Old Fuel Source Lighting Way for Long-Term Energy Investors

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Old Fuel Source Lighting Way for Long-Term Energy Investors

Shale Gas

The most exciting opportunity in the energy industry is in shale gas, which is natural gas trapped within shale formations. Two new methods of retrieval have dramatically changed the amount of gas that is now recoverable.

One is horizontal drilling, in which a traditional well is drilled from the surface down to the targeted rock formation. At the desired depth, the drill bit is then turned sideways to bore a well that stretches through the reservoir horizontally, providing greater access to the gas trapped deep in the producing formation.

The second method is hydraulic fracturing, which has become better known as “fracking.” This is a real difference-maker but, as I’ll talk more about in a moment, it still is highly controversial. Water, sand and — here’s the controversial part — chemicals are pumped into the well to open cracks (fractures) in the shale, allowing the natural gas to flow through them  and into the well. When used in conjunction with horizontal drilling, fracking enables gas producers to extract gas that was previously off-limits, and allows them to do it at a reasonable cost. Fracking is estimated to be used in 50% of all natural gas wells today to improve production.

These new technologies have turned the U.S. natural gas industry on its head. Just five years ago, U.S. gas production was in a permanent decline, so oil companies were spending billions of dollars to import liquefied natural gas (LNG). With demand rising and supply limited, the price of natural gas rose sharply for most of the previous decade. The price per thousand cubic feet (MCF) jumped from $2 in late 2002 to more than $8 in late 2004. It spiked over $10 twice, reaching as high as $14 in 2005 after heavy hurricane activity and nearly hitting $13 in the midst of the oil bubble in 2008.

The price today? $2.50. Thanks to new methods, recoverable natural gas reserves in the U.S. alone equal 100 years worth of this fossil fuel. Shale gas, as estimated by the EIA, accounted for 14% of U.S. natural gas supply in 2009, and that number is on its way to 45% by 2035. Some of the largest shale formations in the U.S. are in Texas (the Barnett Shale, which by itself ended the decline in gas production), Pennsylvania (Marcellus Shale), New York (Utica Shale), Louisiana and Arkansas (the Haynesville and Fayetteville Shales).

Natural gas is used in the oil-refining process, so it was interesting to note that the U.S.’s top export last year — for the first time in history — was fuel. That’s pretty amazing. Through the first nine months of 2011, the U.S. exported 753.4 millions barrels of fuel — aided by booming demand abroad — and imported 689.4 million barrels. Now, America is still the leading net importer of crude oil in the world, but there’s no denying the U.S. has come a long way since 2005, when it was a net importer of 900 million barrels of fuel.

Shale gas is plentiful in other parts of the world too. China, for example, is estimated to have 1,275 trillion cubic feet of shale gas reserves — significantly more than the 862 trillion in the U.S. Argentina has 774 trillion cubic feet, and Mexico has 681 trillion cubic feet (in total, the earth is estimated to contain 6,622 trillion cubic feet of shale natural gas).


Article printed from InvestorPlace Media, http://investorplace.com/2012/02/old-fuel-source-lighting-way-long-term-energy-investors-hal-t-gm/.

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