Natural Gas 201

Last week I offered Fools interested in the Natural Gas industry a brief primer on the fundamentals of natural gas production. Today we dig a little deeper, covering shale plays, drilling methods, and the media darling that is hydraulic fracturing.

Where's the gas?
Most natural gas (but not all) recovered today comes out of layers of shale buried deep in the earth. The shale plays in the U.S. are located in one of many geographic basins. The basins are all given clever names to let us know where they are, like "Fort Worth Basin," "Michigan Basin," "Appalachian Basin," and so forth. Given that basins aren't referred to as often in the media or annual reports, and shale play names can be less straightforward, it helps to have a map.

Shale Play

Majority Location

Conasauga Alabama
Floyd Alabama, Mississippi
Fayetteville Arkansas
Monterey California
Monterey-Temblor California
Niobrara Colorado
New Albany Illinois, Indiana, Kentucky
Haynesville-Bossier Louisiana
Antrim Michigan
Bakken Montana, North Dakota
Gammon Montana, Wyoming
Marcellus New York, Pennsylvania, West Virginia
Utica New York, Ohio, Pennsylvania, West Virginia
Devonian Ohio, Pennsylvania, West Virginia
Woodford Oklahoma
Excello-Mulky Oklahoma, Kansas
Barnett Texas
Eagle Ford Texas
Avalon-Bone Spring Texas, New Mexico
Hermosa Utah
Manning Canyon Utah
Mancos Utah, Wyoming
Mowry Wyoming

Source: Energy Information Administration.

The three biggest shale plays in the U.S. are the Marcellus, Haynesville, and Barnett. It is important to note that in some of these cases, the shale contains both oil and natural gas.

Now that we know where the gas is, let's go get it.

Horizontal vs. Vertical Drilling
Natural gas companies drill two types of wells, vertical and horizontal. Vertical wells go straight down into the ground; horizontal wells go down, and then gradually bend out to the side for about a quarter of a mile until the pipe is running parallel to the ground above. A horizontal well can run under the ground anywhere from 3,500 to 10,000 feet. This section of the well is called the lateral.

On average, it costs twice as much to drill a horizontal well than a vertical one. Of course, if it wasn't lucrative, companies wouldn't do it: The average horizontal well can yield as much as 15 to 20 times the natural gas that a vertical well produces. On top of that, drillers are able to drill horizontally in vertical wells that were previously tapped dry.

Take, for example, the Mississippi Lime play. Underneath the ground in northern Oklahoma and southern Kansas is a layer of limestone rich in oil and natural gas liquids. Vertical drilling for oil boomed 100 years ago in this area, making companies like Phillips Petroleum into big names. Though it was considered dry decades ago, SandRidge Energy (NYSE: SD  ) , Chesapeake Energy (NYSE: CHK  ) , and Devon Energy (NYSE: DVN  ) have brought it back to life with horizontal drilling, first reaping the rewards there two years ago.

Fracking: The process
Once a horizontal well is drilled, the next step is hydraulic fracturing, also known as fracking. Fracking a well happens over several stages, each stage a repetition of the same process along a different section of the lateral. The process breaks down like this:

  • Insert a perforator into the section of the lateral at the furthest end of the well. This section is now known as Stage 1 Frac.
  • Send an electric current to the perforator, setting off a charge that blows small holes through the lateral and into the surrounding shale.
  • Pump fracking solution under incredibly high pressure down into the well and up out of the small holes.
  • The pressure from the solution breaks apart the shale, releasing natural gas trapped in the rock, which then flows to the well.
  • A temporary plug is placed at the end of the Stage 1 Frac and the process is repeated on the next section of the lateral, called the Stage 2 Frac.
  • After all the stages of the lateral have been fracked, the temporary plugs are removed and gas flows up the well to a pipeline.

Hydraulic fracturing can also be used in vertical wells, but it is essentially impossible to produce gas from a horizontal well without it.

