Lots More Gas: Another Take

The New York Times has an article today reporting that domestic Natural Gas reserves are 35% higher than previously estimated due to improved ability to tap deep shale deposits. (Zacks Equity Research senior analyst Sheraz Mian has also posted a blog on this earlier.) This helps explain why natural gas prices are so low relative to oil prices.

In terms of energy content, there is a 6:1 ratio between an MCF [thousand cubic feet] of gas and a barrel of oil. At the current futures price of $4.12 an MCF, natural gas is going for the equivalent of only $24.72 a barrel, a massive discount to the current $71.06 price of oil.

This will make a very significant difference to your energy investments. At least for the near term, look for E&P companies that are "oily," like Denbury Resources (DNR - Analyst Report) rather than "gassy" like Chesapeake (CHK - Analyst Report). The oily firms will be reporting much better profits in the current environment.

Shale gas is relatively expensive to extract, it tends to be deep and needs sophisticated hydraulic fracturing. The current low price of gas is likely to inhibit drilling in the near term, which is bad news for the land drillers like Patterson-UTI (PTEN - Analyst Report). The current price of oil is high enough that demand should be strong for the deepwater drillers like Transocean (RIG - Snapshot Report) that are more tied to oil exploration and development activity.

Over the long term, though, the much higher natural gas reserves are very good news for the economy. We can use domestic gas to offset some of our ever-increasing reliance on imported oil supplies. Natural gas has both advantages and disadvantages relative to oil. The key advantage other than being cheap is that it is a much cleaner fuel, with a far lower amount of CO2 produced per energy unit than for oil (and much, much lower than coal).

Thus even though it still adds to greenhouse gas emissions, to the extent we can switch to natural gas it will be an improvement. Gas-fired generators can be fired up quickly, making them a good complement to renewable energy sources like wind and solar that can be intermittent. The disadvantage is that it is a gas and thus hard to transport over water.

Also, our existing fleet of autos is geared toward liquid fuels, as is the support infrastructure (i.e. gas stations sell gasoline, not natural gas). However, the recent dramatic increase in our gas reserves means that the Pickens plan of moving toward using more natural gas as a transportation fuel makes more sense now than ever. This would be a very good thing for Congress to think about while they are writing the new cap and trade regulations.