New Technology Makes Natural Gas a Viable Replacement for Oil

The U.S. is set to become the world’s leading producer of natural gas — and is on track to become an exporter of the same. And yet you hear none of this on the radio or see it in other mass-media outlets.

T. Boone Pickens isn’t a stupid man. He’s made billions from oil. In the last few months, he has spent $60 million advertising his belief in the future of natural gas for use in transportation and electricity. (And why not; we have plenty of natural gas.) Perhaps you’ve seen his commercial?

A few years ago, the talk was in building liquid natural gas terminals to import gas from Russia and Africa. But now, the talk in certain circles is about the U.S. exporting natural gas. The landscape for hydrocarbons is changing rapidly. It’s not 2006 anymore.

The reason that natural gas sold off over the past two months lies trapped in shale. There have been two major finds in the past few years: one in the Barnett Shale region near Fort Worth, Texas, and the other more recently from Shreveport, Louisiana, called the Haynesville Shale find. Both these discoveries are turning landowners into Jed Clampett-style multimillionaires.

According to the San Francisco Chronicle, one unemployed machinist named Chris Moreno, who owes 45 acres, was offered $750,000 to drill on his land as well as 25% of the production yield.

Profit From the Natural Gas Boom: New Technology Makes It Work

The process for retrieving this natural gas from shale is more expensive than the traditional wells and requires breaking up the shale using fracture pumps and horizontal drilling techniques. That said, when natural gas is over $5.50, it works… and there is a lot of natural gas to be extracted.

New horizontal drilling technology, including hydrofracturing, has made shale-based natural gas accessible.

Natural gas in places like the Haynesville formation in Louisiana is situated in vertical columns. Imagine six milk cartons in a row. If you stick a straw in one carton, you get one carton of milk. If you stick six straws end on end and drill it horizontally through all six cartons, you get all the milk with one really long straw.

Profit From the Natural Gas Boom: “But This One Goes Up to 11…”

Chesapeake Energy (CHK) has pioneered using six sections and is now using eight sections for its sideways drills.This greatly reduces the cost per unit of gas recovered. In fact, CHK has some rigs down to below $5.50 MMBtu.

In hyrdofracture drilling you simply pump pressurized water down into the well. This breaks up shale and releases more gas. You then fill the gaps with permeable sand and pump out the water and gas.

The benefit of the Haynesville site is that it is naturally pressurized. This means that instead of pumping out the gas it squirts out by itself, again saving money. Chesapeake believes that it can get its costs down to $5 and change. Today, the futures market values natural gas at $7.50, down from $14.

Profit From the Natural Gas Boom: U.S. Production Booming

U.S. production increased by 8.8% in the first five months of 2008 compared with the same period in 2007. This is the biggest percentage increase since 1959. There is a huge difference between U.S. oil production and natural gas. U.S. oil production peaked in 1970, and is down 21% in the past decade alone. This is why you see T. Boone Pickens running around talking up natural gas as a replacement for oil.

Not only is natural gas the cleanest of the hydrocarbon fuels, but the U.S. has a lot of it.

Navigant Consulting claims there is as much as 842 trillion cubic feet of natural gas trapped in shale in the U.S. That’s enough to meet four decades of current demand.

Profit From the Natural Gas Boom: Natural Gas Cars

Utah has developed the public infrastructure for natural gas pumps. You can fill up your car at 82 cents-a-gallon equivalent (compared to $3.50 per gallon of traditional gasoline).

This has caused a sales boom in the Civic GX from Honda (HMC), the only car company currently selling natural gas cars to the public. The Civic GX fills its tank in your garage using a slow fill method from your gas line. It takes about five hours to fill up and will drive for 200 miles.

The governor of Utah converted his state-owned SUV to natural gas using his own money.

According to the Energy Department, there are 8 million natural gas vehicles operating worldwide, but only 116,000 or so in the United States — most of these vehicles are used by state or corporate fleet. I know Baltimore has switched over from diesel buses to natural gas. (I know this because that diesel stink doesn’t flow in the vents anymore when I’m trapped behind them.)

