Natural gas will become more important as the world slowly transitions to renewable energy sources, making shale gas reserves a hot topic in the energy industry.
A recent report from Canadian investment bank AltaCorp Capital Inc. said natural gas use could increase nearly 80% over current levels by 2050.
"In the move towards increasing use of renewables, natural gas will play a much bigger role than just 'bridge fuel,' we believe it will become the largest source of energy on the planet," AltaCorp analyst John Mawdsley wrote in the report. "We expect companies levered to natural gas, especially those with long-term unconventional resources, will see significant share price appreciation as natural gas demand increases."
Natural gas demand also will get a boost from the U.S. Environmental Protection Agency's (EPA) goal to curb non-carbon emissions at U.S. power plants, meaning coal-fired plants will need cleaner-burning natural gas.
Growing demand has increased the need to obtain natural gas from unconventional sources like shale rock formations. As a result, Money Morning readers interested in these energy developments have sent in questions about investing in these developing trends. Here is one such question:
What's the latest outlook on shale gas? Which regions hold the most shale gas? Is it too early to invest?
– Walter H.
The U.S. Energy Information Administration (EIA) estimates that the United States has 862 trillion cubic feet of recoverable shale gas resources. Key areas of U.S. shale gas reserves include the Barnett Shale play in Texas, and the Marcellus Shale in West Virginia, Ohio, Maryland, Pennsylvania and New York.
A recent study from Pennsylvania State University said companies with interests in the Marcellus Shale area expect to increase their investments to more than $11 billion in 2011, up from $8.8 billion in 2010 and $4.5 billion in 2009. The Marcellus Shale play is estimated to hold 489 trillion cubic feet of gas.
The United States is the second largest holder of natural gas reserves. A report released by the EIA on Tuesday estimated shale rock formations in 32 foreign countries hold about 2.76 trillion cubic feet of recoverable gas, or seven times the amount known in the United States.
China has the biggest overseas natural gas shale reserves of the countries studied, with 1.275 trillion cubic feet. After the United States, Argentina has the third largest reserves, followed by Mexico, South Africa, Australia and Canada.
The study did not include Russia, the Middle East or parts of Asia and Africa that are known to have high conventional natural gas reserves.
The ability to tap into these sources could significantly boost the global natural gas supply. U.S. companies' ability to drill for natural gas reserves created a supply boom last year and held natural gas prices steady.
While many countries hold large reserves of recoverable natural gas, not all have the technology readily available to extract it from the tight shale rock formations. So many foreign energy companies have been hunting for deals with U.S. and Canadian counterparts that have shale gas drilling knowledge. That has triggered a wave of merger and acquisition activity in the natural gas industry.
Two multibillion-dollar deals so far this year highlight the importance of shale gas in the global energy sector.
In early February, PetroChina Co. Ltd. (NYSE ADR: PTR) announced a deal to pay Canada's largest natural gas producer EnCana Corp. (NYSE: ECA) $5.4 billion for half its shale gas assets in British Columbia and Alberta.
In a smaller deal this month, Japan's Marubeni Corp. (PINK ADR: MARUY) said it would pay Texas-based Marathon Oil Corp. (NYSE: MRO) $270 million for a 30% stake in the Niobrara Shale region in southeast Wyoming and Northern Colorado.
Last October China made its biggest ever oil/gas deal with the United States when its state-owned energy company China National Offshore Oil Corp. (CNOOC) (NYSE ADR: CEO) invested $2.16 billion in Chesapeake Energy to learn about shale gas extraction methods.
"This is the one area that [China] seriously wants to get into," Gordon Kwan, an analyst at Mirae Asset Securities, told The Financial Times. "They don't have the technical expertise and Chesapeake is the market leader in shale oil and gas."
Global interest like this makes companies with strong shale gas knowledge and drilling capabilities attractive investment opportunities.
Experts expect a rise in Chesapeake stock as well other companies with large holdings in the Eagle Ford shale area of southern Texas. Along with Barnett and Marcellus it's one of the most active oil and gas regions in the United States. Companies with holdings there include EOG Resources Inc. (NYSE: EOG), Pioneer Natural Resources (NYSE: PXD), and Petrohawk Energy Corp. (NYSE: HK).
EOG also has a stake in the Marcellus shale region.
Companies looking to profit from exploration outside the U.S. regions include Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), which plans to spend $1 billion a year over the next five years in China. Shell plans to drill 17 wells in China and already started drilling two shale-gas exploration wells in Sichuan, China's most prolific gas province.
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Website. Please include your name and hometown with your email.
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- U.S. Energy Information Administration:
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