It's been a roller-coaster year for the energy sector. Oil prices have skyrocketed, plummeted, and then recovered again. We've seen troubles in major oil-exporting countries like Nigeria, Venezuela, and Iran. But on the natural gas front, a new study sheds light on a trend that many investors have already seen firsthand.
According to a report released Thursday by the Colorado-based Potential Gas Committee, an authority on gas reserves, the U.S. appears to have far greater natural gas reserves than was previously thought.
The report, whose lead author was Professor John B. Curtis of the Colorado School of Mines, says that the U.S. has a future supply of about 2,074 trillion cubic feet of gas. That's over 35% more than the previous PGC study found back at the end of 2006, and at current rates represents about 100 years of production. You can bet that the big boost is at least partly responsible for gas trading at about $4 per million BTU today, versus more than $13 at its peak last July.
The higher supply clearly comes from the work of companies like Chesapeake Energy (NYSE: CHK) and Devon Energy (NYSE: DVN). Using advanced technology, these and other companies have unlocked gas trapped in shale formations, such as the Haynesville in Texas and Louisiana, and the Marcellus formation in the Appalachians. Extracting gas from such formations is still a new phenomenon, and yet already about a third of our total potential gas reserves are shale-based.
The new figures likely will support the contentions of gas advocates like energy investor T. Boone Pickens, who has argued for a bigger role for natural gas in our nation's total energy picture. Pickens has been especially interested in gas as a transportation fuel, claiming that it could be a valuable substitute for foreign oil.
From an investment perspective, though, greater supply means low prices, and that's not good for gas producers. My advice to Fools with a taste for energy is to concentrate on producers such as Hess (NYSE: HES) and smaller Denbury Resources (NYSE: DNR), which have relatively high oil reserves compared to their natural gas holdings. This obviously implies care where most gas producers are concerned until the report's effect on already-low gas prices becomes clearer.
At the same time, I'd avoid land drillers such as Bronco Drilling (Nasdaq: BRNC), whose utilization rates may remain low as long as gas prices stay weak. Deepwater players Transocean (NYSE: RIG) and Diamond Offshore (NYSE: DO), however, have kept utilization rates up despite low gas prices and therefore continue to be attractive.
All in all, though, I judge the major bump in U.S. gas reserves to be sparkling good news for the future prospects of the industry. Now all we need is the wisdom to follow the advice of Boone Pickens and other natural gas advocates, and we'll have done ourselves a tremendous favor.
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