The growth in the usage and production of natural gas in the United States will probably be the big energy story of this decade.
In fact, it’s already so big that if you flip on your TV, you might run across commercials touting how the United States has more than 100 years of reserves in the ground.
- Why Is Google Creating A New Hardware Division?
- How Will The Virgin America Deal Alter Alaska Air’s Capital Structure?
- Chevron Q1 Earnings: Revenues And Earnings Suffer, Cash Outflows Still Greater Than Inflows, Company Cuts Capex
- Currency Impact Drags Down Master Card’s Q1 Earnings But Fundamentals Still Strong
- What Is India’s Share In The Net Sales Of Diageo Before And After The Purchase Of United Spirits Limited?
- Exxon Mobil Q1 Earnings: Revenues And Earnings Suffer Due To Low Oil Price Environment, Company Cuts Capex
The reserves in question are found in shale formations that were previously inaccessible due to inadequate technology. But now, with fracking – a process that uses water, sand and chemicals to “push” gas out of less accessible places – new supplies of natural gas are coming on-line.
The result is lots and lots of optimism surrounding natural gas… In fact, it’s all a bit too much…
Let’s Not Get Ahead of Ourselves
It’s important to maintain a modicum of pessimism right now, since the not-yet-extracted gas falls firmly into the “speculative” category.
Sure, the reserves are probably there, but they aren’t easy to access. And the cost of extraction could end up being much higher than what’s economically feasible.
Check out this chart of proven reserves to get a more realistic handle on the current situation.
Now, U.S. consumption is at about 25 trillion cubic feet per year. Based on proven reserves, that gives us about 12 years’ worth of supply. The 100-year number mentioned above that’s being thrown around so liberally is based on reserves that may or may not be tapped based on economic and financial conditions.
What’s more, the method we’d be relying on for tapping those reserves, fracking, might be all the rage at the moment. But it also has serious drawbacks:
- It’s an environmental hot potato, as chemicals used in fracking aren’t exactly eco-friendly.
- Fracking could be linked to minor earthquakes in surrounding regions.
- Water is used heavily in the process and must be available in adequate supply at an attractive price point.
- The government could legislate against fracking to the point where the practice becomes too expensive.
Any one of these factors could lead to the reduced use of fracking and, accordingly, a dampened outlook for natural gas.
But that’s down the road…
LNG Exports are a Long Ways Off
You’d think there’d be a ton of money to be made right now by shipping our supplies to the more profitable European markets, right?
Well, there is potentially big money in the exportation of Liquefied Natural Gas, or LNG, but there’s also a problem…
Regardless of its potential for raking in the bucks overseas (natural gas prices are much higher there than here in the states), not much is actually being exported at this time.
The United States just doesn’t have the infrastructure in place that could handle large-scale liquefaction and overseas transportation.
Take Cheniere Energy (NYSE: LNG), for example. It’s been trying to secure financing for such an operation for over a decade now. And the latest projections are for operations to begin in another couple of years – maybe.
Bottom line: We know that Natural gas is seeing greater demand each year. Adoption of the resource in vehicles, power plants, residential applications and commercial use is growing at a rapid clip thanks to low prices. And a recent MIT study predicts that natural gas consumption will double by 2035.
Once natural gas demand exceeds the available supply, which should start happening in the next five years, expect prices to soar. But until then, be sure to take the latest hype with a grain of salt.