Fracking: The controversy
No one has ever argued that drilling for anything is good for the environment, so it should come as no surprise that this is a contentious issue. The main concerns surrounding hydraulic fracturing are the contents of fracking solution, and the fear of gas and fluids leaking into the water table.

Fracking solution varies from company to company, some of which are more willing to disclose their "recipe" than others. Typically the solution contains water, sand, gel, and chemicals -- ingredients whose purposes range from keeping the cracks in the shale open to preventing bacteria buildup in the well. In an example of industry best practice, Range Resources (NYSE: RRC  ) discloses the contents of fracking solution on a well-by-well basis, posting the information on its website.

Well, well, well
Knowing what's in the solution is helpful; knowing that the solution and the gas it has released are not in your drinking water is even more helpful. Studies have implicated fracking in the contamination of numerous water wells in northeast Pennsylvania, the dissolved methane appearing in higher concentrations when active gas wells were close by. The industry, naturally, refutes it.

This has been an especially complicated problem in Pennsylvania, home of the Marcellus Shale and multitudes of horizontal wells. This is a state that, for some reason, has no laws or regulations that govern the construction of private water wells. A 2009 state survey discovered that 43% of all drinking water supplies failed to meet safe drinking water standards, entirely because of contaminants unrelated to fracking. This doesn't mean that fracking is off the hook, it simply shows how messy the situation really is.

Many now advocate for testing water wells near drilling sites before, during, and after fracking. Certain states also have laws that require testing. West Virginia requires water well testing within a 1,000-foot radius of a gas well before drilling commences. Chesapeake Energy offers free water testing to anyone within a 2,500-foot radius of a proposed well site.

Don't worry, there's more
The water issue does not end there. When the fracking solution flows back up from the well, it is ultra-salty and can contain significant amounts of hazardous material. The water can be recycled and used again as fracking solution, injected into storage containers deep in the earth, taken to a wastewater treatment facility, or sold as de-icer to be spread over America's roadways come wintertime. It's estimated that 65% of fracking solution was recycled in Pennsylvania this year. That's a great number, up significantly from the past, but 50 million gallons went unaccounted for, so there is still work to be done.

Foolish bottom line
Some states have introduced a ban on drilling new wells until the EPA concludes once and for all how bad fracking really is. The environmental concerns are real, but they can often be overblown by the media just as the gas companies can exaggerate how safe the process is. The best bet for an investor serious about the industry is to read extensively from a variety of sources and ultimately make his or her own decision about investing. Tune in next week for the final primer, "Natural Gas 301," for insight on financial metrics and risks important to investing in natural gas companies.

Having second thoughts about natural gas? Click here and comfort yourself with the Fool's Special Free Report, "3 Stocks for $100 Oil."

Fool contributor Aimee Duffy doesn't own shares of the companies mentioned in this article. If you have the energy, check out what she's keeping an eye on by following her on Twitter @TMFDuffy.

The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Range Resources 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 (13) | Recommend This Article (46)

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 October 20, 2011, at 1:59 PM, Teacherman1 wrote:

    Good informative article Aimee.

    I missed 101, but will go and read it.

    Look forward to 301.

  • Report this Comment On October 20, 2011, at 4:26 PM, kickbishopbrenna wrote:

    Great article, but ehy has the Nat Gas ETF dropped into one of those drilling holes? Its been unreal..I hope its gonna climb!

  • Report this Comment On October 20, 2011, at 6:15 PM, idiotisk wrote:

    I'm a petroleum landman working in the Eagle Ford Shale. One important item left off the otherwise good discussion is the fact that the well operator cements in from top to bottom the surface casing at a depth well below the fresh water table. Then drills to the objective depth, builds angle, then turns horizontal. The surface casing is designed to protect the fresh water zones. The state tells us what depth that is with their extensive water research. So it turns out that the producing horizon at say 7,000'-10,000' or whatever has several thousand feet of pipe, cement, and solid rock between it and the cemented surface pipe set from the surface to 2, 3, or 4,000'. It is hard for me to imagine any contamination and how this would happen, short of the catastrophic 1 in a million casing and cementing failure that happened with the Deepwater Horizon / BP rig. It's boom time in many areas of Texas and the landowners love it, unless they don't own the mineral rights.

