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New Gas Discoveries a Boon for U.S. Energy Sector

by: Money Morning August 28, 2008 | about stocks: CHK / OMVKY.PK / RDS.A    

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by Jason Simpkins

After declining for 15 years, U.S. natural gas production is finally on the rise, thanks to new technological developments that make it possible to draw large amounts of gas from deposits previously thought to be unreachable. An increase in natural gas production of the magnitude many industry insiders predict could do wonders for business, the environment and even U.S. energy independence.

U.S. gas production is up 9% this year - a rate of increase not seen since 1984 - with most of that gain coming from natural-gas shale, particularly the Barnett Shale, a deposit that now produces 7% of the country’s gas supply. Indeed, there could be as much as 842 trillion cubic feet of retrievable gas in shale deposits throughout the United States alone, according to Navigant Consulting.  That would support the current level of U.S. consumption for about 40 years.

"It’s almost divine intervention," Aubrey K. McClendon, chairman and chief executive of the Chesapeake Energy Corporation (CHK), told The New York Times. "Right at the time oil prices are skyrocketing, we’re struggling with the economy, we’re concerned about global warming, and national security threats remain intense, we wake up and we’ve got this abundance of natural gas around us."

Shale beds are a major part of the story. The Barnett - with reserves of 2.5 trillion cubic feet of natural gas, and as much as 30 trillion cubic feet of natural gas resources - was the first shale field to undergo major development, and has seen output increase tenfold since 2001. It’s just one of at least 24 shale beds in North America. The Haynesville in Louisiana and the Marcellus in Appalachia may be even bigger, but will require further development and won’t come online for another two to five years.

The vast potential of fields like these has only been unlocked recently with advances in the technology of horizontal drilling hydraulic fracturing. Horizontal drilling, or slant drilling, allows producers to drill laterally beneath cities and neighborhoods, and hydraulic fracturing is simply a method by which water is pumped into the rock to break the sediment and release the gas.

Some analysts are urging speculators and prospectors not to get too carried away, however, as there is still a great deal of uncertainty concerning how much natural gas the deposits actually hold. The U.S. Energy Department estimates shale-gas reserves at 125 trillion cubic feet, or roughly one-seventh the Navigant estimate.  Of course, the government estimate is based on 2006 data and could increase.

Regardless of what remains to be discovered, Deutsche Bank AG analyst Shannon Nome said in a recent report that production from the eight largest shale fields could hit 6.6 billion cubic feet a day this year - or 11.8% of national gas production - and then rise to 14.5 billion cubic feet a day, or 23% of U.S. production, in the next three years.

A Bright Future for Natural Gas

A large domestic supply of natural gas would lower utility costs nationwide, reduce U.S. dependence on foreign oil, and help combat global climate change.

More than half of U.S. homes use natural gas for heating purposes, and with the cost of oil still substantially higher than it was a year ago, heating costs are expected to be 20% higher this year than they were in 2007. According to the Energy Information Agency, U.S. consumers will pay an average of $1,182 to heat their homes this year.

In recent months, however, increased natural gas production - spurred by the addition of shale sources - has actually caused gas prices to decouple from oil. Natural gas prices have plummeted 40% since early July, while the price of crude is down slightly more than 18%.

Additional natural gas resources would also ease U.S. dependence on foreign imports. The United States imported a record-high 4.6 trillion cubic feet of natural gas in 2007, at an estimated cost of $32 billion. And the government expects 2009’s figures to top that.

Natural gas is also the world’s cleanest fossil fuel, emitting 45% less carbon dioxide than coal and 30% less carbon dioxide than oil. That makes it an important transition fuel that could give solar, hydro, and wind-power technologies time to become more productive and efficient resources.

It can also be used in cars. General Motors Corp. (GM) already makes 18 models of cars and trucks that use compressed natural gas [CNG], and more could follow. One congressional bill, introduced last month, aims to make 10% of Detroit’s output CNG-compatible by 2018. It also offers a $90,000 tax credit to get 20,000 gas station owners to add CNG pumps. 

Chesapeake Energy’s McClendon says the United States could convert 10% of its vehicles to CNG within eight years, and only increase overall natural gas consumption by 1%.

