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The U.S. Natural Gas Supply Just Got 26% Larger

By Matthew DiLallo - Apr 14, 2013 at 8:37AM

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A recent study now shows that we have much more gas than previously thought.

When an oil and natural gas exploration company books its energy reserves, it's really using its best guess based on the currently available data. As with most guesses based on limited data, they tend not to be as accurate as we'd like. Sometimes that's a good thing, as in the case of our nation's future natural gas supply.

A recent study by the Potential Gas Committee shows that the U.S. now has 26% more recoverable gas than the group estimated we had at the end of 2010. The total now comes to 2,383.9 trillion cubic feet, or Tcf. That's really good news both for producers and for current and future end users.

Thanks to the Marcellus Shale, the Atlantic portion of the country has the highest ceiling, at an estimated 741.3 Tcf of recoverable natural gas. That means decades of production coming from the likes of Range Resources (RRC 2.54%) and Chesapeake Energy (CHKA.Q), which have large acreage positions in the Marcellus and in the region as a whole. 

Chesapeake is already the nation's second largest natural gas producer. The company pumps out 4% of our total production, and if gas prices rise, it has the potential to produce even more gas in the future. The company is the largest leaseholder in both the Utica, at 1 million net acres, and the Marcellus, at 1.8 million net acres. If gas prices are high enough, Chesapeake has plenty of room to expand its drilling budget and increase its production.

Range Resources, which was the top producer in the Marcellus last year, also has a large acreage position in the play. The company has 700,000 net acres in the Marcellus as well as another 231,000 net acres in its Southern Appalachia division. Overall, the company believes it controls 54 Tcfe of resource potential in its acreage just in the Atlantic potion of the country. As one of the lowest-cost producers of natural gas in the country, Range can profit even in a low-price environment.

Knowing that we have a larger supply of natural gas is great; however, it won't do a whole lot for profits if prices don't head higher. The good news here is that more demand is on the way. Overall, there should be enough room so that everyone can profit as more natural gas comes out of the ground.

One area to watch is liquefied natural gas exports. Currently, Cheniere Energy (LNG -0.81%) is first in line to begin exporting natural gas. Its Sabine Pass terminal is scheduled to come online in 2015. There's a boatload of projects in various stages of the approval process that would like to join Cheniere.

The problem here is that chemical companies such as Dow Chemical (DOW) have vowed to vigorously fight an increase in natural gas exports. With more than $4 billion in projects coming online over the next few years that use natural gas as a feedstock, you can understand why the company wants the price kept low. With the study showing that we have more natural gas than previously believed, maybe we can have our gas and export it, too.

A final area to consider is the massive potential for natural gas as a transportation fuel. As more fuel stations are being built, natural gas has real potential to finally change the fuel industry. Leading the charge is Clean Energy Fuels (CLNE 2.01%), which is building out America's Natural Gas Highway. The fact that we have more clean-burning natural gas than originally thought means we should have plenty of gas to go around.

Everything still hinges on the price of natural gas. If the price runs too hot, it will crimp demand. Likewise, a depressed price will cause drillers to pull back, as they've done the past year and a half. Knowing that our supplies are now 26% higher, the price of natural gas should only moderately increase over the longer term, while drillers should expand production only when prices move higher. If we play our cards right, our nation could have a sustainable competitive advantage on its hands.

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Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
Clean Energy Fuels Corp. Stock Quote
Clean Energy Fuels Corp.
$4.57 (2.01%) $0.09
DuPont de Nemours, Inc. Stock Quote
DuPont de Nemours, Inc.
Range Resources Corporation Stock Quote
Range Resources Corporation
$25.38 (2.54%) $0.63
Cheniere Energy, Inc. Stock Quote
Cheniere Energy, Inc.
$131.95 (-0.81%) $-1.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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