If we sat down and came up with a list of the biggest game-changers in history, I think we would all agree that energy and the advancements in its uses through the years would be at or near the top of the list.
We could go all the way back to the use of fire as man’s first attempt to harness natural resources to make a better life. The use of boiling water to produce mechanical motion goes back more than 2,000 years, and the initial steam engine became critical to industry and transportation about 300 years ago. Heck, man even made it to the moon thanks to energy.
There is no doubt that energy enables much of modern life. It’s scary to imagine how different our lives would be without the energy to power our homes, appliances, cars, phones, computers, airplanes, industry and so on. Most of us in developed nations take these things for granted, but in many parts of the world, modern energy applications are just now beginning to see the same widespread use. Global economic development is changing the game again, and quite simply, the world needs to find more energy to keep up.
According to the U.S. Energy Information Association, total world energy consumption will increase more than 52% from 2008 to 2035. The vast majority of this growth will come in developing nations, where demand is expected to double. But here’s what’s most surprising:
Even in 2035, almost a quarter of a century from now, roughly three-quarters of the world’s energy needs are still expected to be met through the same old sources of oil, natural gas and coal — all of which have limited resources. Yes, renewable energy, nuclear power and other alternatives will grow, but not enough to become primary producers of energy.
So how the heck will this demand be met? We can’t just run out of energy.
If we won’t have new sources of energy, we have to do a better with the old ones — and that’s where the game is already changing. Now, technological advancements allow us to get to old sources of energy brand new in ways.
Enter the newest old fossil fuel, shale (natural) 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).
The Growing Use of Natural Gas
Natural gas is the most appealing of the traditional energy sources because it is so much cleaner than coal and oil. Now that the supply is plentiful, it’s also cheaper, and that’s why it will be the dominant theme in energy in the coming years.
For one thing, natural gas is now the fuel of choice to generate electricity because it’s so much cleaner than coal and doesn’t have the safety stigma of nuclear power. Natural gas-fired electricity generation is expected to make up 80% of all additional capacity added between now and 2035.
As you would expect, alternative uses for natural gas are also being developed to take advantage of all this potential energy, especially in transportation. We won’t see a bunch of natural gas passenger vehicles on the road anytime soon — the manufacturers aren’t ready, and there is a lack of storage and distribution infrastructure — but there is tremendous potential in commercial vehicle fleets. One firm, Pike Research, estimates the total number of natural gas vehicles worldwide will grow nearly 70% from 1.9 million units in 2010 to 3.2 million in 2016.
President Barack Obama has pushed for fleets to move to natural gas — most recently in his State of the Union address last week. He said natural gas is the best way for the U.S. to reduce dependence on foreign energy, and he is pushing for a credit to encourage large trucking fleets to shift to natural gas engines.
Somebody seems to be listening. On Monday, AT&T (NYSE:T) ordered 1,200 natural gas-powered Chevy vans from General Motors (NYSE:GM), and according to reports, plans to spend $565 million on 15,000 alternative fuel vehicles in a 10-year period.
The Debate Over Fracking
Fracking is opening up a whole new world of natural gas supply but, as I mentioned, it is also very controversial. Many folks have health and environmental concerns, and I am one of them. For example, there appears to be some evidence that groundwater (drinking water) can become contaminated from the solutions used in fracking. Some scientists have also tried to link fracking as a contributing factor in some of the recent minor earthquakes in the U.S.
Even with these concerns, fracking will not stop anytime soon. It has provided jobs at a time when they are hard to come by, it helps lower costs for American manufacturers — which in turn results in cheaper goods for consumers — and the increased supply of natural gas means sharply lower prices that save us a lot of money in heating and utility bills.
In his State of the Union speech (a full transcript can be viewed here), President Obama said his administration will take “every possible action” to safely expand shale gas drilling efforts, and in an acknowledgment of the concerns, he proposed requiring gas drillers on public lands to disclose the chemicals they use in fracking.
What if there were a way to do fracking safely, without the environmental and health concerns? That would be a real opportunity, especially if companies are one day forced to disclose what chemicals they’re using.
This is why I recommend purchasing shares of Halliburton (NYSE:HAL), a company becoming more involved in natural gas by recently developing promising “green” technologies that may reduce or even eliminate some of the big controversies surrounding the fracking process.
More on my recommendation of HAL stock can be found here.