"Imagine if tomorrow you could announce a new energy plan that would in one stroke cut your constituent’s gasoline bill in half, reduce oil imports, improve our air quality, enhance national security, strengthen the dollar, reduce greenhouse gas emission and create tens of thousands of new jobs in the U.S.," said McClendon.

Europe’s Shale Game

With so much at stake, and shale gas recovery booming in the United States, the movement is gaining significant traction in Europe.

"There’s a possibility that under our feet are the same kind of shale-gas deposits that you have in the United States," Brian Horsfield, a professor of organic geochemistry at the GFZ German Research Center for Geosciences in Potsdam, Germany, told the International Herald Tribune. "There are many of the same types of shale formations in Europe."

Next year, GFZ scientists will begin mapping possible shale-gas sites in Europe, and investigate the possibility of commercial recovery, with the Barnett as a standard.  They aren’t alone, however, as OMV Aktiengesellschaft (OMVKY.PK), an Austrian energy company, has already been conducting tests of gas shale in the Vienna Basin. Royal Dutch Shell PLC (RDS.A) has also obtained exploration contracts for to sites in southern Sweden and Lane Energy Poland is exploring that country, IHT reports.

"The Europeans have to hope that these shales will do for them what eastern shales have done for the U.S. gas supply, which is to boost the main supply that is coming from the Gulf of Mexico," said Don Hertzmark, an oil and gas consultant in Washington. "That would reduce the prices the Russians were able to charge the final consumers in Europe."

Russia and its state-owned gas monopoly, OAO Gazprom, control more than 25% of Europe’s total gas supply. Even before its recent intrusion into Georgia, Russia was anything but a reliable supplier.

Last year, Gazprom threatened to cut off gas shipments to Belarus, and the energy giant followed through with similar threats against the Ukraine as recently as March.

Gazprom reduced natural gas deliveries to Ukraine by a full one-quarter in March after accusing the country of failing to pay $600 million in gas bills for the year. After Ukrainian officials failed to turn up for planned talks aimed at ending the supply dispute, Gazprom threatened to cut supplies by another 25%, reducing the total amount of natural gas to the Ukraine by half.

It was the second time in as many years Gazprom cut gas shipments to the Ukraine, which in 2006 installed a pro-Western government in Kiev.

Most recently, Gazprom offered to buy all of Libya’s oil and gas exports just as the former terrorist state was beginning to look like a viable alternative for Europe to diversify away from Gazprom’s dominance.

Virtually all of Europe would breathe a sigh of relief if major shale discoveries, like those found in the United States, were located somewhere on the continent.

"Shale is the most significant domestic natural gas find in 50 years," Chris Ruppel, an analyst at the institutional brokerage firm Execution, told The NY Times. Ultimately, this could mean "the United States will become gas independent, and more industrially competitive versus Europe for gas-intensive industries such as chemicals, fertilizer, smelting iron and aluminum."

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This article has 36 comments:

  •  
    Aug 28 07:57 AM
    This is really great news! I hope the Europeans find similar shale deposits, which will help break the Russian stranglehold on Europe's energy supplies. This shows that the USA is still top dog when it comes to finding creative solutions! Remember, we found out about this great resource first! Kudos to the quality of American geologists, and, also, to our educational system, often maligned, but which, as we can now see, is world-class. Now, if only we could stop printing so much paper money...
    Reply
  •  
    Aug 28 08:02 AM
    Sounds great - fire up the drills!!!
    Reply
  •  
    Aug 28 08:36 AM
    Makes more sense than deep offshore drilling for oil. Cleaner fuel and we have more price stability since the Ruskies and Muslims don't control the reserves. Get the infrastructure in place to use for vehicles NOW. We shouldn't be waiting for hopes of more oil or technology to be the savior. The public service sector should have already done this.
    Reply
  •  
    Aug 28 09:08 AM
    These people are working on this intently, and have been for the past couple of years. This is going to happen, but it may take a few years for everything to fall into place. We don't have the infrastructure in place to fuel cars with CNG, and that will be the big hurdle we have to jump over first. Once that is in place, everything else should come quickly. Go Haynesville Shale! Go Clean Energy Fuel! Thank you Mr. McClendon, and thank you T. Boone Pickens!
    Reply
  •  
    Aug 28 09:23 AM
    Using natural gas as one of many fuels for power generation which in turn runs electric cars = even less pollution than using natural gas directly for transportation, so therefore the U.S. gets more energy independent and even greener.
    Reply
  •  
    Aug 28 09:30 AM
    Nice write up, well worded.
    Reply
  •  
    Aug 28 10:26 AM
    Folks, get real! Please stop limiting your thinking to one fuel vs another; we need them all. As we transition to solutions to Global Warming, we need to look at all fuels. Gas is the best hydrocarbon fuel no doubt but we also need oil and coal to keep our present industries, infrastructures and homes running.

