Shale Gas to the Rescue

The Potential Gas Committee (PGC), a respected panel of academics and experts supported by the Colorado School of Mines, has painted an optimistic picture of the nation’s long-term natural gas supply situation. In its latest biennial report released today, the committee pegs the nation’s total natural gas resource potential at 2,074 trillion cubic feet (Tcf), up 35% from their last estimate in 2006.

A minor explanation is in order to correct reporting by the mainstream press about PGC’s estimate of the nation’s natural gas ‘reserves’ at 2,074 Tcf. These are not proved reserves as are declared by E&P players every year, but a much broader classification that includes proved, probable, possible and speculative reserves. The proved reserves tally for the U.S., according to the Energy Information Administration as of year-end 2007, was around 237 billion cubic feet.

As such, it is far from certain that all or most of the estimated resource potential will actually get produced. But the bigger point here is that the U.S. has plenty of natural gas resources, much more than was previously estimated.

The 35% jump in the PGC’s estimate primarily reflects greater appreciation of the resource potential of new prolific shale gas fields in Texas, Louisiana and Pennsylvania. These are not new discoveries in the sense of exploration success, but more in the sense of evolutionary improvements that have enabled the industry to tap the enormous resource potential of natural gas trapped inside shale rock.

The Barnett Shale field in Texas is the most developed of these shale plays, while the Haynesville Shale play in East Texas/North Louisiana is currently being developed. Another very prospective shale play at a very early stage is Marcellus shale in Pennsylvania. The massive resource potential and lack of exploration risk in these shale plays make them very attractive assets for exploration and production companies.

In the current low natural gas price environment, largely a result of recession-hit and plentiful supplies, we have favored E&P players that have access to such plentiful resource-rich assets, such as the shale plays, and have attractive hedges in place. Chesapeake Energy (CHK - Analyst Report) and EnCana (ECA - Analyst Report) are the second and third largest acreage holders in the Haynesville shale, while EOG Resources (EOG - Analyst Report) and XTO Energy (XTO - Analyst Report) also have significant presence in this major play.