    This country has a chance for cheap energy again and thumb it nose at Hugo Chavez and the sheiks of araby.

  • Report this Comment On October 20, 2011, at 6:52 PM, ironyworks wrote:

    Water from deep drilling tends to turn acidic.

    Acidic water corrodes both steel ( pipes) and cement pretty aggressively over time.

    Once a seep is established, the flow often accelerates.

    No one seems to be responsible for older , capped off oil wells here in CA...Hard not to think the same thing will be true of NG wells in the future.

  • Report this Comment On October 20, 2011, at 11:26 PM, wellboy wrote:

    The industry, and its various representatives and defenders, talk about hydrofracking only as the "main course." Those of us who object to it are talking about the whole process, soup to nuts. ironyworks makes a valid point. The wells are typically productive for about 5 years. When they're capped and the dirillers are long gone, how long will the cement casings and steel pipes maintain their integrity? What will happen 10, 15, or 20 years out? Isn't it time we thought of future generations instead of our short term profit prospects? Once ground water is contaminated it doesn't clean itself up very well. Now that Dominion plans to export 1 billion cubic feet of liquified natural gas (LNG) per day out of its Cove Point facility in Lusby, Maryland (with other companies also applying for permission to convert their LNG import operations to export operations) sort of blows the myth of national and energy security out of the water.

    http://dom.mediaroom.com/index.php?s=43&item=1038

  • Report this Comment On October 20, 2011, at 11:46 PM, skeptic94 wrote:

    This is a news letter from a Canadian landowners assoc. Pg 4 deals with real life fracking. Read for yourself how the US and Canadian Governments are providing security and protecting property rights in North America.

    http://www.landownerassociation.ca/rsrcs/CAEPLALandownerJour...

  • Report this Comment On October 25, 2011, at 4:33 PM, foolgabby wrote:

    What the frack??

  • Report this Comment On October 28, 2011, at 1:46 PM, majakblue wrote:

    Water contamination is a serious but not the only issue with fracking. Fracking can use from 1-13 million gallons of drinking water per well. This can be a serious issue in areas where water is scarce and is certainly an issue in my county where natural gas companies have leased mineral rights.

    The contracts are typically in poverty stricken areas of the county and are often predatory in that these give the corporations the right to drill even though it may deny the owners the traditional uses of their own lands. Landowners are responsible for any damages to neighbors' properties, wells or other liabilities. The corporations are not obligated to restore properties or roads once drilling is complete. If no gas is found, the owner will not be compensated for damage to the property. The landowners signing the contracts are often too poor to retain legal counsel and are unaware of these issues.

    Additionally, transport of water in and natural gas out of the drilling site results in 1000 trucks per day through rural areas resulting in damaged roads that we would not be able to pay for. Our county does not have the revenues. It also results in heavy air pollution and we already have high asthma rates in our county, particularly among children and the elderly.

    In our county we are developing sustainable building and ecotourism industries, but these are still in the early stages. We do have well-developed organic farms and vineyards that are thriving. Fracking will pretty much demolish these businesses due to air and water pollution and lack of water due to the millions of gallons required for drilling. We would be changed from a beautiful area developing clean businesses to a region for heavy, dirty industry. Want to come live here?

    Fortunately, fracking is currently illegal in North Carolina and I am hoping that it will remain so. I am hoping that investors will show some social responsibility and refrain from investing in an industry where the risk to air and water, the risk to human health and local economy is so great. In my opinion, as a small town citizen, biochemist and river monitor, the risk is unacceptable.

  • Report this Comment On October 29, 2011, at 11:12 AM, rfaramir wrote:

    Private property rights are the answer to all these problems. Protecting them, standing up for them, and educating people about them.

    The landowners signing bad contracts need education so they can understand what their rights are and what contracts are or are not in their interest.

