On Jan. 26, the U.S. Department of Energy (DOE) released a
report showing the United States had about 482 trillion cubic feet
(Tcf) of recoverable natural gas reserves in shale formations (not
counting conventional basins).
That's a big number by any measure -- enough to fuel U.S. energy
needs for the next 20 years at the current rate of consumption.
However, before this update, the last DOE projection pegged
domestic shale reserves at 827 Tcf -- nearly twice as much.
So should investors panic? Has the natural gas renaissance we've
all been told about -- and been positioning to
profit
from -- been a sham?
Here's what you need to know...
Before we get any further, let's remember that calculating oil and
gas reserves is an inexact science. Sometimes even the best
geologists are wildly off the mark. The more extensively an area is
drilled and developed, the more data are collected regarding what
lies below the surface.
Since thousands of new wells have been drilled and monitored in the
nation's shale plays in the past year, earlier estimates have been
fine-tuned.
Apparently, the latest data suggest that prior reports may have
exaggerated Pennsylvania's Marcellus Shale reserves. Marcellus
reserve estimates have been cut from 410 Tcf to 141 Tcf. That
accounts for most of the overall downward revision nationwide.
But consider this...
The U.S. Geological Survey (USGS) announced last September that the
Marcellus Shale held 84 Tcf of gas. Before that, the agency was
sticking to an estimate of just 2 Tcf.
So the number wasn't just tweaked -- it was raised 40-fold. At the
same time, potential natural gas
liquid
(
NGL
) reserves were taken from a few million barrels to a few billion
barrels. Revisions of that magnitude prove these reports are
anything but precise readings.
Furthermore, government agencies are widely considered to be
ultra-conservative in their projections. They ignore thousands of
undeveloped acres where gas is hidden. Plus, they don't reflect
what's in the ground, only what can be economically recovered --
and extraction technologies are getting better all the time.
If the shale revolution has taught us anything, it's
that technology can put resources that were once viewed as
off-limits firmly and cheaply within our grasp
.
It's the single most important thing you need to keep in mind when
investing in this sector.
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Bottom line
, these estimates have been revised before and will be revised
again. And as I continuously tell readers of my
Energy & Income
newsletter, the industry is still plowing billions into the
Marcellus Shale -- and you don't do that without a pretty strong
conviction about the potential resources in place.
Risks to Consider:
This latest report means we may need to temper some of the
earlier Marcellus projections. But it doesn't really change the
calculus for investors.
By any measure, the U.S. still has copious amounts of shale
gas.
Action to Take -->
The
market
has yawned at this news, mostly because it already expected the gap
between the DOE and the USGS estimates to narrow. I wouldn't rush
to any judgment just yet, but these types of reports do need to be
carefully considered.
Keep in mind, a sharp downward estimate isn't necessarily a bad
development. In fact, less gas would
mean
a quicker end to the supply glut, which could lead to stronger
natural gas prices -- good news for producers such as
Chesapeake Energy (NYSE:
CHK
)
.
On the other hand, upward revisions mean a more sustainable
inventory
of inexpensive fuel, the perfect environment for liquefied natural
gas (
LNG
) exports made by
Cheniere Energy (NYSE:
LNG
)
and increased demand for
Clean Energy Fuel's (Nasdaq:
CLNE
)
gasoline and diesel alternatives.
[These are just some of the plays you need to keep in mind when
looking at this sector. For more of my favorite ways to profit from
oil and natural gas, I invite you to
watch this exclusive presentation
.]
-- Nathan Slaughter
Nathan Slaughter does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CHK, LNG in one or more if its "real money"
portfolios.