Twenty years ago, Fort Worth, Texas, was a much different place than it is today.Once an unremarkable Dallas suburb, it has blossomed over the last two decades into the most important natural gas hub in the United States.

Just this week, I flew into the Dallas-Fort Worth Airport. Driving around, I was struck by how the typical suburban landscape in Fort Worth has been overrun with natural gas infrastructure. Natural gas pipes wend their way through the community. New pipeline rights of way and wells are everywhere. Companies are leasing subdivisions – cul-de-sac by cul-de-sac – to drill beneath them for gas.

You see, Fort Worth sits in the heart of the gas-rich geologic formation known as the Barnett Shale. Shale is a sedimentary rock made of fine particles of clay and mud deposited at the bottom of ocean basins or giant lakes. The shale oil and gas companies covet has a lot of old plants and algae mixed in. That kind of shale makes natural gas and sometimes oil over time. The Barnett Shale is a textbook example.

Here’s what Oil and Gas Investor recently said about the Barnett Shale:

With high-profile Barnett asset sales of more than $1 billion and gross production topping 1 billion cubic feet per day (bcf) – and even the Fort Worth City Council willing to lease city land for drilling – no one needs to be convinced that shale plays are valuable, highly prospective and worth a closer look.

Indeed, the boom is on… Between 2004 and 2007 alone, the number of well permits issued by the state for the Barnett Shale rose 231%, from 1,112 to 3,679. As of June 3, energy companies had drilled 7,766 gas wells in the Barnett Shale, and drilled and permitted another 4,661 wells.

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The Barnett Shale adds $5.2 billion per year to the Fort Worth economy. You can expect that to double in the next seven years.

And plenty of energy companies have made fortunes in the Barnett Shale over the last five years. One company in the S&A Oil Report portfolio, XTO Energy (XTO), went from $32 per share to more than $73 at its peak in just two years. Another Barnett player, Quicksilver Resources (KWK), went from $19 to $45 this year alone.

The U.S. consumes about 23 trillion cubic feet of natural gas per year, but only produces about 19 trillion cubic feet. Canada supplies the rest, but it is falling short. Between a lack of drilling and the increased use in developing tar sands, Canada’s exports will dwindle.

That means the future of U.S. natural gas prices looks good for the long run.

Of course, the run-up in share prices for Barnett Shale developers like XTO and Quicksilver means we won’t find a lot of bargains there. But seeking to repeat its overwhelming success in Barnett, the energy industry has turned its attention to an equally promising shale region – this one in the birthplace of the U.S. petroleum industry, Pennsylvania.

Central Pennsylvania is flush with a dark, organic-rich shale industry professionals compare to the Barnett Shale. The shale, called Marcellus, has the kind of potential to turn poor farmers into millionaires.

Importantly, these gas-rich shale beds are close to the demand centers of the urban corridor from Boston to Richmond – unlike natural gas stranded in Colorado and Wyoming.

In 2002, the U.S. Geological Survey estimated these eastern shale beds hold 30.7 trillion cubic feet of natural gas – that’s a little more than a year’s worth of consumption for the entire U.S. But more recently, Schlumberger’s engineers updated those estimates, taking into account the technological advances from 2002 to today. Schlumberger puts the volume up as high as 1,000 trillion cubic feet – more than 32 times the old estimate.

Right now, companies are rushing to the shale region of Pennsylvania the way they did in Fort Worth a few years ago. Pretty soon, companies working there will see their shares take off the way Barnett developers did.

I’m a long-term natural gas bull, so I think you’ll do well in several different kinds of investments here… from pipelines to ETFs to exploration companies. But for the biggest returns, I recommend focusing on Pennsylvania – the site of the next great American energy boom.

Source: Why Pennsylvania Land Prices Are Skyrocketing

This piece is taken from The Growth Stock Wire. It’s in the form of a questions and answers session. But it’s well worth the read if you’re interested in the ins and outs of shale oil.

The Commodity Investor

Matt Badiali

Q: I’ve read some articles on shale gas. What is the big deal with this stuff? – H.B.A: Shale is the world’s most common rock, formed from mud and clay deposited at the bottoms of lakes and ocean basins. Shale looks like the slate you see in chalkboards or on roofs, (slate is actually shale that was “cooked” in the earth).

Clay and mud are tiny -– much smaller than sand. So it’s hard to tap shale deposits. (See the next question, about the Bakken Shale, for more details.)

Some shale is full of old plants and animals. These shales become the source rocks for oil and natural gas. In the past, it didn’t make sense to drill shale for either oil or gas. Shale presented technical challenges that were beyond most of the industry. However, that began to change in 1990, when oil-service giant Schlumberger began focusing its attention on the natural gas in shale.

The company estimates that shale contains 500 billion to 780 billion thousand cubic feet (MCF). We consume about 23 billion MCF per year, so that’s about 20 to 34 years worth of natural gas. Today, one MCF sells for more than $13. So the reward is in the trillions of dollars.

The Barnett Shale became the proving ground for shale technologies. Barnett is in the Fort Worth Basin of Texas, which underlies the entire region west of the city of Fort Worth. The Barnett Shale holds between 25 billion and 250 billion MCF.

