The Horn River Basin
The Best-Kept Secret in Natural Gas Discoveries
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Let's face it, there hasn't been much pushing natural gas lately.
While oil prices are trying to find support at $70 per barrel, natural gas has stubbornly remained under $4/Mcf. At least, that's been the theme for natural gas in 2009 so far.
The problem stems from the current surplus of natural gas. Also, shale production had a record-setting year in 2008— U.S. onshore production jumped approximately 9%. Things were looking great for natural gas producers, and investors couldn't have been happier. . .
That is, until the economy hit the proverbial fan. The ensuing disaster destroyed demand, and prices deteriorated quickly. Demand has dropped by an estimated three billion cubic feet per day since last October.
When you take into account the production growth from those shale plays, it's no wonder prices plummeted. There was no way to alleviate the glut of natural gas. Companies were forced to scale their drilling efforts back drastically.
As much as I'd like to predict that natural gas will head back over $15/Mcf this summer, I think we can all agree it won't happen. In fact, there will be quite some time before we see that price again.
Several other analysts have preached to their readers about prices dropping below $2/Mcf, but I simply don't believe it.
And even after watching prices slide more than 75% since last July, I can't think of a better time to get back into natural gas.
For starters, drilling activity has been crushed. In the U.S., there are currently 700 active rigs drilling for natural gas. That's compared to over 1,600 rigs running a year ago. The downturn in drilling will undoubtedly have an effect on production this year.
Once we move into the heating season, we may finally begin to see demand pick up again. Furthermore, any good news for an economic recovery will help push demand higher.
I know what some of my readers are thinking: "What about LNG?"
Many of my veteran readers know that I'm not a huge fan of liquefied natural gas. Even though the U.S. is expected to receive more LNG this summer, I'm still not convinced. According to the EIA, LNG imports in 2009 thus far aren't enough to get excited over.
The reason for my lack of faith in LNG shouldn't come as a surprise. When demand finally begins to pick up again (and it will, dear reader— all it takes is time), those shale plays are going to make a comeback.
One in particular has managed to stay below the radar. . . until now.
The Best-Kept Secret in Natural Gas Discoveries
Ask yourself, "What's the first thing that comes to mind when someone asks me about shale gas?"
I'd bet the answer is one of the prospective shale plays in the U.S., whether it's the Haynesville shale in Shreveport, Louisiana or even the Marcellus shale stretching across several states, including Pennsylvania, New York, Ohio, and West Virginia.
You might even think of the play that started the shale bonanza: the Barnett shale in Texas. Companies were able to extract the natural gas from the Barnett shale as early as 1980. People really started taking notice after advancements were made in fracturing techniques and horizontal drilling.
After the success of shale production in 2008, the cat was out of the bag.
Companies quickly rushed to grab as much land as possible, and the major players established their positions. However, one shale play in British Columbia was lost in the frenzy.
The Horn River Basin Discovery
The Horn River Shale Basin is located in the northeast corner of British Columbia. Don't feel bad if the name doesn't ring a bell. Truthfully, not many people have heard of it. Nevertheless, this shale gas field is being hailed as the largest in Canada.
And much like the U.S. shale plays, the Horn River shale is huge.
There's an estimated 250 trillion cubic feet of natural gas in the formation, and up to 20% of it is considered recoverable. Considering the fact that Canada's natural gas production has been in jeopardy, this can only come as good news to future production.
Since the Horn River Shale Basin is relatively new to the scene, investors have several options open to them.
Investing in the Horn River Discovery
Of course, the usual suspects are present in the Horn River basin. Apache Corp. (NYSE: APA) and EnCana Corp. (NYSE: ECA) each operate on half of their 400,000 acre position. Both have also performed admirably since early March.
However, that's not the only road available for investors.
Last year, I told my readers the Horn River basin wasn't going to be an overnight success. In order to bring this production to market, the Horn River shale will need to develop a better infrastructure.
If you're looking for a strong infrastructure play, take a closer look at Spectra Energy Corp. (NYSE: SE). The company is planning to raise capital expenditures to approximately $1 billion next year.
Like every other energy company, Spectra has had to cut spending this year due to lower natural gas prices. The company has announced it is looking to expand its gathering and processing capacity in the Horn River shale.
Then again, if you're waiting for natural gas prices to reach $15/Mcf before making a move, you've already lost the game.
Until next time,
Investor's Note: Developing shale plays like the Horn River basin are going to play a strong role in future production. That much has been evident over the last few years as shale production has taken off. And profiting from these new shale basins is nothing new to members of the $20 Trillion Report. Don't wait for energy prices to peak again before you decide to find those profits.