    Our ultimate goal is to provide the world with clean energy which means we have to transition to an electric driven economy. And where is the electricity going to come from? Solar, wind and - this everyone has to accept - nuclear. We can have 10 to 20% wind and solar but the rest have to come from nuclear. By nuclear I mean not only the common system we now have (PWRs and BWRs) but pebble beds, fast breeder reactors, etc. These are the only systems that we can develop to provide the world with limitless electric power for eons to come and it's clean, CO2 emissions free. The terrorists problem is solvable, so is the waste handling. It is a matter of investing enough money in research. As these new systems are developed and implemented, we simultaneously and steadily reduce our use of hydrocarbon fuels. Consequently, we will also reduce our dependence on Russia and the volatile Middle East. Hopefully, with reduced incomes, come reduced ability to terrorize the world.

    Hydrocarbon usage will never disappear. We need it to power our ships and airplanes and some land based applications. But it will be at a much more reduced rate that our environment can tolerate for the long term.

    The sooner the US gets into it in a massive scale of research the sooner we control our world and the sooner the West can reduce it's dependence on Russia and the volatile Middle East and Venezuela. And the biggest problem of all - Global Warming, has to be turned around quickly.

    From the standpoint of energy, we are at a crossroad. Who we elect as President has never been as important as today. We need today a President who has the proven wisdom, maturity, honesty, integrity and passion to lead the US and the world in the right direction - regardless of politics - and has already demonstrated through numerous past actions that he cares a lot about our country's future. More importantly, a man who will, upon election as President, will not be hampered in his decisions by having to look ahead to a second term.



    Reply
  •  
    Aug 28 10:29 AM
    Even better: why not drill in the offshore areas for natural gas?? Does anyone realize that there are huge potential gas discoveries off the east coast and off the Florida coast in GOM? In fact, a discovery of large amounts of natural gas were found many years ago off Destin, Fl, but the companies were not allowed to develop it. Its still there. Waiting.

    Most folks don't realize that the drill here, drill now idea is not just about oil. Natural gas is an abundant resource offshore too.

    Oh, and madam speaker Pelosi, in case you haven't figured it out, natural gas is a fossil fuel! The dumbarse was quoted saying that natural gas could replace our use of fossil fuels. What a joke. You folks in California should really elect someone with an IQ over 10!!
    Reply
  •  
    Aug 28 11:17 AM
    Mmarrkk you do not seem to be aware that we here in California, especially the SF area where Pelosi reigns, have deemphasize science in high school because it is knowledge not important in life? In fact even english and economic history is de-emphasized as well. Pelosi does not know the meaning of "strategic" as in Stategic Oil Reserves. Just count your (ours too) blessings she has no known ambitions to run for President of the USA.

    As to natural gas in the coast of Florida, you are correct, it is there waiting. Waiting for the Chinese to develop the fields, sell (export) to us the gas futher eroding the value of our dollar.
    Reply
  •  
    Aug 28 12:04 PM
    Mmarrkk: Natural gas is not a fossil fuel. The last time I checked cows do not fart fossils.
    Reply
  •  
    Aug 28 12:09 PM
    Brian, surely you are joking, right?

    If so, hahahaha. A cow once farted a Pelosi!

    If not, get a science book dude. Natural gas, the kind produced from underground, is a fossil fuel and has the exact same origin as crude oil.
    Reply
  •  
    Aug 28 12:33 PM
    Mmarrkk: I can assure you I am not joking. I suggest you take a high school chemistry or physics class. There is no such thing as so-called "fossil fuel." Fossils have never been miraculously or magically transformed into fuel. Ever.