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I’m not targeting companies that are just Barnett players for investment. However, I am interested in companies that learned how to drill the Barnett and are now leasing land in the many new shale regions.

Investors can take a look at companies operating in the Huron Shale in southern Ohio, the Fayetteville Shale in Arkansas, and the Ootla in Canada.

Q: Why can’t we pump all the oil out of the Bakken Shale? – D.S.

A: The Bakken Shale, the granddaddy of the shale oil fields, underlies northeastern Montana and western North Dakota. A recent government report put the amount of oil in the Bakken Shale between 200 billion and 400 billion barrels: enough to eliminate our oil imports for at least 45 years.

However, the report also says we can only recover about 3 billion to 4 billion barrels of that oil with current technology. That’s a terrible recovery rate… around 1% or 2%.

The problem with the Bakken Shale – and with many of the shale deposits around the world – is “permeability.”

Some reservoirs are like a glass of grape juice and ice cubes. You stick in a straw and suck up the juice around the ice cubes. That’s a permeable reservoir.

However, some reservoirs are like clusters of grapes. You know there’s a lot of juice in there, you just can’t get it out. You have to stick the straw in each grape, suck a little, and then move to the next one. That’s an impermeable reservoir.

Impermeability is one of the problems facing by companies working in the Bakken Shale and other “unconventional” oil fields. You need a way to put the straw through as many grapes as possible.

It took a long time for oil companies to realize that drilling straight down wasn’t the best way to do that. The solution is directional drilling. In directional drilling, the well is drilled at an angle using a computer to help guide the drill bit.

I visited a well in south Texas where the bit went down deeper than a mile, then turned west and drilled horizontally for more than a mile. I was amazed… Here was this thick steel drill casing, steered by an engineer in a truck miles away. Now nearly all the big drilling and service companies, like Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI), offer steerable drilling in three dimensions.

In 1990, only about 40 rigs, or 6% of all the rigs in the U.S., were drilling horizontally. As of last month (according to the Department of Energy), 519 rigs, or 28% of the total, were drilling horizontally.

That makes it much easier for oil companies to get more out of their shale deposits. And as this technology advances, I think more of Bakken’s “grapes” will yield oil.

Some excellent companies are drilling in Bakken, including XTO Energy (XTO). But while XTO is adding reserves, you’re going to have to pay up for the growth these days. I told readers of the S&A Oil Report about the company last July, and we’re up 41% so far.

Good investing,

Matt

Source: The Commodity Investor Q&A

Global consumption is growing almost twice as fast as for oil, it is the cleanest-burning of the fossil fuels, and it is comparatively cheap: it currently trades at about half the cost of crude oil on an energy-equivalent basis.

In an energy-hungry world, it’s therefore not surprising that there’s now a mad scramble to procure long-term supplies and bring them to market.

Let’s take a look at some of the current major developments…

Pipelines. Russia, which has the world’s biggest reserves of natural gas, is building a direct link to Germany beneath the Baltic Sea, and planning others to China and Italy. These are enormous undertakings. The 3,000km Italian link, for example, is expected to cost $15bn.

Elsewhere, the ConocoPhillips-BP pipeline to bring North Slope gas from Alaska to Canada’s oil sands industry and the lower 48 US states will be the largest private-sector construction project in North America. And the pipeline China is building from Turkmenistan in Central Asia to Shanghai will stretch for 9,000 kms.

Liquefaction. An alternative means of moving gas is to liquefy it by freezing, ship the liquids across oceans, then turn it back into gas. The technology is not new, but LNG (Liquified Natural Gas) facilities are hugely expensive. For years this limited its transportation to countries not accessible by pipeline, mainly Japan.

But high energy prices have now made LNG viable on a large scale. And there are other advantages. European nations, for example, nervous about their increasing dependence on Russian gas, are looking to alternative sources such as North Africa, using LNG. China signed a $60bn deal with Qatar last month to buy three million tons of LNG a year over 25 years from 2011.

With its volumes growing 7% a year, LNG is the fastest growing of the fossil-fuel industries. Because of the massive investments required, it is dominated by a handful of very large multinationals.

New Reserves. Oil majors are boosting efforts to find and tap hydrocarbon deposits that are primarily gas, with oil as a side-product.

The newly-discovered Sugar Loaf field under the Atlantic off Brazil, claimed to be one of the world’s biggest, is primarily a natural gas resource. The Shtokman development in the Barents Sea off Russia’s Arctic coast, and several projects off the coast of north-west Australia, focus on production of gas, not oil.

There is also increasing interest in exploiting hard-rock resources that have been neglected in the past because it’s difficult to tap their gas. On the western slopes of the US Rockies, Exxon Mobil is starting to employ an explosive fracturing technique three times more effective than conventional technology to unlock the riches of the Piceance Basin.

Coal-bed Methane. The “fire-damp” found in coal deposits – the curse of miners throughout the ages – is almost pure methane and an excellent substitute for natural gas, which is about three-quarters methane. It may be recovered from worked-out collieries or from coal deposits left unexploited because they are so gassy they are too dangerous to mine, and already accounts for a tenth of natural gas production in the US.

