Is This the Most Dangerous Investment in Energy?

With all the political turmoil in the Middle East, oil has dominated the commodities landscape, but I'm here to tell you why you need to start paying attention to one of the biggest trends in energy. Read on, and I'll fill you in on the most controversial drilling practice in the U.S., and how you can possibly make boatloads of cash from its success.

So what's all the drama about?
Natural gas prices have been low for a long time now, and people investing their dollars into the natural gas market have been sourly rewarded.

The main reason: an oversupply of gas due in part to energy companies, specifically those that search for shale gas using a controversial method called hydraulic fracturing, or fracking.

The newest saga dealing with fracking is that there are numerous claims that state:

  1. Fracking can contaminate groundwater and soil with terribly harmful chemicals.
  2. Fracking companies are overestimating their production levels at wells and cannot be trusted.
  3. An enormous amount of money is pouring into companies involved with extracting shale gas, and the outcome and profitability of their projects is more than uncertain.

In fact, last week, New York Times reporter Ian Urbina quoted an email from an industry analyst, who said that shale gas is "a giant Ponzi scheme, and the economics just do not work."

So is this the most dangerous play in energy?
Probably not. So far, numerous columnists and experts have come out since the New York Times article to dispute the claims against shale gas. Most notably, the U.S. Energy Information Administration (EIA) has said that the conclusions drawn by Urbina were at odds with the data that was provided to him.

Chesapeake Energy (NYSE: CHK  ) CEO Aubrey McClendon also fired back, saying that the most sophisticated reservoir engineers and geoscientists in the world do not believe in the scarcity of shale gas. He also made sure to reiterate that his company follows all industry and U.S. GAAP standards, so there should be no question as to the reliability of well information and productivity.

If that's not enough evidence, simply look to the commodities market to verify the availability of shale gas. Prices are cheap -- so cheap, in fact, that they are at a 50% discount to European sources and are at a record 16% discount to coal. If energy companies were in fact inflating their production levels and fudging numbers, I doubt that the commodities market would be pushing down the price of natural gas so significantly. The fact is that supply is prominent, and these companies are trying their hardest to figure out what to do with all their extra reserves. Exciting? Yes. Dangerous? Not in my mind.

So why should you even care?
It's no secret that the U.S. is overly dependent on importing oil from foreign nations in order to fulfill domestic demand. However, high oil prices, geopolitical turmoil, and complicated environmental regulations all combine to make many investors turn to natural gas as a possible substitute or answer to our oil-entrenched ways.

In addition:

  1. As emissions standards change and climate concerns grow, there will be more and more focus on reducing coal capacity in favor of things like natural gas.
  2. The EIA has substantially lowered its projection of natural gas imports, meaning we will have to depend more heavily on domestic, or shale gas for production.
  3. By the year 2030, the EIA expects shale gas to represent about 7% of total global gas production. Not just U.S. production -- but total global production!

200 reasons it could affect you
Estimates of recoverable U.S. natural gas were about 1,100 trillion cubic feet in 1990; today that number stands at about 2,587 trillion cubic feet. Shale gas production, in particular, is expected to triple between 2009 and 2035. Remarkably, the United States has 200 years of natural gas supplies.

If you're building a portfolio of stocks for yourself, or for your children, or grandchildren, and you're looking to invest for the long term (maybe not 200 years, but still, you get my point), then natural gas might just be one of the best options available to you.

So who are some of the biggest players in the sector? Chesapeake Energy, as mentioned above, in addition to Devon Energy (NYSE: DVN  ) , Encana (NYSE: ECA  ) , and EOG Resources (NYSE: EOG  ) . Of course, the majors like ExxonMobil (NYSE: XOM  ) and Total (NYSE: TOT  ) , while making the majority of their money from oil, have delved into the natural gas market as well.

But the leading independents certainly aren't going to let the big boys push them around, nor are they just going to complacently wait for the price of natural gas to go back up. Chesapeake, for instance, has said it's going to invest $1 billion over the next 10 years in natural-gas-vehicle technologies. The company is going to try and increase demand for natural gas as an alternative to gas and diesel, and it's doing so by setting up service stations and highway infrastructure. Primarily Chesapeake will be investing in two companies, Clean Energy Fuels (Nasdaq: CLNE  ) and Sundrop Fuels.