Peterbilt has been selling a Model 320 with the Cummins-Westport natural gas engine, which has a liquid natural gas fuel system, for the past four years. It also offers a dual-fuel (diesel and liquid natural gas) Caterpillar (CAT) engine.

If you are in the trucking business, your biggest expense is fuel. This country needs a national network or filling stations (both compressed natural gas and liquid natural gas).

Natural gas is the only viable long-term energy solution for transportation. With a new man in the Oval Office, I predict that we’ll see a natural gas infrastructure buildout announced in his first 100 days in office.

Comments

[Maxroom:]

I can only hope that the country and it's new masters (elected or appointed?) will see the wisdom in having our hydrocarbons pumped from on-shore US wells. I'm "betting" that the US financials will continue to contract for a while. Once they bottom out, we can pile onto NG producers, like CHK. Their true value will be revealed and their share price should rebound nicely.

2008 Oct 09 04:07 PM

[Chuck Steak:]

Very informative article. "Natural gas is the only viable long-term energy solution for transportation." Perhaps Detroit automakers will finally begin to figure out that natural gas vehicles are the next big thing.

2008 Oct 09 04:19 PM

[haydete:]

Chuck, the OEMs have made NG vehicles for years. They were sold into fleets that had their own high pressure CNG refuelling stations - consumers did not have access to CNG for vehicles at the time. We don't need to push the OEMs, it's mature technology. We need to push the infrastructure to set up stations around town (not everyone will want to refuel at the garage, and you have more range when you can refuel on the highway.)

2008 Oct 09 08:19 PM

[oilandgaspr...:]

You have to also factor in the notion that the technology to drill for and retrieve oil has also improved greatly. We are now drilling for oil in areas deemed unthinkable only 10 years ago. I just cannot imagine being a viable replacement for oil but I see it as easing the pressure on demand for oil in the long term.

2008 Oct 10 08:05 AM

[Ferdinand E...:]

I don't believe that the US is set to become as important in the great world of natural gas as the author seems to be claiming, nor that gas is a viable replacement for oil, and I wouldn't advise anyone else to believe it. As for the US becoming a major exporter of the same, I wonder how the new man in the White House will feel about that, especially he he wants the US to become...'energy independent'.

Like the author I believe that Mr Pickens is a very smart man, but I am not sure that that is enough where this topic is concerned.

2008 Oct 10 08:47 AM

[Ozarker:]

I believe that the US is set to become important in th great world of natural gas just as the author is claiming and that gas is the most viable replacement for oil, and I would advise anyone to believe that. As for the US becoming a major exporter of the same, I think the new man in the White House will feel the same, expecially if he want the US to become "energy independent". Like the author, I believe that Mr. Pickens is very smart man, and I am sure that that is enough where this topic is concerned.

2008 Oct 10 10:32 AM

[Iknownothing:]

Anyone who does not favor CNG should (laugh) take gas.

2008 Oct 10 11:59 AM

[admar:]

If our leaders are paying attention this is a golden opportunity for them to enhance the security, quality of life and the quality of our environment with one program. A shift to natural gas with the sense of urgency that won WW2 would provide it all. An employment boom that we sorely need, a lower carbon footprint, an improvement in our impact on global warming, an opportunity to improve our infrastructure, and the additional income, corporate, and other taxes would lower our deficet. In addition to stopping the flow of $700 billion of our dollars to people who don't like us and plan to do us harm. It seems like a no brainer to me, but then perhaps we have none of those either.

2008 Oct 10 01:33 PM

[Chuck Steak:]

Fred Banks, I'm curious -- what is your reasoning in saying that you aren't bullish on the future of natural gas?

2008 Oct 10 04:29 PM

[Ferdinand E...:]

There is no real evidence (yet) from the reserves or production pictures to accept the position offered by the author and those good people who believe him. Furthermore, what may be happening with gas is the same thing as with oil, where various observers predicted an oil production turnaround on the basis of the exploitation of shale oil or offshore deposits and so on, although with oil that is strictly a fantasy. Naturally, gas may turn out to be different, but at present I personally am unable to believe that - although I hope that it's different..