    Counties (all governments, really) need to enforce laws against damaging property. Damage a road? Pay for its repair and reinforcement. Damage a neighbor's property (including pollution)? Pay to restore it. Degrade the traditional use of a property, pay restitution. No contract should let them out of these obvious responsibilities.

    Water rights need to be private. In a free market, a newcomer would have to outbid the existing customers for the water. This will drive up the price (where it is scarce), causing all the users (new and present) to conserve, to invest in new sources, to recycle, or to invest in lower use tech, or to make do with less. Where water is politically allocated, there is overuse, unwise uses, deprivation, corruption, waste, hard feelings, and no motivation to improve.

  • Report this Comment On October 29, 2011, at 2:30 PM, majakblue wrote:

    Hi rfaramir,

    I agree with your comments that that we need law enforcement when damage to roads and other property occurs. However I strongly disagree with the concept that private property rights answer all of these problems.

    Who will educate the poor landowner about contract law and language? We have a non-profit that is making efforts, but we need a concerted effort by the banks who hold their mortgages. They only tell them that they have violated their mortgage agreement after the fact.

    Who will pay the additional health costs and loss to businesses due to increased air and water pollution from fracking?

    As for outbidding existing customers for water, typically the Natural Gas companies get their water from creeks, rivers, lakes and ground water in rural areas, depleting supplies traditionally used by farmers, nurseries, vineyards and residential households. They typically only pay for water for gas wells in municipalities. If they outbid or deplete water supplies for existing customers, the result is that small organic farmers and other businesses requiring clean water and air sources, desirable additions to our community, are put out of business in favor of heavy, polluting industries. Lower income folks will have to choose between paying for water or food.

    Somewhere, compassion and concern for others should enter the equation. The concept that private property rights and profitability outweigh our obligations to the safety, health and quality of life of our neighbors strikes me as ultimately self-destructive. "We all live downstream."

  • Report this Comment On November 03, 2011, at 5:23 AM, kmacattack wrote:

    Majakblue, I'm not sure about all your allegations, but your argument is totally one sided. You fail to mention that natural gas used as a fuel ONLY in the long haul trucking application will reduce OPEC oil imports by nearly 50 percent within a 5 year period. It will stop the flow of $300 billion per MONTH from the pockets of American citizens directly to the bank accounts of OPEC sheikhs in the Mideast, which often end up being used to finance terrorists who want to destroy America and our economy. You fail to mention that Compressed Natural gas as a transport fuel burns 75 percent cleaner than diesel, producing 1/4 the CO2 of diesel fuel, and no sulfur content, and 1/2 the CO2 of gasoline. Considering there are millions of trucks operating daily in America's cities, the benefits of cleaner air in America's population centers, conversion of these trucks to CNG is a tremendous positive benefit. Natural gas is a 100 percent American made fuel, and moving toward using CNG instead of diesel would create about 1 million new high paying jobs. You fail to mention that most of the major gas producers such as Devon and Chesapeake openly embrace the "cap and trade" carrot and stick provisions in the American Power Act, because natural gas burns so clean versus diesel, coal and gasoline, that any carbon tax is easily offset by planting tree farms which eat CO2. We own a farm which is about a mile away from a Chesapeake tree farm. The trees can also be marketed profitably, so "cap and trade" is a win-win proposition for gas producers. America is the Saudi Arabia of natural gas reserves and we have at least a 100 year supply under our country. The energy bill also would embrace and help to fund solar, wind, geothermal, electric and hybrid vehicles, hydrogen, etc. and has been described in objectives editorials as the most significant and most nearly perfect bill to be proposed in congress in about 50 years. Natural gas is, as you point out, a hydrocarbon fuel, and ideally one day we will be able to phase out all hydrocarbon fuels, but for what this country needs RIGHT NOW, it is a far superior alternative to Diesel and gasoline vehicle fuel, and coal as used as a source of power generation. . I have for many years supported environmental legislation, and the energy bill is a huge step toward cleaner air, quite the opposite effect that you are alleging. Should fracking be regulated, and safeguards written into laws regulating the use of fracking? Absolutely, and with the huge cost advantage of natural gas versus diesel or gasoline, for example, the additional costs of safeguarding the aquifers and water wells is miniscule. A new CNG fill station opened locally a week ago in my city, selling CNG for $0.79 per gallon versus $3.59 for Diesel, and about $3.25 for the "cheap unleaded 87" at $3.25. A long haul trucker would save an average of at least $1,000 per week by converting his rig to CNG from Diesel, and the conversion cost is half what it was two years ago. I'll post another paragraph detailing who favors the energy bill which promotes CNG, natural gas, and a plethora of clean, renewable energy sources, and who opposes this bill and why.

