- Beach Energy's initial shale gas testing is positive - Costs are potentially overwhelming - Most analysts doubt commercial viability

By Greg Peel

Shale is hot. A few years ago it was coal seam methane that was hot and now much faith is being placed in the capacity for Australian CSM LNG projects in Queensland's Bowen and Surat Basins to expand to multiple trains and provide untold export riches. It's a crowded market, and not everyone will win, but analysts acknowledge the earnings upside for the likes of Santos ((STO)) and Origin Energy ((ORG)) which are leading the race.

Many foreign companies are joint venturing in Aussie CSM, including America's Big Oil. But with CSM suddenly offering such potential, Big Oil turned inward and realised America boasted vast equivalent resources of its own. Not coal gas, but similar shale gas. As it is in Queensland, suddenly the rush is on in the Azlatex region in the south (Arizona-Louisiana-Texas) which boasts the massive Fayetteville, Haynesville and Eagle Ford shale reserves.

BHP Billiton ((BHP)) has placed a lot of faith in shale gas, having recently acquired ConocoPhillips' Fayetteville tenements at a substantial cost. Aussie listed junior Aurora Oil & Gas ((AUT)) also has acreage at Eagle Ford, and the market has sent its shares through the roof.

Too far through the roof for BA-Merrill Lynch's liking, with the analysts calculating a price of $3.35 implies a "staggering" US$85/acre which is far more than any of Aurora's neighbours and far more than recent M&A transactions imply. Merrills likes Aurora and believe it's a great story, but on current valuation, the analysts can only apply an Underperform rating.

Australia ? land of just about anything one might find under the ground ? also boasts shale gas reserves. One of the most promising shale areas is the Cooper Basin in South Australia, an area which has long provided conventional oil and gas production, gave birth to Santos, and currently provides Beach Energy ((BPT)) with its conventional earnings stream.