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 (DB) 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 (OTC ADR: OMVKY), an Austrian energy company, has already been conducting tests of gas shale in the Vienna Basin. Royal Dutch Shell PLC (RDS.A, RDS.B) 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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