Shale Gas: unconventional energy to mainstream energy. The next mega trend.

Today was a really weird day for me. It started off quietly, it ended pretty tepidly too. However in the end, I am not sure why I get the feeling of melancholy. Maybe its the time of the month for me, I am not sure. But as I write this note, I write it with a somewhat heavy heart. Don't get me wrong, I did not lose any money today, just felt like grumbling a little. Throughout the whole day, the market did not make any sense to me, I did not know whether to buy or to sell. Well I guess it happens to the best of us.

I deliberately came home early today, partly because of my cranky mood, partly due to my need to study something that has caught my eye. Over the past few weeks, I have been reading a few articles on the topic of Shale Gas. I am not sure how many of you know what this is, I for one did not know what to make of it.

Shale gas is defined as natural gas from shale formations. The shale acts as both the source and the reservoir for the natural gas. Older shale gas wells were vertical while more recent wells are primarily horizontal and need artificial stimulation, like hydraulic fracturing, to produce. Only shale formations with certain characteristics will produce gas. The most significant trend in US natural gas production is the rapid rise in production from shale formations. In large measure this is attributable to significant advances in the use of horizontal drilling and well stimulation technologies and refinement in the cost-effectiveness of these technologies. Hydraulic fracturing is the most significant of these.

# The consulting firm ICF forecasts that tight gas, coalbed methane, and shale gas will make a major contribution to future North American gas production. Unconventional gas production is forecast to increase from 42 percent of total US gas production in 2007 to 64 percent in 2020. Despite the current economic conditions, the long-term need for US natural gas should be strong enough to support these anticipated future production levels.

# With the tremendous success of the Barnett, Fayetteville and Woodford shales in the United States, the gas shale resource base will play a major role in the future natural gas production on which the nation will depend. Already the Barnett Shale gas play in Texas produces 6 percent of all natural gas produced in the Lower 48 states. Recent announcements of emerging plays in Appalachia, Northern Louisiana, British Columbia, and South Texas indicate the widespread potential of shale gas resources across North America. Each of these shale gas basins is different and each has a unique set of exploration criteria and operational challenges.

The Potential Gas Committee, an incorporated, nonprofit organization that consists of knowledgeable and highly experienced volunteer members who work in the natural gas exploration, production and transportation industries issued its biennial assessment of the nation’s gas resources in June 2009. This study indicates that the United States possesses a resource base of 1,836 Tcf of natural gas. When combining these results with the Department of Energy’s latest determination of proved gas reserves, 238 Tcf as of year-end 2007, the United States has a future supply of natural gas of over 2,000 Tcf. At current consumption rates, this is enough natural gas to supply the nation for the next hundred years. This is an increase of more than 35% when compared to the Committee’s 2006 assessment. This increase is largely attributable to increased supplies from unconventional gas plays, specifically from shale gas development.

Although shale gas has been produced for more than 100 years in the Appalachian Basin and the Illinois Basin of the United States, the wells were often economically marginal. Higher natural gas prices in recent years and advances in hydraulic fracturing and horizontal completions have made shale gas wells more profitable. Shale gas tends to cost more to produce than gas from conventional wells, because of the expense of massive hydraulic fracturing treatments required to produce shale gas, and of horizontal drilling. However, this is often offset by the low risk of shale gas wells.

North America has been the leader in developing and producing shale gas because of high gas prices in that market. It is a remarkable turnaround. Just 3 years ago, most US energy executives were working out how the US could import enough gas from places as far away as Nigeria, Russia and Qatar. Now they have the largest reserves in the world and the most advanced technology to extract the gas. Obama has even agreed to share the knowledge and technology with the Chinese in order to improve relations.

There is currently a mad rush by the big oil companies like Exxon going into Europe looking for exploration grounds. There seems to be no lack of shale gas fields in the world and large fields have been discovered over the past 2 years.

Why you may ask, did I feel the need to write about this. I feel the world is close to a big change. Oil and coal may have found their biggest rival yet. Natural gas is considered one of the cleanest forms of energy compared to the likes of traditional energy sources.

According to the Energy Information Administration, energy from natural gas accounts for 23% of total energy consumed in the United States, making it a vital component of the nation's energy supply.

Natural gas is used across all sectors, in varying amounts. The graph below gives an idea of the proportion of natural gas use per sector. The industrial sector accounts for the greatest proportion of natural gas use in the United States, with the residential sector consuming the second greatest quantity of natural gas.

Why did I focus on the US? Its because they are the largest consumer of energy in the world. The average US citizen consumes 20 barrels of oil per year, while the average Chinese citizen consumes 1/2 barrel of oil. Get the idea? The US will be the benchmark and leader in terms of energy adoption. If shale gas is what they have most plentiful of, they will adopt it fastest and critical mass was be reached quickly. To the common folk out there, the oil and coal story is still being played and many analysts will not see it coming. That is why I went through this whole story to give you the low down of the future of energy.

Natural gas is currently used mainly for electricity generation and it will first tackle coal and nuclear energy first. It will take a little longer before it takes on oil for manufacturing and transportation purposes. But if shale gas is the answer to the world's energy problems, then peak oil thesis will be thrown out of the window.

Do you believe in it? If you do then start paying attention to the companies that deal in shale gas production, they may end up being the next Exxon. I know the big oil companies are already heavily involved in natural gas production, but from my readings, the big oil companies have been slow movers into the shale gas scene. So there are opportunities. Also companies that use liquified natural gas as feedstock will benefit because the prices of LNG has been falling. Just look at the chart I have attached to the post.

Of course there will be naysayers on this shale gas development, especially on the environmental front, where they are accusing shale gas extraction as a possibly polluting the water supply. Well you cannot deny that for every party, there is always a party pooper. Haha.

Flash Player 9 or higher is required to view the chart
Click here to download Flash Player now

View the full Crude vs Gas chart at Wikinvest

Ok I think I shall stop here. Oh my mum who is a reader commented that she was surprised that I am a Jack Neo supporter. Hahah. I cannot deny that I do not judge him because he is just a man, but as I have told many of my male friends, you can fool around, but be responsible. So Jack gets my support. I am not an idealist and I know the real world is full of temptations.

Best,

SVI