This Massive Shale Shale Play Just Got Bigger
Editor's note: For a more updated information from Keith Kohl on Shale Gas Stocks, click here...
Don't think for a second that natural gas is down for the count.
Like every other chart you've seen lately, natural gas prices have been beaten down in the latter half of 2008. Depending on how you're positioned, it's a hard chart to look at.
The real surprise for me, however, wasn't that prices fell alongside oil's plunge. Rather, it was the fact that natural gas hasn't rebounded yet. Yet despite watching natural gas prices trading at multi-year lows last week, I still believe natural gas prices are heading north this year.
The Natural Gas Slump
Like you, I've been waiting for natural gas prices to rally this winter.
Normally, prices move higher as temperatures fall and people begin to turn on the heat. The increased demand is usually enough to give prices a nice push higher.
Unfortunately, that hasn't been the case so far.
We can thank our economic trouble for this one. Combine that lower industrial demand (from factories, for example) with storage levels building over the last several weeks and you have enough to drive natural gas prices into a slump.
The cold weather simply wasn't enough to pick up the slack. Even in spite of frigid temperatures last week, prices continued their slump. The Henry Hub spot price fell to $4.72 per million Btu.
Once the economy finally starts to climb out of the trenches by the end of 2009, natural gas prices will have no place to go but higher. Like I said, I don't think it's a question of 'if', rather 'when' natural gas will balance out. The problem is that most of the new production in the U.S. is coming from shale plays, which are not very economical when prices are this low.
The Marcellus Shale
As I watched the Barnett play grow into the play it is today, I always had a feeling that we were going to see some big things from shale gas in the future. And it's no wonder that shale production has taken off since 2006. Success from the Barnett wells drew more attention to shale plays across the U.S. I'm pretty sure you've heard me talk about some of the prospective
As you know, the Marcellus shale formation stretches over 500 miles from New York to West Virginia. The play is part of the Devonian Black Shale field. Natural gas producers, utilizing the same drilling techniques used at the Barnett shale, have had tremendous success.
The hype associated with the Marcellus, however, is over its size. When companies began drilling several years ago, people believed the formation held a mere 1.9 trillion cubic feet of natural gas in place.
It took the efforts of two professors, Terry Englander and Gary Lash, to change things for good. They suggested the Marcellus shale could contain up to 500 trillion cubic feet of natural gas, of which approximately 50 trillion cubic feet might be extracted.
It turns out that the amount of natural gas may be even greater. Recently, Dr. Lash announced the new estimate is at 1,300 trillion cubic feet of natural gas.
Before you lose your head on the numbers, don't forget that the difficulties involved in extracting the natural gas. For starters, an average Marcellus well could cost millions for the producer. That kind of investment isn't for the faint-of-heart.
One thing we can count on, however, is that producers won't ignore the Marcellus shale forever.
Understandably, drilling is down right now as producers are faced with lower prices. But let's be fair here, drilling is down everywhere, not just in this particular area.
Once prices move higher, however, we will see a renewed increase in drilling activity. Like I mentioned before, natural gas is still trading below $5/Mcf. The good part of lower prices is that the smaller, more speculative companies won't be able to stick around.
They simply won't be able to afford to stay in the game.
I would suggest sticking with the major players for now. They will be able to effectively weather this financial storm and come out on top once natural gas prices rebound again.
Until next time,
Energy and Capital
P.S. Believe me, I know the patience needed to wait for your favorite stock to move into a specific price range. In this market climate, that can take days or even weeks of careful watching. The reward for such diligence, however, can be extremely profitable. Most of my readers have felt this success by taking advantage of Ian Cooper's Options Trading Pit. Perhaps it's time you checked it out for yourself.
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