SAN FRANCISCO (MarketWatch) — A boom in shale gas production in...

SAN FRANCISCO (MarketWatch) — A boom in shale gas production in recent years has helped lift U.S. natural gas supplies to a record level, creating an ideal environment to sustain low prices and offering a launching pad for a new era in a country striving for energy independence.

After all, shale is an abundant source of natural gas and it’s one that’s expected to last long term. Stir in its low price and relatively low emissions with calls to reduce the nation’s dependence on pricey foreign oil and the energy market’s got plenty of reasons to like natural gas.

It’s “hard to argue against natural gas as a clean, abundant, and domestic energy supply,” said Dan Pratt, director of equity research at IHS Herold. “It should be a growing component of our energy supply going forward.

“However, the speed of development will depend on many things, including economic, political, and environmental issues,” he said.

One thing’s for sure: analysts don’t see an end to the supply glut and they’re not forecasting any sustained spikes in natural gas prices, at least not any time soon.

Natural gas development companies have “proven their methods of unlocking the vast resources in North America,” said Dan Gundersen, vice president of energy finance for Sandstorm Metals & Energy CA:SND 0.00% STTYF -0.11% .

“This ability to accelerate development in the right economic environment could be viewed as an effective cap on future gas prices,” he said, though the cap would be relative to the price of oil and would be much higher than current natural gas prices.
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Oil and gas exploration invigorated by shale

WSJ's Ryan Dezember discusses the changing shape of oil and natural gas exploration in the U.S. brought on shale and the process known as fracking. AP Photo/The Shreveport Times, Jim Hudelson

At the same time, the availability of natural gas from these sources may be just one of the many incentives the market needs to expand its uses of natural gas and find more ways to reduce its dependence on foreign oil.

“We have considerable shale gas resources remaining in the Haynesville, Marcellus and other basins, and these resources can positively change the energy mix of the U.S.,” said Kim Pacanovsky, managing director of oil & gas at boutique investment bank MLV & Co.

Haynesville, located in Louisiana, East Texas and southwestern Arkansas, and Marcellus, which encompasses much of the Appalachian Basin, are among the largest shale basins, but there are more than 20 shale gas basins already identified in the U.S., in various stages of drilling and assessment, she said. “It’s a lot of gas, and it gives us decades to invest in, research and transition to other fuel sources for both transportation and electric generation.” Read about the shale gas revolution.
How’d we get here?

Already, consumers can attribute the drop in natural gas prices — now at their lowest levels in more than year — to the growing interest in shale.

U.S. natural gas in storage hit a record high 3.852 trillion cubic feet in the week ended Nov. 18, according to the Energy Information Administration. Natural gas futures prices NG12F -0.47% lost 9.8% in November and trade under $4 per million British thermal units. Meanwhile, crude-oil futures rose 7.7%.

And “the shale gas revolution is still in its early phases,” said Chris Mayer, editor of Capital & Crisis. “Technology itself is still improving by leaps and bounds”, with productivity of drilling rigs soaring and costs dropping. “It’s an absolute game changer for U.S. energy.” Read Mayer’s recent report on shale.

The U.S. has 2,500 trillion cubic feet of potential natural gas resources. Gas from shale accounts for 862 trillion of that, according to the EIA, more than double the estimate published last year.

That estimate “could very much increase by several multiples,” said Dimitris Kapsis, chief energy officer at American Utility Management. “The facts behind shale gas production have added significantly to natural gas reserves and with gains in shale gas discoveries and technology, shale product is certainly sustainable.”

Mergers and acquisitions in the energy sector certainly reflect that.

As these natural gas plays came to fruition, “there was a significant amount of acreage acquisitions that occurred, with lease terms that required a large amount of drilling in a short period of time,” said IHS Herold’s Pratt. “This bolstered the natural gas supply,” and that was “compounded by the pullback in demand following the 2008 financial collapse.”