The Foolish bottom line
With all the groundbreaking and new technologies, there are of course risks. Many shale gas wells are only a few years old, so their long-term productivity is somewhat unknown. Although the environmental impact, so far, doesn't seem to be overwhelming, new evidence could come to light that renders fracking a very dangerous activity. This is the nature of getting involved with something new and somewhat untested.

However, I'm more confident now than ever that natural gas, and in particular, companies positioned to take advantage of U.S. shale resources, have an unprecedented opportunity in front of them. By investing in these companies before all the smart money does (big institutions and fund managers), you might be able to profit for years to come. 

If you're looking for more groundbreaking ideas, check out The Motley Fool's free report "The Only Energy Stock You'll Ever Need." In it, Fool analysts give you in-depth analysis of one stock poised to pop from the energy boom. Click here to grab a free copy.

Jordan DiPietro owns no shares above. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Total A. and Chesapeake Energy. 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. The Motley Fool has a disclosure policy.


Read/Post Comments (23) | Recommend This Article (69)

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 July 15, 2011, at 6:22 PM, gkirkmf wrote:

    Jordan,

    "Fracking can contaminate groundwater and soil with terribly harmful chemicals."

    If this is not true, then why the Halliburton provision of the energy bill excluding frackers from EPA control via the clean water act. Many folks believe that they won't be harmed by this practice. Mostly, they live in cities and drink bottled water. Those of us who live in the country and depend on wells for water for drinking and watering livestock are concerned. It is not just the witches brew being pumped into the ground that is a problem. From my readings, the disposal of this fluid after its use is what is contaminating the ground water systems (along with an occasional cracked well casing). The current regulatory system consists of "Trust me, I wouldn't do a bad thing". Even the best of companies have had at least a few incidents (CHK to name one). I would watch any investment in a company engaging in wide spread fracking for the first sign of a large metropolitan water system damage suit which could run into the billions. Could make asbestos mining companies look like safe investments by comparison. Let's face it. Any of the current energy extractions methods have a lot of detrimental effects on our environment. It is time to stop picking the "best" of a bunch of bad alternatives, and put our money in some long term bets which minimize impacts. My personal bet is on geothermal electric generation. It has huge potential, and minimal effects on the environment when ALL costs are added up. Ending subsidies for carbon based fuel extraction would spur more growth in geothermal generation. There are plenty of discussions on the fool boards about geothermal generation and companies working on it.

  • Report this Comment On July 15, 2011, at 7:03 PM, mrb1llz wrote:

    I agree 100%. Watch the 60 minutes piece on this. They don't answer the hard questions.

  • Report this Comment On July 15, 2011, at 7:09 PM, jomueller1 wrote:

    The US has a horrible record when it comes to environmental protection. Businesses have no conscience and no patriotism. Money is all that counts.

    So the US needs to finally stop the polluters and hold them responsible. Especially people with dirty fingers need to go behind bars, at their own expense. But as laws are usually weak and there is little law enforcement except speeding violations I see more of the beautiful country degraded and more people sickened.

  • Report this Comment On July 15, 2011, at 7:13 PM, fordgo wrote:

    Look at Newpark Resources Inc (NR) as a company who provides a green solution to the claims of ground source water contamination. NR's patented drilling fluids is totally biodegradable and the use of it is catching on within the oil community.

  • Report this Comment On July 15, 2011, at 8:24 PM, modeltim wrote:

    Why is there something like the Halliburton loophole that exists in fact? I saw the movie Gasland and that was enough for me. Greed and the endless search for short term profitability (My use of short term is meant to imply geological time) will ruin us all. Non-renewables get all the subsidies they want and subsidies for things like solar and other carbon neutral technologies and research get peanuts.

  • Report this Comment On July 15, 2011, at 8:49 PM, drillerjim101 wrote:

    So movies now dictate sound investing?

    I'd rather examine the calm rational facts of the obvious safety of this wonderful technology and its obvious benefits to our hungry energy needs.