  • Report this Comment On November 03, 2011, at 6:32 AM, kmacattack wrote:

    Now for the "wall of shame" as to who has blocked the American power Act from becoming law and why. The American power act (the energy bill) passed the house of representatives with a large bi partisan majority over two years ago, The bill was a labor of love crafted by the most strange set of bedfellows in American History. Sen. John Kerry, D-MA, worked hand in hand with Oklahoma-Texas oilman and energy trader T. Boone Pickens, author of the "Pickens Plan" which is a key component of the bill. Pickens is a life long republican, and along with Chesapeake Chairman Aubrey McClendon, funded the "swift boat documentaries" which ran nation wide on election eve in 2004 and as a result elected George W, Bush to a second term. The "documentary" was nothing more than a political infomercial, and was in fact a clear violation of federal election laws, because Kerry had no opportunity to respond to the claims that he was undeserving of his 3 purple hearts and bronze star he received, despite the fact that every man under Kerry's command, about half of them republicans, insisted that Kerry probably saved the lives of over 20 men with his act of bravery which earned him the bronze star. The republican owned Taft broadcasting group ran the "documentary" on all 149 of their stations in Ohio the night before the election, at a very low cost to the "Swift Boat veterans". The "veterans" paying for the ad were primarily OIL and gas Billionaires T. Boone Pickens and Aubrey McClendon , neither of which served in the military at all. Ohio was leaning to Kerry the day before the election, and the "documentary" swung public opinion just enough that Bush won Ohio, with the help of the republican secretary of state who made sure that there was a huge shortage of voting machines in heavily democratic precents in Cleveland and Cincinnati, forcing people to stand outside in the sleet for up to 10 hours. There were plenty of machines in republican strongholds, allowing voters to walk in and vote within 5 minutes. If Ohio had gone Kerry's way, he would have been elected president. In spite of these "dirty tricks" John Kerry was willing to work with Pickens to craft the bill. Kerry's state doesn't have a stake in the energy industry, but he undertook the task with Pickens as an act of patriotism, and as much as I've resented Pickens role in the 2004 election, I think his motives are patriotic as well. Pickens stands to gain through his ownership of a large stake in Clean Energy Fuels, which owns hundreds of CNG fueling centers nationwide, and which also is in the Wind energy business and owns water rights to a huge aquifer in the Texas panhandle which could eventually supply Dallas and San Antonio with water.

