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The Marcellus Gas Formation

The Next "Super Giant" Gas Field in the U.S.

Written by Keith Kohl
Posted April 29, 2008 at 9:42PM

Editor's Note: For updated information on the topic, visit our updated resource page on shale gas stocks.

"So did you hear about that huge natural gas field?" I asked politely, wondering in the back of my mind if he knew where the conversation was headed.

His reply was a little quicker than I had anticipated, "Yeah, I've been talking about the Barnett shale for a while now. I love it. I think it's the largest onshore gas field in the U.S."

The second I heard him mention the Barnett, I knew he had no idea what I was talking about. I didn't want to keep him in the dark for long.

Don't get me wrong, dear reader. I've been watching companies break through the Barnett shales for a while. Back in September, I suggested checking out Devon Energy (NYSE: DVN), which has jumped about 40% since.

Not too shabby.

They weren't the only ones that made investors happy, either.

After hearing my friend's response, I couldn't help giving him the news. I thought for a second before answering, "You might not want to say that last part just yet."

You see, the new Marcellus formation could make the Barnett shales look quite small in comparison.

The Marcellus Black Shale Formation

To be honest, I'm actually surprised that a number of my readers had no idea about the Marcellus formation.

The Marcellus formation is located in the Appalachian Basin and part of the Devonian black shales. It stretches from New York through Pennsylvania, Ohio, Maryland and West Virgina. The fact that natural gas is in the area isn't the question. In fact, the Appalachian basin has a long drilling history, going as far back as 1815. The Marcellus shales are found approximately a mile below the surface.

Although the region has been drilled countless times, it is still largely unexplored. We're talking about hundreds of thousands of wells that have been drilled in the Basin, yet the overwhelming majority were done at shallow depths.

One of the reasons the Marcellus shales are getting more attention is due to the horizontal drilling success on the Barnett shales. The technique isn't cheap. Drilling a horizontal well with hydraulic fracturing can be three times more expensive than a regular vertical well.

Let me put it this way, companies that are going to spend that much money are going make sure the well will produce. If the wells don't produce a substantial amount of natural gas, the company will end up losing money from drilling costs.

Okay, so how much natural gas are we talking about here?

Back in 2002, the United States Geological Survey (USGS) reported that only about 1.9 trillion cubic feet of natural gas was technically recoverable.

Well, things are about to change.

In December, 2007, two professors, Terry Engelder and Gary Lash, reported that the Marcellus shales could hold 167 trillion cubic feet of gas. And that was based on their conservative estimates. Their higher estimates suggested the formation could be as much as 500 trillion cubic feet. If you take into account a 10% recoverability factor, that comes out to almost 20 trillion cubic feet.

The potential is clearly there, but the question is, "Is the risk worth it?

Investing in Marcellus Shale Gas

Look, you don't need me to tell you there's a huge upside to Engelder and Lash's report. Even if their conservative estimates turn out to be correct, that's a lot of natural gas for the U.S. As you know, natural gas markets are regional (we'll leave liquefied natural gas out of this for now). As imports from Canada and Mexico decline, the U.S. could use the production boost to keep our up with our natural gas demand.

Personally, I'd look for some of your favorite Barnett plays to move into the Marcellus formation. Most of these companies have had tremendous success with horizontal drilling in Texas, why not make a move to an area with a stronger resource base?. Take a look at XTO Energy (NYSE, XTO), for example. Two weeks ago, XTO made their jump into the Marcellus play after paying $600 million to Linn Energy's Marcellus acreage.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

P.S. While I'm on the subject of white-hot energy plays, many of my readers have already made their first round of profits off the massive Bakken formation. The best part, however, is that its not too late to get a piece of the action. If you're interested, I'd recommend checking it out for yourself at the $20 Trillion Report.

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