A report put out the other day by the Kroll Bond Rating Agency stated that the Utica Shale and Marcellus Shale plays could represent more than $10 trillion in new economic activity when fully developed. That's a really, really big number. The total U.S. national debt is "only" about $16.5 trillion dollars.
While the report raised a number of concerns ranging from methane escaping into the environment to water contamination, it saw the exploitation of these shale formations significantly boosting the economies within its footprint. It noted that this could lead to a domestic revitalization of plastics, pharmaceuticals, and fertilizer, as well as all the energy-related economic output.
None of this is really new, but it does remind us that there is money to be made by investing in this long-term trend. While there will be many ways to profit from this $10 trillion opportunity, some companies are positioning themselves to deliver long before anyone else.
Drill, baby, drill!
The report noted that historical daily gas production is expected to rise from the 4.2 billion cubic feet per day, or Bcfe/d, the region produced in 2010 to 15.4 Bcf/d by 2020, making it the nation's leading production basin. For that to happen, drillers need to be incentivized to increase production, and right now with low natural gas prices that's simply not happening. However, I see two drillers that will see the most effect from a rise in natural gas prices.
Topping the list is Chesapeake Energy (OTC:CHKA.Q) the nation's No. 2 natural gas producer. While it has dramatically cut back on drilling in dry gas plays like its 1.8 million net acres in the Marcellus, the company is concentrating on developing its liquids-rich areas, which include an industry leading 1.3 million net acres in the Utica. When taken together, Chesapeake's massive position in the region should yield outstanding long-term results.
Joining Chesapeake in the region is Range Resources (NYSE:RRC) and its more than 1 million net acres in the play. The company sees 24 trillion-32 trillion cubic feet equivalent, or Tcfe, of resource potential in its Marcellus acres, with another 10 Tcfe-14 Tcfe of resource potential in its Upper Devonian Shale position. While the company is currently focusing on the super rich and wet gas formations of the Marcellus, over time it too will enjoy the economic benefits of fully unlocking this vast resource's potential.
With production growth in the Marcellus expected to double from 2011 to 2015 there is a significant amount of midstream infrastructure that still needs to be built. It's estimated that the industry will need to spend $20 billion through 2020 to build critical midstream assets. While there are many companies investing in midstream infrastructure, two really stand out.
While it might be better known as a utility, Dominion (NYSE:D) has several assets strategically located within the Marcellus and Utica shales. Its gas transmission business has more than 8,000 miles of pipelines, 776 Bcf of underground natural gas storage and 288 million cubic feet per day of natural gas processing capacity. It also owns the Cove Point LNG facility which has the potential to be transformed into a liquefied natural gas export facility.
Dominion recently entered into a joint venture with Caiman that is focused on growing its midstream presence in the Utica. Dominion is contributing its wet-gas gathering systems, a natural gas liquids pipeline, and its Natrium processing and fractionation facility, whereas Caiman is kicking in the cash to fund the venture's growth. The partners plan to pursue other opportunities within the wet-gas window while also looking at opportunities outside the window to include dry gas and oil gathering.
Another midstream player to watch is MarkWest Energy Partners (NYSE: MWE). It's the largest processor of natural gas in the Marcellus. It also has a large NGL marketing business which includes both truck and railcar assets, as well as its Mariner West ethane pipeline project which is under construction. In the Utica, like Dominion, it has a joint venture which includes processing, fractionation, and storage assets. MarkWest has an exceptionally strategic position from which it can grow as these plays develop.
Just one word: plastics
While methane, which is used to heat our homes, is the primary component of natural gas, ethane and propane are also very important components. Among other things they are a feedstock to the petrochemical industry in making plastics. The shale gas boom is beginning a renaissance within the industry as it has several new projects under construction to take advantage of these cheap feedstocks.
While NGLs will travel by pipeline to the petrochemical industry along the Gulf Coast, as well as to export facilities along the East Coast, some of the liquids will be consumed in the region's first ethane cracker. That petrochemical complex which is still under consideration by Shell (NYSE:RDS.A) would be a world class facility. Plans currently call for the facility to be built in the rich gas portion of the Marcellus with close access to the Utica. Once built it'll not only deliver economic benefits to Shell but to the region's other producers.
Foolish bottom line
The $10 trillion opportunity will take decades to unfold and there's likely to be plenty of booms and busts along the way. Over time, though, investors who seize this opportunity with a long-term mind-set will be greatly rewarded.