    Before the November elections last year, the energy bill was being boosted by President Obama in numerous speeches. There were 60 votes lined up in the Senate supporting the bill until Sen Ted Kennedy died, and was replaced by republican Scott Brown in Massachusetts. Gallop polling revealed that 85 percent of the American public supported passage of the energy bill., but one senator, Republican leader Sen . Mitch McConnell of Kentucky decided to filibuster the bill, and forced the 6 or 7 republican sponsors to withdraw their support for the bill. The big excuses for McConnell's opposition were in his objection to two key provisions which had been approved by the House a year before. The first was the opposition by big oil and coal lobbies to the "cap and trade" provisions, or as McConnell called it "cap and tax". The other provision was a reversal of Bush's liability limit of $75 million to any company which caused an oil spill or other envoronmental catastrophy. President Obama had just secured an escrow account from BP of $20 billion, for starters, to guarantee that the American taxpayers would not be stuck with the bill for cleaning up the gulf of Mexico after the BP Horizon disaster. The republican leaders ALL cried "foul" in the nation's media, saying that it was "unfair" to make oil companies pay for cleanup costs. This sounds incredible and arrogant, but it's true. Two democrats, who would have provided the 60 vote cushion to override McConnell's filibuster, Sen. Begich of Alaska and Landrieu of Lousiana, were seeking a compromise on the liability issue, fearing that unlimited liability could bankrupt an oil producer and cost thousands of jobs in their states. The deal was nearly done, which would have set up an "insurance fund" of monies from all oil and gas producers which would kick in after the $75 million "deductable" was met by the company who was responsible for the spill. McConnell received a $500,000 "CAMPAIGN CONTRIBUTION" just before the vote from Big OIl lobbyists, and another $50,000 from the powerful coal lobby which helped him decide that we would be just fine if we continued to import ever increasing amounts of oil from the middle east. The coal lobby is scared to death of natural gas, because costs are triple to build a coal fired plant, and they would be hurt the most by "cap and trade" because coal is the dirtiest burning fossil fuel, with diesel close behind. Clean coal is attainable, and when it is economically feasible should be promoted, but currently the cost is TRIPLE per kWh generated vs natural gas or hydroelectric power. Big oil and coal stand to lose trillions of dollars if the energy bill ever passes, and they are huge republican contributors. On the other hand, the American people are overpaying by trillions of dollars due to the monopoly enjoyed by big oil in transportation fuels. Imagine what $250 BILLION PER MONTH left in the pockets of Americans every month would do for the American economy. On the other hand, if you remember a few short years back, you will recall the near depression created primarily due to the devastating effects of $5.50 per gallon gasoline. While Exxon was making $50 BILLION PER YEAR in 2007, Americans were losing their jobs, their homes and their shirts due to energy prices. High energy prices, combined with absolutely stupid tax policy which encouraged people to buy gas guzzling Hummers, Suburbans, Excursions, etc, allowing write offs of up to $80,000 in a single day PER VEHICLE PURCHASED. The automakers loved it up until 2005, beyond that time when gas skyrocked, they were stuck with millions of gas guzzlers in inventory which no one wanted to buy. This is the same time that the Koch brothers made huge profits with their gasoline and diesel refineries. The Koch's stand to lose billions if the energy bill passes, and they were largely behind the funding of the HBO "Documentary", "Gasland". If the energy bill passes, big oil, coal, and the Koch brothers stand to lose trillions of dollars, but the American people will gain a better standard of living, new jobs, new energy technologies which can rebuild American manufacturing and export businesses, cleaner air, dramatically lower fuel and home utility bills, etc. It seems that what is GOOD for Big oil, coal, and the Koch brothers is BAD FOR AMERICA. PUBLIC CAMPAIGN FINANCING would correct this and a multitude of other problems in a hurry. The best thing we can do for our country as Americans is to take all the campaign money away from politicians. As a result, the only political debt owed by politicians would be an obligation to formulate public policy which would benefit the greatest number of Americans. What a novel idea, and it should be supported by all Americans regardless of party, What we have currently is the best group of politicians that money can buy.

  • Report this Comment On November 12, 2011, at 12:55 PM, gimponthego wrote:

    What I found amazing was the immense amount of fracing activity just between San Antonio and Corpus Christi along I-37. A farmer paid $800 an acre a few years ago. Now Flex Frac, Turner Industries Group, TriCan, Haliburton, etc are paying $2,200 an acre just to Drive Across the land to get to the wells..and they are everywhere.

    Big, Brand New Wells that weren't there just a few months ago. Farmers selling acreage outright are getting huge amounts. 18 wheelers with large containers of what looks like water, trailers to accommodate workers. Flex Trac has a billboard with a "$5,000 starting bonus" right under their name. Getting out and seeing for yourself is the only way to go if you have the time.

    I can see the San Antonio to Corpus Christi corridor along I-37 teeming with Natural Gas oriented industry in a year. In this case, all due to "Eagle Ford." Johnny

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