    Your claim that natural gas has the exact same origin as crude oil. Crude oil can only be formed at pressures above 30 kilobar which corresponds to a depth of 100 kilometers in the earth's mantle: www.pnas.org/content/9...

    Methane on the other hand, can be formed in the earth's crust.

    Again, the last time I checked, cows do not fart fossils.
    Reply
  •  
    Aug 28 02:02 PM
    Coal, petroleum, and natural gas are fossil fuels -- by definition.
    Reply
  •  
    Aug 28 02:19 PM
    By whose definition?

    In the history of the universe, fossils have never been made into complex hydrocarbons at crustal pressure. Ever. It's impossible because it violates a fundamental law of science, namely the Second Law of Thermodynamics: www.gasresources.net/T...
    Reply
  •  
    Aug 28 03:20 PM
    "General Motors Corp. (GM) already makes 18 models of cars and trucks that use compressed natural gas [CNG], and more could follow." Can anyone out there tell me ONE CNG that GM is making. The ONLY manufacture that is still make a CNG car is HONDA (the Civic). If GM is making any CNG cars it is only for fleets etc. and not for the general public. I drive a CNG car (one of the best investments I have ever made) but they are hard to find anymore, the waiting list is forever to get a new Honda Civic. I just called the local Honda dealer (so I could be more definitive here) and there is a 12 month wait and 350 people ahead of me (and I'm in little old Utah). I confirmed again that Honda is the only manufacture making new CNG vehicles. As far as infrastructure... yes... there is a big problem with too few pumps. However, most people do not realize they can purchase a home refueling station (small comperssor) to refuel their own cars. Bi-Fuel is another option for conversions. Its probably the best way to go for most people. We need to look at all forms of fuels to reduce our dependency on foreign but most of the US is ill informed about CNG vehicles. With the right education I think it is a fairly simple short term solution for many people.
    Reply
  •  
    Aug 28 04:08 PM
    Brian: please explain coal bed methane to me? When I take coal and reduce the pressure, methane gas is released from the coal and is produced. Also, explain shale gas. When I open up fractures in an organic shale, natural gas flows out.

    And, to the point of natural gas and oil not having the same origin, when oil is produced natural gas comes out of solution and is also produced.
    Reply
  •  
    Aug 28 07:42 PM
    Brian you must be an old fossil, get upto date. check out the videos on biofuels + algae. There are hundreds of startup companys that are growing the highest grade of crude from algae worldwide. These people are going to drive the price of crude below $100. AND the clean coal tech people are going to take it even lower. COAL/ FOSSIL will be the primary source of energy world wide within 10 yrs. New Nuclear Generation will take another 5 to 10 yrs to come online. Electric capacity is available (non peak hours) now, AND will be the transportation "fuel" of choice. Hang onto your hat or loose it!
    Reply
  •  
    Aug 28 09:30 PM
    I've seen the ng story build for years...and have been picking up lots of shale plays when I can...I think it's the best story out there...and I thought that way before I heard of what Boone Pickens plans...
    Wish more people understood the whole story behind it all...thanks for this article and hope there will be more like it.
    Reply
  •  
    Aug 29 01:31 AM
    Mmarrkk: So when a cow farts, oil comes out?

    The proclaimer: Biodeisel is NOT crude oil. Algae CANNOT produce crude oil. It's impossible. Matter of fact, blue green algae is a hydrocarbon destroyer not a hydrocarbon generator. Cyanobacteria feed on crude oil and are used to clean up oil spills. You must be an old fossil because you subscribe to an outmoded 18th century hypothesis. Please study 19th and 20th century petroleum science so you can contribute to the conversation in an intelligent and meaningful way.
    Reply
  •  
    Aug 29 08:43 AM
    Brian, your obsession with cow farts is truly amazing...and telling! Since you completly ignored my questions regarding coal bed methane, gas shales and oil shales, I'll assume you are full of cr** and ignore you from here on out. Thought we'd have a bit of dialogue but you are too infatuated with cows and farting to answer a question. Have fun!


