Shale Gas: A New Market to Explore
Madhuchhanda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a world where natural resources and fuel sources are depleting daily, experts are hard pressed to come up with an alternative solution. Many non-conventional sources have been put forward, but in all the reports I have studied, few have come even close to the market boom that the drilling and extraction of Shale Gas has created.
What is Shale Gas?
Shale gas is natural gas, formed from being trapped within shale formations. Although first extracted in 1821, the value of shale gas has only been realized in the recent few years. Shale gas has become an increasingly important source of natural gas in the United States over the past decade, and interest has spread to potential gas shales in the rest of the world. In 2000 shale gas provided only 1% of U.S. natural gas production; by 2010 it was over 20% and the U.S. government's Energy Information Administration predicts that by 2035, 46% of the United States' natural gas supply will come from shale gas.
The Market View
Led by new applications of hydraulic fracturing technology and horizontal drilling, development of new sources of shale gas has offset declines in production from conventional gas reservoirs, and has led to major increases in reserves of US natural gas. As a result, natural gas prices fell to a 10-year-low.
Meanwhile, Shale Gas stock prices continue to soar at an unprecedented rate. In the first quarter of 2011, Haynesville officially became the highest-producing shale gas play in all of America. Presently, the Haynesville formation – located in eastern Texas and Louisiana – contains roughly 60 trillion cubic feet of recoverable natural gas reserves. Chesapeake Energy Corporation (NYSE: CHK) has a stake in approximately 480,000 net acres in the Haynesville play. With an investment of $1.3 billion into the shale gas play, Cheapsake does not plan to bow out to any competitors any time soon. So far, the company has announced $6.6 billion in sales. Shares of Chesapeake rose 1.3 percent to $17.43 recently.
Barnett, one of the leading shale gas producers is estimated to have about five trillion cubic feet of proven natural gas reserves. Some even project that this formation holds as much as 30 trillion cubic feet. Some of the major players in the Barnett have had tremendous success. Devon Energy (NYSE: DVN), for example, has drilled approximately 3,000 wells in the play during the last six years. Use of fracturing technology has helped Devon increase its Barnett production from 200 million cubic feet of natural gas equivalent per day in 2002 to about 1.3 billion today. Devon accounts for more than 20 percent of the field's overall daily production. Shares have grown well over 400% since.
Elsewhere, Nucor (NYSE: NU) is completing a $750 million plant in Louisiana due to the advantageous costs of operating in an area awash in shale gas. The facility could be expanded to include a total capital investment of $3.4 billion. Not to be left out, Reliance spent $1.15 billion to acquire a 45% interest in Pioneer Natural Resources' 212,000 net acres in the play.
International players too are joining the race for the alternative fuel as Shale Boom hits Central and Eastern Europe. Gas investment is flooding into the region in amounts not seen since the fall of the Berlin Wall. Anglo-Dutch giant Royal Dutch Shell, France’s Total SA TOT and Conoco Phillips COP of the U.S. have acquired exploration rights in Poland, where current estimated reserves equal 35 to 65 years of the country’s demand for natural gas, according to the Polish Geological Institute.
TNK-BP Holding, a joint venture of BPBP and a group of Russian investors, plans to invest $1.8 billion in shale projects at a half-dozen sites around Ukraine. Experts opine that it will not be long before the Shale Gas market completely overshadows conventional resources.
Concerns and criticism
Even though the availability of the alternate fuel is a welcome relief, this process, too, is not without its critics. Pollution of the environment is the main basis for this criticism as activists argue against such mass drillings. Complaints of uranium exposure and lack of water infrastructure emerged as environmental concerns for the rush. In Pennsylvania, controversy has surrounded the practice of releasing wastewater from "fracking" into rivers which serve as consumption reserves.
Despite the on going inspection, Shale Gas remains and will remain a market with endless opportunities as shale-gas boomtowns are popping up all across the country with a surge in demand from foreign consumers (while the gas is still cheap in the US). The current scope of Shale Gas investments is unparalleled. From an investment perspective, this is the new avenue to pursue.
Madhu60 has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.