The Uncertain Future of American Shale Gas

There is so much hullabaloo surrounding natural gas these days, you'd think we'd have a clearer picture of what the future holds for domestic supplies of the stuff. Fact is, we don't. From accurate reserve estimates to commodity pricing, it's time we were honest with ourselves about how much we really don't know about our shale gas.

How much gas is there, really?
The latest and greatest data from the Energy Information Administration contains total gas estimates that are much lower than its numbers from last year. In 2011, the EIA estimated there were 827 trillion cubic feet of natural gas in U.S. shale. In 2012, that number dropped to 482 Tcf. The agency also commented specifically on gas trapped in the Marcellus Shale. Once pegged at 410 Tcf, the EIA now estimates that number is really closer to 141 Tcf, a 66% reduction.

The logic behind the new number is that much more information is available to the agency now than in years past. So that settles it, right? Not exactly. The U.S. Geological Survey estimates that there is only 84 Tcf of natural gas in the Marcellus Shale, almost half of what the EIA estimates. The agencies clearly use different methods of calculating reserves, and we may never know which one is more accurate.

They are not the only ones with varying methods of calculation; gas companies have their own formula, too! In fact, The New York Times reports that the combined reported Marcellus reserves of Chesapeake Energy (NYSE: CHK  ) and Range Resources is equal to the federal estimate for the entire region.

Conflicting estimates can leave investors scratching their heads. How much gas is there? Apparently, no one really knows. And that's not all we don't know!

Any more gas after that?
We also have no idea how much energy is under our land that hasn't been discovered yet. Not surprisingly, even industry insiders have differing opinions.

At an energy conference at the end of last November, several executives spoke up about their thoughts on whether there are American energy resources yet to be discovered. Mark Papa, CEO of EOG Resources, and Chuck Meloy, senior VP at Anadarko Petroleum (NYSE: APC  ) , both see potential for additional finds. Chesapeake CEO Aubrey McClendon (probably consulting a very old, very expensive map) disagreed.

Let's talk money
Now that we've established we have no idea how much gas is under the earth, or in our future, let's move on to our next uncertainty -- price. Just in case you've been living under a rock (digging for natural gas!), I'm going to break this to you gently: The price of dry gas is not very high right now.

The Department of Energy is currently weighing the impact that approving natural gas exports will have on American consumers and industry. Many anticipate that such approvals would drive the price of gas up 3% to 9% over the course of 20 years.

This would be good for the natural gas industry, but it could negatively affect consumers and companies like Dow Chemical that are building new plants in the U.S. for the first time in decades to take advantage of low gas prices. The DOE is essentially conducting a cost-benefit analysis that hinges on which route would create more jobs. Rest assured that a decision won't be made anytime soon and that we will continue to know nothing about the future of natural gas prices for quite a while.

How does this affect my portfolio?
An industry in question doesn't mean all investments should be off the table. There are plenty of companies that stand to benefit from natural gas production but are diverse enough to get by without it.

Let's consider 2011's third-quarter production numbers (the most recent data available) for the top five U.S. gas producers:

Company

Third-Quarter Production
(MMcf/d)

ExxonMobil (NYSE: XOM  ) 3,917
Chesapeake Energy 2,763
Anadarko 2,271
Devon Energy (NYSE: DVN  ) 2,028
Encana (NYSE: ECA  ) 1,905

Source: Natural Gas Supply Association.

Clearly, some of these companies are more diverse than others. ExxonMobil and Anadarko have substantial global operations; Chesapeake and Devon Energy do not. Though, to its credit, Devon has built up a portfolio of some of the most desired liquids-rich acreage in the United States. Encana spun off its oil business in 2009, and though it is now trying to pursue liquids production full force, its success is very much in the hands of natural gas.

Foolish takeaway
In the world of investing, it is better to know more than less. But as long as you are honest in your investment thesis about what you don't know, your investments don't have to suffer through uncertainty. The price of natural gas will rebound eventually; rather than try to time that event, investors should focus their energy on gas companies like Devon Energy that have shown an ability to adapt quickly to changing market conditions.

You can also search for companies like ExxonMobil that profit off oil and gas alike. Consider starting your research with three stocks that Fool analysts have pegged to profit from high oil prices.

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, where she goes by @TMFDuffy.

The Motley Fool owns shares of Devon Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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