Solutions to Shale's Problems

By definition, the act of buying and selling of stocks indicates that each of those securities has both bulls and bears ready to line up behind it. And the same can be said for entire industries -- perhaps none more so than energy.

However, that's a dichotomy that's far more pronounced for natural gas these days than for oil. Crude has been slowly but steadily rising in price for approximately the past 18 months. Indeed, it currently hovers at $90 per barrel. And while we hardly appear headed for $200 or even $150 a barrel during the next couple of years, neither are we apt to chance upon serious forecasts that a downward spiral to, say, $50 or $60, is in the offing.

The slurping sound from gas
But natural gas is quite another story. Only a few years ago, we were convinced that we were about to hear that slurping sound that occurs when a straw reaches the bottom of an empty glass. As most Fools know, however, new natural gas exploration and production technology has allowed us to tap unconventional reserves, rapidly providing more gas at lower prices than expected.

Hydraulic fracturing -- or "fracking" -- involves drilling wells and then pumping millions of gallons of water, sand, and chemicals into the formation to break open the rocks and thereby release the trapped gas. When combined with horizontal drilling, the result has been untold amounts of new natural gas from places like the Marcellus Shale of Ohio, Pennsylvania, New York, and West Virginia, along with the Barnett Shale of North Texas, and the Haynesville Shale of Texas and Louisiana.

But there's one difficulty that's been blamed on this revolutionary process: The undisclosed chemicals used in the fracking process have been held accountable for contaminating nearby water tables. However, most problems ultimately have solutions, and there just might be a way around this ballyhooed water contamination conundrum.

What's in those chemicals?
While the Obama administration is mulling a policy to require gas drillers to reveal the chemicals they use when fracking on federal lands, and the New York State Assembly passed a bill late last month banning the process until mid-2011, the producers are loathe to specify the chemicals they employ, citing the need to maintain trade secrets.

But wonder of wonders, the big oilfield services companies that are involved in formulating the chemicals appear to be reconstituting their mixtures such that they will be environmentally harmless. For instance, Halliburton (NYSE: HAL  ) , which leads the pack in U.S. shale drilling, has developed a fluid called CleanStim, which is comprised of ingredients used in processed foods.

At the same time, Baker Hughes (NYSE: BHI  ) is producing BJ SmartCare, which the company says employs ingredients that also find their way into condiments and toothpaste. And smaller Houston-based Flotek (NYSE: FTK  ) appears to have completed trials of biodegradable chemicals that employ citrus products.

Gassing up the trucks
So if these apparently benign ingredients end up diminishing efforts by landowners, environmentalists, and public bodies to stop fracking, the results could include reductions in both transportation fuel costs and greenhouse gases. For instance, Robert Transport, a Boucherville, Quebec hauler of dry and frozen food products has ordered 180 new liquefied natural gas trucks from PACCAR (Nasdaq: PCAR  ) subsidiary Peterbilt. The trucks are powered by Cummins (NYSE: CMI  ) engines.

Cummins' compressed natural gas engines, along with its liquefied models, offer comparable power efficiency to diesel engines. I'm wagering that other over-the-road truckers will turn to natural gas-powered equipment, thereby providing positive environmental effects and reduced transportation costs for the companies and their customers.

In the meantime, until prices for dry gas increase materially as a result of its heightened use in power generation and transportation -- as Jack Williams, the president of ExxonMobil's (NYSE: XOM  ) recently acquired XTO unit predicted last month -- a number of exploration and production companies that heretofore have concentrated on shale gas will likely transition to (higher priced) shale oil. Chesapeake Energy (NYSE: CHK  ) , for instance, is aiming for about 30% of its total production from liquids by 2015 and is shifting its capital spending budget from 90% gas focused down to 35% in two years.

Tough to knock ExxonMobil from first place
My conclusion from these anticipated changes is that they bode especially well for ExxonMobil. The company sits atop the world's public energy companies, boasts globally disseminated crude production, has assumed new leadership in U.S. gas output, and anticipates potential new gas production from the likes of Indonesia, Canada, Germany, and Poland.  

That, it seems to me, is a formidable combination, one that will remain tough to top.

Chesapeake Energy is a Motley Fool Inside Value recommendation. PACCAR is a Motley Fool Stock Advisor choice. The Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Fool contributor David Lee Smith doesn't own shares of any of the companies named above. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2010, at 9:05 PM, jokurs wrote:

    The fracking process as currently practiced is the biggest threat ever to the earths environmen.. If it were sound, why would drillers need an exemption from the clean water and clean air act?. Read the most recent story of drilling in the town of Dimock, PA. where water tables were poisoned- people forced to leave their homes . To learn ALL the real facts see the award winning Movie, 'Gasland" by Josh Fox.

  • Report this Comment On December 22, 2010, at 10:32 PM, rv3lynn wrote:

    In west Texas million gallon/million pound fracs are standard procedure. I would guess that there are 15 to 20 big fracs like this every day in this area. And they have been happening for years. I am not aware of a single case of groundwater contamination as a result of this activity. Oil and gas production, however, is showing a substantial increase.

  • Report this Comment On December 23, 2010, at 9:54 AM, pswedmond wrote:

    Like the comment from WesTexas, we Okies have been fracking wells for fifty years with few problems. Extraction of any mineral has risk/reward aspects, whether it be gold, copper, coal, oil, gas or anything else for that matter.

    Yes, I live in Oklahoma and yes I think fracking can be done properly. NO, I am not in the oil business and YES, I have been an environmentalist for over fifty years. I have followed closely the stories from Pennsylvania and Wyoming and there is a geological reason for these folks problems and it may very well stem from improper drilling. Just like a highway fatality usually involves improper driving, I think it is up to local governments to understand and inspect and make miscreants follow the law. Let's not forget that the first commercial oil wells in the US were in Pennsylvania almost a century and a half ago.

  • Report this Comment On December 23, 2010, at 11:54 AM, JeremyBoak wrote:

    Every time I hear about contamination of ground water, it appears to be about well water that is flammable, not about hydraulic fracturing chemicals actually in the well water. But natural gas in wells comes from failed wellbores, not from from induced hydraulic fractures connecting to the groundwater system, as far as I can tell. So any natural gas well that is completed badly could have this result, whether it was hydraulically fractured or not. And a failed completion is already a legal liability, as well as a potential criminal liability. If there are failures, let's enforce the law, not destroy the entire industry.

  • Report this Comment On December 23, 2010, at 8:06 PM, colonnar wrote:

    Check out Flotek's '3rd Quarter Results' at their website, www.flotekind.com. If their 'fix' on the perceived fracking problem is 'transformational' - as they state - it could have a huge effect on such a small company. In addition, they appear to have a lot of other sticks in the fire.

  • Report this Comment On December 29, 2010, at 2:45 PM, ojay93 wrote:

    jokurs, you can not possibly be taken seriously by stating something you watched in a movie. unbiased research is key when creating a proper opinion.

    Josh Fox is a very rich man pushing personal agendas.

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