As crude oil becomes more challenging to find and produce, requiring work in areas that are progressively more remote and more technically difficult to operate in, natural gas may just ride to our rescue.
Indeed, with gas being cleaner-burning and increasingly more plentiful domestically than oil, it would appear to be just a matter of time before gas spreads to a variety of additional uses. It already heats half of U.S. homes, and it appears to have growing potential both in increased use for generating electricity and as an alternative fuel for vehicles.
At the same time, gas is still being discovered in a variety of new locations. For instance, Royal Dutch Shell (NYSE:RDS-A) and Norway's StatoilHydro ASA (NYSE:STO) have just announced a huge new discovery off the cost of Norway. Although exploratory drilling continues, early estimates place the value of this field as high as $228 billion.
A quick turnaround
So why, with all its advantages, has natural gas frequently been something of an energy afterthought? There are a couple of reasons, one being that until just a few years ago we were convinced that the supply of domestic natural gas was running out. And then there was inertia: Since the first cars had been rolled out, they'd been propelled by oil products, and a change didn't seem technically or commercially feasible ... or necessary.
However, in recent years, work by independent producers like Chesapeake Energy (NYSE:CHK), Southwestern Energy (NYSE:SWN), and Newfield Exploration (NYSE:NFX) has propelled us into a whole new world in which we now have more gas than we can currently use. The companies had drilled into gas-plentiful hard rock, or shale, in places like the Barnett Shale in north Texas and the Haynesville Shale in northwestern Louisiana, and found ample amounts of natural gas. The Barnett yielded four billion cubic feet of gas per day in 2008, and there are those who believe the Haynesville may be one of the largest discoveries ever.
Going sideways
Much of the companies' successes have come from horizontal drilling, where the bit drills straight down into the shale, and then turns sideways to keep it within the formation. At the Baker Hughes (NYSE:BHI) annual meeting last week, CEO Chad Deaton noted that amid a recent sharp decline in rigs working in North America, those involved in horizontal drilling had remained far more active than rigs employing the conventional approach.
But the combination of those discoveries, the new technologies, and the increased production that has resulted all occurred almost precisely at the same time our current economic debacle was beginning. So, just as gas supplies were increasing, overall energy demand plunged. One result has been a slide in natural gas prices more precipitous than the drop in demand. Another is that it's been harder for the smaller and medium-sized companies within the energy industry to obtain funding for drilling and production.
Cooler than my house
So prices should recover when our economy strengthens, right? Maybe, but it's not a sure thing. While 98% of the gas we use is produced locally, liquefied natural gas, or LNG, could be on the verge of becoming more prevalent, as companies such as El Paso Corp. (NYSE:EP) and Cheniere Energy have started building LNG terminals along the U.S. coastline. That would make it easier to import gas from foreign sources, potentially keeping prices down.
All in all, for a host of political, environmental, and economic reasons, I'm betting that over time, gas will replace a meaningful amount of the oil and coal we currently use. Obviously, having ample supplies of our own natural gas will reduce dependence on foreign energy imports. Billionaire energy spokesman T. Boone Pickens has been gaining adherents in Washington for his call for an increase in its use as a fuel for autos, trucks, and buses. Given that support, I suspect natural gas will have a prominent place at the core of the president's energy policy.
The bottom line
For Fools with long investment time horizons, I'd advocate a close monitoring of the gas producers. Chesapeake is the biggest of them all, and despite some recent speed bumps, I'd wager that over time, it will make investors very happy.
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