I notice that there are some people who do not go along with me on this matter, and as usual I say fair enough. One thing though is clear to me, which is that those people who really and truly know about this topic have the same opinion as I do. I can also note that the concept of energy independence is absurd, assuming that economic theory has any place in this discussion. At the same time I at least partially accept the positions of both presidential candidates (+ Governor Palin) in this matter, and believe like the good Paris Hilton that the best energy policy for the US is an amalgam of their positions - though with the bunkum removed.

2008 Oct 11 05:52 AM

[Ferdinand E...:]

Hello again Chuck Steak. I was incorporating some corrections into the forthcoming new printing of my energy economics textbook, when I happened to look at a few things in my chapter on natural gas, which started me going through my files.

The conclusion that I have now arrived at is that there is NO possibility of the US becoming a major exporter of gas. In fact, if the LNG terminals that certain people do not want constructed are not constructed in (or near) the US, then the price of gas in the US is going to escalate, although this may not take place until the present spell of 'demand destruction' (caused by the bad news from the macroeconomy) is passé.

A month or so ago I was told by someone in Paris that my opinion of the gas situation in the US was right on the money, but like many people on this site I make a point of taking anything coming from the IEA with a grain of salt. Unfortunately the USEIA seems to be working the same side of the street. The good news about shale gas may change a few things, but don't worry (in case you were worrying), a gas export boom originating in the US is out of the question.

2008 Oct 11 11:39 AM

[Chuck Steak:]

Thank you for your response(s), Fred Banks. If you believe that NG prices will eventually escalate, does it stand to reason that in spite of whether the US does or doesn't become a major exporter of gas, it would still appear that NG E&D companies such as Chesapeake make attractive long-term investments?

2008 Oct 11 05:02 PM

[STLPlace:]

It seems to me Pickens plan did not get too much attention.

One reason I suspect is his past association with Swift boat thing made him perceived not as an impartial person on this matter. Not to mention his personal economy interest in Wind and other enerfy stock holding in his hedge fund.

2008 Oct 12 09:05 PM

[Ferdinand E...:]

Real companies with real energy assets have got to be good long term investments. Maybe the other kind are too, but I don't know.

About the Pickens plan, the idea of a wind corridor through the middle of the US doesn't sound right to me, but I will leave the judging of that up to someone else. However, if Mr Pickens was unable to see through the Swift Boat scam, I hesitate to trust his smarts. Anyway, my basic interests are oil and nuclear. In the latest Economist, they commented on nuclear by giving a figure of ten years from ground break to grid power. This is the kind of information going around the wine bars in London, because as far as I am concerned four years should be about right, assuming that everybody connected with nuclear projects are serious.

2008 Oct 14 05:55 AM

[Red Raider:]

The author's comments are generally correct, however, we are missing one important issue. Pipeline transmission infrastructure limits current NG sales. And NIMBY resistance is likely to limit pipeline construction.

The benefit of LNG imports includes the backfeeding of transmission lines to improve their capacity to supply users at the ends of the line, such as those in New England. Pipeline limitations will also affect our ability to export Nat Gas.

2008 Oct 14 11:16 AM

[Robert D.:]

While predicting that a commodity with a lower price and cost to the producer is "the right" substitute to oil, the problem is the infrastructure and national acceptance. Then you have to allocate as to what that energy can be used, transportation, or industrial or residential energy?

Companies will only invest in "new energy sources" if it makes sense = they need to make a long-term profit. As soon as NG prices drop lower you will find a lot of E&P companies decreasing their funding drastically. If oil drops any lower, we will go back to thinking "we have plenty of oil, because prices are low."

We have to plan and allocate resources to R&D for these new technologies while oil is still cheap (yes, $80 is cheap).

My one concern for NG, is how safe is it to transport?

2008 Oct 16 09:37 AM

[Sober Realist:]

So if we start using nat gas for transport, what's that going to do to my heating bill? Not a good thing.

2008 Oct 27 10:51 AM