    Solar and wind will never be a substitute for our proven oil and gas God given blessings.

    Jim

  • Report this Comment On July 15, 2011, at 9:02 PM, ds10 wrote:

    It appears that the author has not read his own introduction:

    " Fracking can contaminate groundwater and soil with terribly harmful chemicals."

    And yet he is comfortable stating,

    " If you're building a portfolio of stocks for yourself, or for your children, or grandchildren......then natural gas might just be one of the best options available to you."

    He neglects to point out that your children and grandchildren may not even be alive to enjoy the fruits of this investment!

  • Report this Comment On July 15, 2011, at 9:54 PM, maiday2000 wrote:

    The comments on this article are like the blind leading the blind. The move "Gasland" was a total scam, even the environmental commission of the State of Colorado said as much. All wells are prone to contamination from methane if not drilled correctly or sometimes it just happens. I grew up on well water and saw it happen, no fracking going on anywhere close! All of these general statements like "the U.S. has a horrible record on the environment" and "our children and grandchildren may not even be alive" are spoken out of pure ignorance.

    There may be problems and concerns with fracking, but there are literally thousands of people investigating these companies and their procedures and yet the only ones who have and negative statements have to resort to lies and/or drastic fabrications to come up with their "proof." What does that tell you?

  • Report this Comment On July 16, 2011, at 12:08 AM, dp58 wrote:

    As a career government scientist, I know from experience it is quite common for both Federal and State regulatory agencies to have their professional capacities significantly suppressed by large scale and powerful sectors of industry.

    In my best professional judgement, hydrofracking needs an awful lot of careful evaluation and research before it can be deemed environmentally benign, at least relative to more traditional forms of gas extraction.

    For an easy though non-science based read, try "Hydrofracked? One Man's Mystery Leads to a Backlash Against Natural Gas Drilling", by A. Lustgarten. At a minimum, it raises some very significant questions and concerns.

  • Report this Comment On July 16, 2011, at 12:32 AM, dmhp wrote:

    Maiday2000 is correct, Water wells can produce methane *(natural gas)*, if the geology permits. Hydrofracking has been performed safely for decades in vertical gas wells, The new drilling sites are bigger and require much larger quantities of water to support the horizontal drilling which is the change in technology. Yes, we need to manage the waste water and other emissions, but we also need the economic benefits that a new cheap domestic fuel source will bring.

  • Report this Comment On July 16, 2011, at 3:45 AM, punchy101 wrote:

    I live in NYC. While we have vast numbers of amazing things here, the one that makes all the others possible is our water supply. Far seeing 19th century citizens realized that without a source of potable water the city could not grow or even survive. They began a gigantic project to provide it. Over the years it has continued to grow to meet the needs of the city. It is a priceless resource. Got that? Priceless. Screw it up and it cannot be replaced. Risking this marvelous resource for the finite benefits of an unproven technique does not make sense. Let fools (other than present company) rush in somewhere else.

  • Report this Comment On July 16, 2011, at 8:10 AM, MrSold wrote:

    The probability of opponents of hydrofracking lying to promote their agenda is 100%. I have watched the green movement for the last 50 years and each of their targeted activities started with a lie in order to stop the activity.

    The following US Industries have been hurt because of regulations promulgated by these lies:

    Farming, Timber, Coal, Lead, Asbestos, Oil, Manufacturing, Nuclear power, Natural gas, and now the CO2 that we exhale.

  • Report this Comment On July 16, 2011, at 11:57 AM, gimponthego wrote:

    One thing I've learned (and it's sad) is never trust anything you read watch or hear. 35 years in the media: News/Talk and advertising opened my eyes big time.

    Consultants refer to viewers and listeners as "mullet" and "lemming." Investing and business exists for one reason: to make money.

    I helped start CCU here in the Alamo City (recall that symbol?) and a brief conversation I had with one of the two principals stands out in my mind (this was the late 80's..just prior to the de-regulation of how many stations a company could own in a single market and the flood gates opened for us)

    I was standing outside one of the talk studios watching Gen. (Ret) Chuck Yeager being interviewed and the principal walked up and asked, "How's it going, Johnny?" I said, "Just great! We're making money and that's the main thing." There was a pause and he said, "No, Johnny, it's the ONLY thing." It made my job a lot easier knowing whatever I did..I could do no wrong as long as my people and I were generating revenue.