Just this year, for example, integrated oil giant Chevron Corp. CVX -0.96% became one of the largest leaseholders in Pennsylvania, with more than 700,000 net acres of leases in the Marcellus Shale. Read more about the recent oil and gas M&A.

Overall, counting lease acquisition costs and various corporate acquisitions, over $100 billion has been invested in shale gas and oil development since 2008, said Alan Herbst, a principal at Utilis Advisory Group.

Large scale shale gas production began in 2006, prices peaked in 2008 and have fallen over 60% since, he said.

And the normal rules of economics haven’t been able to stem the rise in production, in large part due to the fact that profitability remains.

“Many of these shale plays are still very profitable at today’s prices,” said Ben Smith, president of energy data and information provider First Enercast Financial.

Some of the dry gas fields such as Barnett in Texas, Haynesville and Marcellus are still profitable at prices below $4 per million Btu, he said, and wet gas fields, such as Eagle Ford in Texas, Utica, which sits below Marcellus Shale, and Woodford in Oklahoma, can produce profits at prices below $3.

Dry gas does not contain some of the heavier hydrocarbons as vapor that wet gas does — and wet gas is commonly associated with petroleum and has added value because of the extractable hydrocarbon liquids it contains, according to the Arkansas Geological Survey.

“The production that is being hurt by the current weak price environment is conventional and offshore production,” Smith said. “Output from those sources has been in steep decline as shale gas is able to out-compete.”
Boosting consumption

So a lot would need to happen for the market to rid itself of the supply glut and boost prices.

“Greater consumption is needed to soak up increasing amounts of U.S. natural gas production and strengthen prices for the commodity,” said Utilis’ Herbst.

Some of the avenues available to accomplish that may include having electric utilities burn greater amounts of natural gas to generate electricity, he said. That could chip away at coal’s dominant market share for electric power generation.

An eventual economic recovery, greater amounts of natural gas as a transportation fuel and higher exports of liquefied natural gas could also help enhance natural gas demand, he said.

“A rebound of natural gas prices to $5-$7 is expected should these events occur, but this will take several years to happen,” said Herbst.

Indeed, progress toward making natural gas more popular as a transportation fuel has been slow.

“It certainly feels ... like a reality that natural gas really will make a significant difference in transportation fuel and electricity generation,” said Seth Rabinowitz, who covers commodities as a partner at Silicon Associates. “Now that we’ve firmly established that the amount of natural gas in the United States is mind-blowing when considering shale gas deposits, we’re just a couple micro-shocks away from consumers taking the plunge.”

Proposed earlier this year, the New Alternative Transportation to Give Americans Solutions Act of 2011 aims to encourage increased production of, and tax incentives for, natural gas vehicles and the infrastructure to support them.
Moving parts

There are “many moving parts” that must be considered to decide when gas prices will eventually rise, said MLV & Co.’s Pacanovsky.

Reuters
People gather on the steps of New York City Hall protesting the state’s plan for shale oil drilling in the city's watershed in New York January 4, 2010.

Those include natural gas vehicle subsidy legislation, rigs moving to oil projects for better economics, the economy remaining stagnant, continued erratic weather, oil price volatility and potential federal oversight of fracking, she said. Fracking is also known as hydraulic fracturing — is a method used to release gas trapped in rock formations.

“The additional supplies coming to the market from fracturing over the next couple of years promises to be extensive,” said Jeffery Born, a professor at the College of Business Administration at Northeastern University in Boston. But environmental concerns could potentially close off “promising sites before their production through fracking methods.”

These factors “combine to make it impossible for anyone to predict when this bubble of gas will be eliminated,” said Pacanovsky.

All the while, “the excess supply of cheap natural gas will lead to energy independence in the U.S., and stop the export of American petro-dollars.” said Mickey Cargile, managing partner at Cargile Investment Management.

Myra Saefong is a MarketWatch reporter based in San Francisco.