BG Group, the global specialist in the discovery, extraction and supply of natural gas, plans to build the world’s first plant to produce LNG from coal-bed methane piped 400km from fields in the interior of Queensland, Australia.

Liquid fuels. Although currently used as gas to fuel central heating, industrial furnaces and power stations, natural gas can be converted into liquid fuels. In Qatar, which has the world’s third largest gas reserves, they’re building plants to do just that.

Worldwide demand for natural gas has been growing at an average rate of nearly 3% a year, compared to oil’s 1.7%. China’s gas consumption is forecast to triple over the next 12 years, India’s to double. Yet between them they have less than 2% of global reserves, so they will be forced to look to imports from the Mideast, Russia and Australia.

Investing in natural gas: major role in power stations

The strongest demand growth area for natural gas is in electricity generation. Dirk Beeusaert, chief executive of Suez, the world’s biggest operator in the field, says the investment cost per kilowatt of power from gas turbines is “half that of a coal plant, and a third of that from a nuclear plant of the same capacity.”

Gas power stations can be built quickly, are flexible in operation, reduce dependence on other resources such as coal, oil and nuclear – and have particular attractions in these times of ecomania. Not only do they produce less greenhouse gases than other fossil fuel, but they can be used efficiently to generate intermittent power, to fill the gaps when turbines driven by wind and water shut down because of calms or droughts.

A couple of decades ago, gas accounted for little of the world’s electricity generation; now it fuels almost one-fifth.

Although the oil majors are giving increasing attention to finding and producing natural gas, most of the world’s resources are closed to them, or are politically high-risk. Russia seeks to use its gas supplies as a strategic weapon in its dealings with Europe and is squeezing out foreign companies. Iran is a different kind of political minefield. Qatar is happy to partner international oil firms, but is also right in the middle of the potentially explosive Middle East.

One country that is benefiting from all this is Australia, which has reserves almost as large as those of the US, production that is likely to continue expanding for the next quarter-century, and a business-friendly environment. Chevron’s Gorgon project alone, which got its go-ahead from regulators a few months ago, expects to produce more than a trillion cubic metres of gas over its 60-year life.

Q: I saw that Nigerian oil output is going to fall… Doesn’t America import oil from there? What are the ramifications? – D.C.

A: The ramifications are, we could be in trouble.

A recent story in the Financial Times covered the possibility that Nigeria’s crude oil output could fall by a third in the next seven years. The problem is, Nigeria is one of the top five foreign oil suppliers to the U.S.

Here are the latest numbers from the Energy Information Administration:

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Now let me show you that same table from a scary perspective… the change in production levels from 10 years ago, and one year ago.

As you can see, our primary oil suppliers are suffering production declines… except for Canada. The major reasons Mexico, Nigeria, and Venezuela are faltering are lack of investment and government mismanagement. The major reason Canadian production is increasing is the development of its gigantic tar-sand deposits.

So… the short answer to the Nigerian question is “yes… this is bad for the U.S., and it signals higher oil prices.” But so does the decline of Mexico’s Cantarell field and the idiotic ramblings of Hugo Chavez.

Basically, any bad news you read from these regions is just more of a buy signal for the safe, vast deposits of Canada.

Q: Did you see that a rocket hit a Japanese oil tanker in the Middle East? Will that affect U.S. oil prices? – J.S.

A: Absolutely. Attacks on oil tankers, drilling platforms, and pipelines are all too common today. That’s because they make easy targets for any group with a cause and some easily-purchased explosives. What better way to hold a country hostage than to threaten its energy infrastructure?

And now look where you’ve gotten us, J.S., we’re right back to the answer above. We’re right back to Canada.

Canada is sitting on a huge oil reserve with a “no risk” transport route to the world’s largest consumer. Caribou generally do not engage in the destruction of oil infrastructure.

Q: What oil companies will benefit most from the high oil prices? – A.L.

A: In a recent DailyWealth, I covered the benefits of investing in government-backed oil companies, like Brazil’s Petrobras. I think these are big beneficiaries of $117 per barrel of oil.

These majors have many of the benefits of investing in a “non government-backed” oil company like Chevron, except they have huge backers behind them when it comes to securing resources at less-than-competitive rates.

Brazil doesn’t entertain outside offers for its choice of offshore drilling blocks. These are some of the most promising offshore fields in the world, they’re getting more valuable by the day, and they’re reserved for Petrobras.

And let me throw this curve ball in here… natural gas producers.

While the price of natural gas has increased about 40% in the past 12 months, the price of crude oil has skyrocketed 80%.

Natural gas and crude oil can be substituted for each other in some applications, so high crude oil prices act as a magnet to draw natural gas prices higher. That’s great news for natural gas producers like EnCana, XTO Energy, Apache, Devon Energy, and Canadian gas trusts. Many of these companies are soaring right now… which tells us the market agrees with the “higher natural gas price” thesis.

Good investing,

P.S. If you can’t tell yet, I’m as bullish on Canada as any region in the world. The bull market in oil could easily send my top Canada ideas up by hundreds of percent this year. You can learn more on the region’s best investment here.