Shale Gas: A Boon or Bubble? - Analyst Blog

Over the last few years, a quiet revolution has been reshaping the energy business in the U.S. Known as 'shale gas' - natural gas trapped within dense sedimentary rock formations, or shale formations - it is being seen as a game changer, set to usher in an era of energy independence for the country. This unconventional fuel source is expected to transform domestic energy supply in the future decades by providing a potentially inexpensive and abundant new source of fuel for the world's largest energy consumer.

Huge Geographic Potential

According to the Annual Energy Outlook 2011 published by the Energy Information Administration ( EIA ), the U.S. possesses 2,543 trillion cubic feet (Tcf) of potential natural gas resources. Of this, natural gas from shale resources accounts for 862 Tcf. In fact, more than 19 geographic basins across the country, from the West Coast to the Northeast, are recognized sources of shale gas.

The Game-Changing Technology

Shale has long been known to contain gas, but is tight (not porous) and therefore generally with poor flows. Hence, without an effective means of production, shale gas was historically viewed as worthless and uneconomic. But not any more.

With the advent of hydraulic fracturing (or fracking) a decade ago - a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals - shale gas production is now booming in the U.S. The new technology, together with the sophisticated horizontal drilling equipments that can drill and extract gas from shale formations, are hailed as breakthroughs for U.S. energy supplies and play a major role in boosting domestic natural gas reserves.

Once considered too expensive to produce, the share of shale gas in the U.S. gas production has shot up at a stunning pace during the last decade. In 2009, the U.S. went past Russia as the world's largest producer of natural gas, thanks to shale gas production. That year, shale gas comprised 14% of total U.S. natural gas supply. As per EIA, production of shale gas is expected to continue growing, and by 2035, it is estimated that gas extracted from shale rock will constitute 46% of the total natural gas supplied by the U.S.

The success of shale gas development has pushed natural gas prices down more than 70%; from a peak of about $13.60 per million British thermal units (MMBtu) in 2008 to the current level of around $3.50, sinking in between to a low of $2.50 in September 2009.

The Economic Promise of Shale gas

Even some four-five years back, domestic firms thought that a price of at least $6 per MMBtu was required for the profitable extraction of shale gas. But the introduction of fracking has transformed the economics of shale gas, which has become viable in some cases at just $3 per MMBtu. Taking a step ahead, The Woodlands, Texas-based independent energy producer Anadarko Petroleum Corporation (APC) thinks it can churn out gas from the Marcellus Shale deposits - a massive deep shale formation extending from New York to West Virginia - at as low as $2.50 per MMBtu.

Jumping on the Bandwagon

Lured by the promise, abundance and the economic attractiveness of shale gas, some of the biggest energy firms in the U.S. have joined the roster of operators in the Marcellus and other shale gas fields. For example, Chesapeake Energy (CHK) - the second-largest natural gas producer in the country - and Anadarko have been sinking dollars to pull out all the stops in acquiring Marcellus Shale acreage. In fact, Chesapeake has roped in Norwegian major Statoil ASA (STO) into the Marcellus, China's CNOOC Ltd. (CEO) into the Eagle Ford shale formation in South Texas, and French oil and gas giant TOTAL SA (TOT) into the Barnett Shale in north-central Texas. Another independent, Houston, Texas-based EOG Resources Inc. (EOG) was one of the first to see potential in shale gas and currently has significant presence in four of the best shale basins: Bakken (North Dakota), Eagle Ford, Marcellus, and Utica (Ohio).

Even supermajors like ExxonMobil (XOM) and Chevron Corp. (CVX) have made a beeline to produce gas from shale. In 2010, ExxonMobil purchased domestic natural gas supplier XTO Energy, a company heavily invested in the Pennsylvania shale gas business, for around $40 billion. Earlier this year, Chevron agreed to scoop up Pittsburgh-based Atlas Energy to add acreage in the Marcellus Shale.

What the Critics Say

As with all advances in hydrocarbon exploration and production, shale gas also has its share of critics. Anti-fracking advocates, who believe that the drilling practice is far too loosely regulated, have long argued that the technique has fouled the underground water table, public health and the environment, citing evidences of possible water contamination.

Others remain apprehensive and feel that the recent push to expand shale gas development in basins across the U.S. could be overly optimistic and may not live up to the hype that producers such as Chesapeake and other industry proponents have created. They insist that while the initial production volumes remain impressive, shale gas wells typically experience high decline rates, raising questions over the long-term economic health of the plays.

To Conclude

Despite what the naysayers believe, there is little doubt that the growth of shale gas has the power to change the way we use energy. The revolution is not a bubble and will prove to be long-lived, reflected by the growing acknowledgment by the major energy firms that domestic natural gas in the U.S. will represent an increasingly key source of energy production. Most importantly, it's found in plentiful quantities here in the U.S., is less polluting than other fossil fuels and persistently cheap.

ANADARKO PETROL ( APC ): Free Stock Analysis Report

CNOOC LTD ADR ( CEO ): Free Stock Analysis Report

CHESAPEAKE ENGY ( CHK ): Free Stock Analysis Report

CHEVRON CORP ( CVX ): Free Stock Analysis Report

EOG RES INC (EOG): Free Stock Analysis Report

STATOIL ASA-ADR (STO): Free Stock Analysis Report

TOTAL FINA SA (TOT): Free Stock Analysis Report

EXXON MOBIL CRP (XOM): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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