Tapping the Marcellus Shale Formation

This is one investment we don’t plan to miss.

In fact, people should have been tipped off after the IEA released its report, Are We Entering A Golden Age of Gas?

For the IEA, there’s not much excitement. Prices are near two-year lows currently, a supply glut is plaguing the United States, and the shale production process is under heavy public scrutiny.

And still, the time to buy couldn’t be better…

Despite the hurdles, the outlook is loud and clear.

Within two decades, global gas demand will climb to 194 Tcf, about 60% higher than it is today.

By then, China — which matched Germany’s demand in 2010 — will be using as much natural gas as the entire EU. India’s demand is projected to increase four-fold. Even the oil-rich countries in the Middle East will double their gas consumption by 2035.

A growth story like this doesn’t come around too often for investors. And there’s only one place to start…

We call it the Marcellus.

The formation stretches nearly 600 miles through parts of Pennsylvania, Ohio, West Virginia, and New York. It is quickly becoming the hottest unconventional gas play in the country.

Officially considered the first Marcellus well, the Renz 1 was drilled about eight years ago in Washington County, Pennsylvania.

Up until then, however, not much attention was focused on the play…

Hundreds of thousands of wells have been drilled in the Appalachian region, but only at shallow depths. As you can see, the Marcellus shale can run as deep as 9,000 feet:

click to enlarge

It wasn’t until the success in the Barnett shale that companies began utilizing horizontal drilling and hydraulic fracturing techniques in the Marcellus.

Simply put, companies first drill vertically, then turn the bit horizontally and continue into the formation.

If we really want to get an idea of how things have changed for the better, look no further than the USGS. Back in 2002, they reported only two trillion cubic feet of natural gas was contained within the Marcellus. Their new current estimate is approximately 84 trillion cubic feet — and you can bet this won’t be their last upward revision.

According to the EIA, shale gas will make up 46% of our domestic production by 2035.

But we’re not just looking at an unconventional future in natural gas, but an unconventional present as well.

Over 14% of our current production is from shale formations like the Marcellus. Within three years, Marcellus gas will contribute more than $17 billion to the region — a 54% increase from 2010.

The Fate of Fracturing

We can’t broach the topic of the Marcellus shale and not look closer into the fracturing debate. The two are linked, and the fate of fracturing will inevitably decide the future development of the Marcellus.

You see, along with horizontal drilling techniques, extracting the natural gas without fracturing the rock would be impossible. Unlike conventional plays, the natural gas in these shale formations are trapped within rocks with low permeability. Without the fracturing process, it would no longer be economical for companies.

Despite the media blitz against the process, the truth is that more than 1.2 million wells have been stimulated using hydraulic fracturing.

As you know, this process involves blasting the formation with millions of gallons of water, sand, and chemicals in order to crack open the rock and allow the gas trapped inside to flow freely.

Fortunately, that’s not the only way companies are able to produce the natural gas.

One fracturing company is already offering up a cleaner solution — one that completely eliminates the need for water.

This technology’s success in the Eagle Ford would inevitably spread like wildfire throughout the rest of the U.S. shale basins — especially in the Marcellus, where the fracturing debate is centered.

The Marcellus Wild Card

Right now, U.S. shale gas production has its limitations…

Natural gas markets are regional, since transportation is mainly through pipelines. It’s why we currently have a supply glut in North America.

That will undoubtedly change over the next few years.

Dominion Resources, for example, is seeking government approval to begin exporting liquefied natural gas from their Maryland terminal.

At first, the company would be able to export approximately one billion cubic feet of natural gas per day…

Dominion itself would not directly own the LNG, but rather its customers would be responsible for supplying, shipping, and selling the natural gas.

And if they’re given a thumbs up, a flood of natural gas from the Marcellus shale would flow into international markets.

Until next time,

Keith Kohl
Editor, Energy and Capital