil and liquids-rich development in

our portfolios. This migration to oil and

liquids will likely continue over the short and

intermediate term. Despite pricing challenges

facing natural gas exploration and

production, we believe the relatively low

CO2 footprint and fewer geopolitical risks

of North American natural gas make it an

attractive long-term commodity.



Examples of the types of companies in

which Commonfund Capital is investing

include a provider of environmental

oilfield waste management services that

respond to increased regulation of

onshore unconventional drilling. Another

portfolio company provides gas gathering

and processing infrastructure, which is needed

to support increased natural gas drilling,

especially sites with low finding and development

costs and liquids-rich content. An oil

drilling exploration and production company

is taking advantage of existing infrastructure

in the Permian Basin—historically

an area of high drilling activity—but

using new technology to extract resources

more efficiently.


Just a few years ago, there was wide

agreement that the U.S. was fated to live

with permanent energy scarcity and its

accompanying geopolitical and economic

problems. That has changed—rapidly,

dramatically—owing to technology. These

newly accessed major sources of supply

within U.S.-friendly borders will present a

very different dynamic—one that will

shape U.S. foreign policy and domestic eco-

nomic activity going forward. While this

new energy reality is not without challenges

(environmental concerns, for instance),

the investment opportunities it presents

are exciting.



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