    Never lose sight of the fact that talk radio is schtick..no more no less. One of the most conservative hosts I've known, and da**ed abortion as the "worst of all crimes" came running from the studio during a commercial break, eyes wide, asking "Where can my mistress get an abortion?!" Don't believe anything in this world except yourself. Just my opinion.

    Jordan, if you talked to T. Boone Pickens about maintaining the quality of a commodity (traded like any other) so vital to life, "boatloads of cash from its success" might be something people would think of twice.

    "So should you even care?" I applaud you and the article because it makes people think. Johnny

  • Report this Comment On July 16, 2011, at 1:32 PM, lsuflyfisher wrote:

    I wish we would stop using petroleum as a catch all for all energy. Oil goes primarily for fuel for some type of internal combustion engine, be it cars, trucks, airplanes etc., and a small portion also goes to make chemicals. Reduce car usage and oil will take care of itself. Very little gas goes to this purpose so talking about natural gas and oil on the same converstation is misleading at best. Gas is used for Power generation, mostly to replace coal, to generate electricity and some,as well, geos into chemicals. Producing more gas will not necessarily reduce our oil consumption (apples and bananas) but it may reduce our coal use to generate power. With more and more cars going electric, where is the elctricity going to come from? not from oil but from coal or gas. Fracking will take care of itself when those using it get regulated for the crap they are using as fluids and miraculously green clean fluid will emerge (at higfher costs of course.) Working in industry and burning gas for process heat in outr plant, I am not complaining about gas prices and hope the supply stays plentiful for a long time, no matter where it comes form.

  • Report this Comment On July 16, 2011, at 2:19 PM, fstxrico wrote:

    The "Haliburton loophole" indeed lets fracking to get around the clean water act, but only because the act was never intended to deal with it in the first place. The clean water act deals with releases within the aquafer, and doesn't allow any chemical to be deposited in the ground. Because fracking is done at depths well below drinking water, and the chemicals used are consumed, or returned to the surface in flowback, it is inconsiquential to ground water. The bigger concern would be elevated methane levels in drinking water, and should be easily delt with. Fracking is sound and proven technoligy that has been in practice for over 40 years, and should continue where effective.

  • Report this Comment On July 17, 2011, at 12:00 AM, gdf55 wrote:

    Putting my green hat on for a minute, I'd point out that natural gas is not "clean," just perhaps cleaner than coal. Burning it still produces CO2. The truly green energy sources are wind and hydro - and nuclear if you're willing to ignore all the long-term storage issues, which most people aren't.

    Now I'll take the Green hat off and put on my investing hat. Why does natural gas seem like such a great investment when, as the author states, projected supplies of it have more than doubled since 1990 (more supply means lower prices), fracking for it is more expensive than just tapping deposits (reducing margins), and companies like CHK appear, at times, to be more like a real estate play than an energy producer?

    I'm a long-term investor in CHK. As the author suggests, I haven't felt all that well rewarded for it.

  • Report this Comment On July 17, 2011, at 9:54 AM, gimponthego wrote:

    Might I suggest you try EVEP. They have made us thousands and I see no let up in the foreseeable future. From "Seeking Alpha" :EVEP has the best looking chart. It looks to be in a still strong uptrend. EVEP may be the only one you really want to start averaging into soon.

    It has a small market cap. Its comparatively large lease holdings in the Eagle Ford should do wonders for its long term profitability. Its dividend of $3.04 (approximately 6%) will pay you to wait for the development in the Eagle Ford. The dividend should also buoy the stock."

    Just my opinion, as I agree with the author, David White from a June 22nd article. If you're not getting what you expect from "A"...try "B." GLTA,

    Johnny

  • Report this Comment On July 18, 2011, at 12:44 AM, TMFRosetint wrote:

    One of the better articles on the Fool in quite some time. Props.