    On Aug 29 01:31 AM Brian Pursley wrote:

    > Mmarrkk: So when a cow farts, oil comes out?
    >
    > The proclaimer: Biodeisel is NOT crude oil. Algae CANNOT produce
    > crude oil. It's impossible. Matter of fact, blue green algae is a
    > hydrocarbon destroyer not a hydrocarbon generator. Cyanobacteria
    > feed on crude oil and are used to clean up oil spills. You must be
    > an old fossil because you subscribe to an outmoded 18th century hypothesis.
    > Please study 19th and 20th century petroleum science so you can contribute
    > to the conversation in an intelligent and meaningful way.
    Reply
  •  
    Aug 29 10:16 AM
    CHK and XTO are supposed to be good plays now because natural gas is relatively inexpensive compared to oil (a much higher ratio than normal). If you add to this the two storms that are headed toward the Gulf currently, then they are really good short term palys (assuming oil doesn't go down too much). The storm seem likely to prevent shipments to LNG ports in the Gulf to some degree. The storms may also do some damage to the natural gas producing infrastucture in the Gulf. Even if they don't, there is definitely an emotional factor. Gustav seems especially likely to head toward the Gulf production and/or shipping terminals in the Gulf. Hanna looks like it is on roughly the same course at the moment, but it is a little too early to tell. These two companies are mostly land based, so they are not really prey to the Gulf's weather vagaries. They seem to be a good short term buy (1 to 2 weeks), and they are very possibly a great long term buy.
    Reply
  •  
    Aug 29 11:28 AM
    Gustav is now supposed to barely touch Cuba (or miss it altogether). It is supposed to gain tremendous strength as it move towar the Yucatan channel. At this time it is forecast to be a strong storm headed straight at the gulf oil infrastucture. Some areas around New Orleans are also slated to evacuate on Sat. morning. It should definitely be hurricane strength -- perhaps a very strong hurricane by the time it makes landfall in the western edge of the Gulf.
    Reply
  •  
    Aug 29 11:37 AM
    Most of the oil and gas companies are shutting in significant production in the Gulf. They are already evacuating personnel.
    Reply
  •  
    Aug 29 12:08 PM
    Another short term factor seems to be the Russia theat. Some are now knowledgeably speculating that Russia may cut off or cut down oil deliveries to Western Europe in response to the threat of EU sanctions and NATO naval actions in the Black Sea. The rumors are that the Kremlin is notifying Russian oil companies that they may be told soon to cut off or restrict oil flow to Europe. It seems likely there is some truth to the rumors. We will have to wait to see how this will all play out.
    Reply
  •  
    Aug 29 12:29 PM
    Apparently there is strong belief that Gustav will be a strong hurricane. Norfolk Southern has just onnounced that they will reroute all New Orleans bound train traffic to Memphis. If nothing is happening, it sure is having a significant effect. Hanna is apparently right behind Gustav. It seems likely oil prices will rise next week with all of geopolitical and weather related problems impinging on the industry.
    Reply
  •  
    Aug 29 12:34 PM
    The Destin Pipeline Co. just declared Force Majeure on its Gulf operations effective 9am Aug. 30. This pipeline carries 1.2bcf of gas per day of production. CHK and XTO are looking better for a short term move upward.
    Reply
  •  
    Aug 29 12:58 PM
    On the negative side, the dollar seems to be going up today. This would tend to make oil and gas cheaper. This might exert downward pressure on the stocks. However, that effect should be roughly cancelled out by the fact that a strengthening US dollar also makes US equites more attractive. This should tend to make the price of good stocks go up. CHK and XTO are good stocks.
    Reply
  •  
    Aug 30 08:54 AM
    Simpkins: "Additional natural gas resources would also ease U.S. dependence on foreign imports. The United States imported a record-high 4.6 trillion cubic feet of natural gas in 2007"

    ...from Canada.

    Note also that jet aircraft, Peterbilts, D-9s won't run on nat gas.

