Wednesday, September 23, 2009

Part II: Betting on Progress and Technology

In recent years, natural gas producers in the United States have struggled, mostly in vain, to be taken more seriously in the energy world. Big oil companies like Exxon had concluded that natural gas reserves in the United States were not sufficiently abundant to warrant big investments in exploration and drilling. When small independent gas producers argued otherwise, they were often ridiculed.

But the natural gas folks now have numbers on their side due to new successes in getting gas out of shale rock. Geologists have always known that shale rock, often found in combination with coal and oil deposits, holds substantial amounts of natural gas. If a piece of shale rock is broken and lit with a match, it will actually burn for a few moments with a small flame.

The shale gas was previously considered unreachable, but advances in drilling techniques have changed that assessment. The result is a dramatic increase in estimated natural gas reserves. The Potential Gas Committee, loosely affiliated with the Colorado School of Mines, reported in June that natural gas reserves in the United States are actually 35% higher than believed just two years ago, and some geologists say even that estimate is too conservative.

"I used to say the nation is awash in natural gas," Hefner says. "Now I say we're drowning in it." (See price chart above, data here.)

Shale formations are deep underground — 6,000 feet or more — and the rock is relatively impermeable. Deep drilling is expensive, and in the past the amount of gas that could be reached was not considered sufficient to justify the cost. In recent years, however, gas producers expanded the use of "horizontal" drilling. After boring more than a mile below the Earth's surface to reach the shale layer, a drill operator will slowly "steer" the drill bit to one side, until it is heading sideways across the shale layer, thus achieving access to more of the shale than a traditional vertical well could provide (see chart above).

National Public Radio, part 1 of 3-part series on natural gas. Part 2 available here, here's an excerpt:

In the energy world, Big Oil has long been the key player — with one notable exception: The natural gas business in the United States is dominated by small, independent companies. More than 80% of U.S. natural gas supplies are produced by companies with a market capitalization of less than $500 million. On average, these companies have only a dozen employees.

But their business is booming. New production techniques in recent years have enabled companies to extract natural gas from shale rock formations deep underground. As a result, estimates of accessible natural gas reserves have been revised dramatically upward. Small gas producers can justifiably take the credit for the transformation of their industry.

MP: What a great tribute to America's entrepreneurial spirit, the important role of small businesses for the U.S. economy, and a clear demonstration of how advances in technology and the invisible hand of the private sector are our most effective "energy policy."


At 9/23/2009 8:38 AM, Blogger Jack Miller said...

Thank you for the excellent posting. Investors should note the formula energy down = technology up. The money that consumers save on their energy bills will be spent on consumer electronics. The number of rigs being used to drill for natural gas is going down because so much gas has been found. The growth in sales of smart telephones and electronic reading tablets, over the next year, will be huge!

At 9/23/2009 9:23 AM, Anonymous diz said...


Nat gas prices are down so much due to a variety of factors, not the least of which is a significant drop in industrial demand associated with the recession.

The shale plays have been going strong for several years now, including during the perod of high prices shown in the graph. One different aspect of shale plays is that they are "blanket formations". Within a certain area, you can pretty much count on the shale being there. (Older exploration techniques tended to rely more on targeting isolated geological structures.) But with the shales, when gas price gets to a certain level the play becomes like printing money. So, with those high prices we had ~2000 gas rigs working in the US. Far more than are needed to offset production declines. Throw in a drop in demand from the recession and we are way oversupplied.

Of course, with the drop in price, we are now down about 60% in gas directed rigs and probably operating below the level that will replace natural declines. So, expect prices to come back up once the excess is worked out. $2 or $3 is not a high enough price to justify much drilling in these shale plays. Indeed, forward curves for 2010 and 2011 are in the $5 to $6 range. This is in part responsible for there being any drilling rigs working at all.

That and certain institutional aspects that create inertia (budgeting cycles, the need to drill to hold leases (they expire after a term if you don't drill), drilling because you have a rig under contract and would be paying for it anyway, etc.)

At 9/23/2009 9:33 AM, Anonymous Anonymous said...

The money that consumers save on their energy bills will be spent on consumer electronics.

If only that were true. It turns out that Obama and company have the cure for lower energy prices - Cap-and-Trade - which will add, at a minimum, $1760 to every household energy bill. It will also make it more expensive to buy and sell your home. Add that to the additional taxes to pay for health care "reform" and the ever increasing deficit and you'll be lucky if you can afford dinner.

At 9/23/2009 9:55 AM, Blogger Cabodog said...

Why is my vehicle still running on gasoline?

Fuel cell technology is rapidly gaining and Honda's Home Energy Station is an incredible solution for providing heat for the home, electricity for the home (and grid) and hydrogen for a fuel cell vehicle.

We have the infrastructure in place TODAY (natural gas) to put fuel cell technology into place TODAY. Why isn't it growing? Could it be that the natural gas industry just doesn't have the lobbyist organization that petroleum does?

At 9/23/2009 10:29 AM, Blogger Tom said...

We already generate more electricty from nat gas than from coal. 1000 cf of nat gas at $3.60 today has as many btu as 8 gallons of gasoline. We need use it to power vehicles. We have about 100 years supply of nat gas at today's useage rate. It seems there is vastly more than that, given this new drilling method. Great news.

At 9/23/2009 10:33 AM, Anonymous Anonymous said...

A new pipeline from Wyoming to Ohio will be completed this year...

At 9/23/2009 10:34 AM, Blogger Shakes The Clown said...

This blog always seems to pump me up. I bet you are a happy guy to have a beer with.

At 9/23/2009 10:37 AM, Anonymous Anonymous said...

And the Democrats want to stop gas drilling....They want the EPA to control gas drilling. That way nothing gets approved.

At 9/23/2009 1:50 PM, Anonymous Benny The Real Man said...

Excellent post. Wonderful news.

At 9/23/2009 2:29 PM, Blogger Jack Miller said...

"It turns out that Obama and company have the cure for lower energy prices - Cap-and-Trade"

This statement assumes Obama has the votes. He needs Joe and Olympia in the senate. The drop in favorability polls suggest that many blue dogs will drag their feet. The Intrade odds on healthcare are about 1 in 4. I would not bet on cap and trade. I would bet on a boom in e-readers and the demise (life support only) of the post office.

At 9/23/2009 2:33 PM, Blogger Jack Miller said...

The microbes producing natural gas are numbered in the nonillions (a trillion times a trillion). The good earth is manufacturing natural gas as fast as we use it. Japan is working to harvest methane hydrates that cover the oceans floor. Formerly ardent Global Warming scientist now expect a cooling period.

At 9/23/2009 2:42 PM, Blogger Jack Miller said...


You are still driving an internal combustion vehicle because the "energy crisis" is a shame. About 1 trillion out of 13 trillion barrels of oil have been consumed. We are having to drill deeper but very profitable oil is still available. The Honda technology you mentioned is neat but still very expensive.

At 9/23/2009 2:49 PM, Blogger Braxton Hicks said...

I feel better about buying my natural gas powered whole house Emergency/Standby generator two years ago. It it possible that this becomes my primary source of electrical power? It is paid for.

At 9/26/2009 11:17 PM, Anonymous Cromagnum said...


Fuel cells, as great as they are, have one drawback. They use Platinum.

Its expensive and rare.

There simply is not enough that has been mined/refined to handle all the fuel cells just for cars

Now if there is an alternate for this....


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