  • Report this Comment On July 18, 2011, at 9:25 AM, trin6810 wrote:

    Hydrofracking destroys water - does everybody not get it - gas drillers can not treat wastewater - they have to "bury" it 10,000 feet below ground - water is finite - Jordan - you should tell everyone to buy water companies - just like boone is - make these companies "desalinate" the water - they would be out of business in a heartbeat - brine is 10x saltier than sea water - google theo colborn - she isn't making any money out of this industry - just showing what wonderful neighbors they are

  • Report this Comment On July 19, 2011, at 5:55 PM, footchester wrote:

    Time to double down on my H2O investments; there is no more vital resource to humanity. And business can't help itself when it comes to developing new and spectacular ways to spoil our very finite supplies of clean, fresh water.

  • Report this Comment On July 21, 2011, at 1:11 PM, 48ozhalfgallons wrote:

    The Sidoarjo mud flow most likely caused by fracking. It cannot be stopped. It cannot be contained. After the BP gulf spill, who knows what mischief geology has in store for us? Just how smart are we in the face of greed? Man would be wiser to pursue maximum efficiency in the consumption of energy rather than pursuing maximum energy for maximum gain.

  • Report this Comment On July 21, 2011, at 1:16 PM, TMFPhillyDot wrote:

    @HallShadow,

    Thanks for the compliment, I appreciate it!

    @trin6810,

    I in fact have told people to buy water companies. In fact, I'm a big fan of Veolia Environment and have bought shares for my Motley Fool real-money portfolio. You can read my buy rec here: http://www.fool.com/investing/general/2011/03/31/rising-star...

    Thanks for the comments!

    Jordan (TMFPhillyDot)

  • Report this Comment On July 22, 2011, at 3:39 PM, SkepticI wrote:

    If I needed any evidence the propagandists have nailed human nature, it would be that anyone accepts the notion CO2, something every animal on the planet produces, is a pollutant. Or maybe that windpower has no emissions, and uses no oil..... If you could see the numbers of trucks hauling tower sections, blades, and rail car sized generator housings down the Columbia River freeway, it might change your mind if you were observant. Not to mention the pickup trucks for the maintenance people and the daily area check, bird pickup etc. Of course I shouldn't discount the CO2 reduction by the killing of birds and bats,,,maybe that will save the planet.

    I do insist that efficiency is not only important, it is its own reward. Natural Gas fired Combustion Turbine cycles (Brayton cycle) with conversion efficiency in excess of 60% is one of the most concentrated, efficient methods of producing useful energy. Exceeded only by Combustion turbine Cogeneration cycles with efficiencies in excess of 90%.

    The only thing MORE efficient in terms of concentrated production of electric power for least land, steel, manhours etc is hydro. And I come from an area (NW) where hydro is abundant, vilified for its effects on fish, politically excluded from "renewable" power labels and generally disparaged. Even so, we need some controllable gas turbine power to balance the grid so that when green yo-yos flip their switches they get instant power. (apologies to crazies off the grid)

    When wind was 0.1% of our supply it was grand and not a problem. When it got near 2% it started to give us some headaches because it is inherently uncontrollable. If it ever gets to 10% without solving the storage and regulation problems, it will cause serious grid disruptions.

    The kind of water problems fracking presents, pales in comparison to mine drainage, geothermal brine, and oil well waste, all of which are being managed with less squawking. If groundwater issues from fracking have your attention, maybe you should pay Butte MT or Bakersfield CA a visit for some perspective.

    If you think some energy conversion technology is perfect and green, you just haven't looked closely enough. Natural Gas represents our best hope to reduce oil, (nearly all used for transportation) improve our efficiency and technology base, in short to grow our way out of current troubles. And no I don't work in the Natural Gas industry. I used to say that about Nuclear Power, but the Luddites are managing to suppress that. Coal has had the same treatment. Both fuels have had significant technology developments that can produce power with emissions as low as Natural Gas, but at much higher capital costs. Add to that their perception problems, that makes Natural Gas significantly more attractive for the next decade or two. If you look at the age of current plants, the pressure to reduce emissions, the general approach will be to replace these old plants with Natural Gas, not wind, and not hydro.

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