    Philmon's remark about this "great new resource" and can-do creative Americans was pretty funny, since Barnett play was discovered and mapped in the 1970s, cheap fracing and horiz drilling in the 1980s.
    Reply
  •  
    Aug 30 12:42 PM
    One might think that the possibility that Russia may cut off or restrict oil and gas flow to Europe would make the prices of these items go up. There is some logic to this line of thinking. However, this threat mostly affects Western Europe economies. As a consequence it has a specific negative effect on the Euro value. The result may be that the US dollar will strengthen against the Euro. This would tend to make oil prices go down. I think you can see that the two effects might roughly cancel each other out with respect to the prices of oil and gas in US dollar terms.
    Reply
  •  
    Aug 30 03:47 PM
    Actually Alan I think you'll find in 2007 there were over 2 BCF /day being imported as LNG from Trinidad and other places to the east. It started 2007 at 3 BCF/day but went down to 1 BCF/day later in the year as the prices in the Far East and Europe went to $20/MMBTU. No one wanted to ship LNG to the US for $8-10 when they could send it to Japan for $20.

    While the Barnett was discovered and mapped in the 70's and some of the drilling/fracing techniques were starting to develop in the 80's, I think you will find that the Barnett didn't really take off until 2000. Just look at a graph of the production from the Barnett. It was lying flat and very very low until 2001/2002 then it started to ramp up as Devon, who purchased Mitchell, started pumping money into it. Then in 2005/06 they started using horizontal wells. Not many horizontals drilled until then. Drilled them, studied them, changed them, etc. so I know what I'm talking about.


    On Aug 30 08:54 AM Alan von Altendorf wrote:

    > Simpkins: "Additional natural gas resources would also ease U.S.
    > dependence on foreign imports. The United States imported a record-high
    > 4.6 trillion cubic feet of natural gas in 2007"
    >
    > ...from Canada.
    >
    > Note also that jet aircraft, Peterbilts, D-9s won't run on nat gas.
    >
    >
    > Philmon's remark about this "great new resource" and can-do creative
    > Americans was pretty funny, since Barnett play was discovered and
    > mapped in the 1970s, cheap fracing and horiz drilling in the 1980s.
    Reply
  •  
    Aug 30 07:43 PM
    Mmarrkk, the Republicans have just chosen for their Vice Presidential candidate a Creationist who wants that drivel taught in schools. I would be she has some rather amazing things to say about fossil fuels as well.

    Science education in the United States is a complete and utter disaster. And it is the fault of both parties.
    Reply
  •  
    Aug 31 02:37 PM
    My Thanks to Brian & Mmark for correcting my assumption, I am an old fossil. I am sorry for allowing my exitement about a new Enviromental Breakthrough cause me to make some assumptions. The point is that any biofuel production (algae biodiesel/fuel, ethanol ) and the use of electric powered vehicles will reduce our demand for crude oil. Couple that with Clean Fossil Burning Technologies spells a WIN, WIN, WIN, WIN, WIN FOR ALL! It will be a win for Corporate America, a win for the Investors in new technologies, a win for the Enviroment, a win for the world economy and a win for every breathing being on earth! Imagine the Billion + tons of GHGs produced every year being converted into useful, valuable materials.
    Reply
  •  
    Aug 31 04:21 PM
    Alan von
    Altendorf wrote:

    Note also that jet aircraft, Peterbilts, D-9s won't run on nat gas.

    Please see the following Story about Rentech and their successful pilot program to create synthetic jet fuel:

    \biz.yahoo.com/bw/08080...

    From that article:

    "The Rentech Process is a patented and proprietary technology that converts synthesis gas from carbon-bearing resources into hydrocarbons that can be processed and upgraded into ultra clean synthetic jet and diesel fuels. Rentech’s Colorado facility provides a platform for the production of these products from a wide variety of resources, including waste materials, into fuels that could have a potentially carbon neutral or even carbon negative footprint. These fuels are also cleaner burning and more efficient than petroleum-derived fuels. The PDU is currently producing synthetic fuels from natural gas, and once gasification is added, it will also be capable of producing fuels from biomass and other fossil resources."

    Reply
  •  
    Sep 01 12:51 PM
    What impact would transportation use of Natural Gas, have on the estimated life remaining of known natural gas reserves
    Reply
  •  
    Sep 02 09:06 AM
    This is about nat gas, not the hot air you speak of.


    On Aug 30 07:43 PM otbricki wrote:

    > Mmarrkk, the Republicans have just chosen for their Vice Presidential
    > candidate a Creationist who wants that drivel taught in schools.
    > I would be she has some rather amazing things to say about fossil
    > fuels as well.
    >
    > Science education in the United States is a complete and utter disaster.
    > And it is the fault of both parties.
    Reply
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