Monday, July 25, 2011

A trillion dollars opportunity

The Energy Information Agency estimates technically recoverable shale gas resources in Poland at 5.295 trillion cubic meters (5.295e12 m^3).

Based on the current spot price of the natural gas ($4.3780/MMBtu) in the US where shale gas extraction shook the dynamics of the gas market, this translates into around 841 billion USD of potential revenues.

Given the current global economic situation and the idiosyncrasies of the European gas market this is a rather conservative price estimate (I will return to it later).

1 MMbtu / 1027 Btu/cf = 973.71 cf (cubic feet, feet^3)

973.71 cf = 27.572 m^3

1000 m^3 / 27.572 m^3 (1 MMbtu) = 36.2687

1000 m^3 * NG.F = $4.3780 * 36.2687 = $158.784 / 1000 m^3

5.295e12 m^3 * $158.784 / 1000 m^3 = $840 761 280 000

OK, so let's go back to some more pricing analysis.

The average price of the natural gas sold by Gazprom reached $306 at the end of 2010 and is expected to increase to $400 in 2011.

Meanwhile the average natural gas spot price over 10 years in the US was $5.69/Btu or $206.369/1000 m^3.

As the production of shale gas in Europe increases and LNG-based geographical arbitrage equalizes prices among regions, the European prices will come down over time.

Hence the long term average spot price is probably the better estimate of the value of reserves. Then the gas reserves of 5e12 m^3 translate into nearly 1,1 trillion USD.

If only reserves are as large as estimated by EIA...

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