Shale gas assets have become a hot story lately, with the news that Total (NYSE: TOT) put in a bid to buy these from Chesapeake Energy (NYSE: CHK) and ExxonMobil put in a bid for XTO Energy (NYSE: XTO).  So what is shale gas and fracking – the process it depends upon for gas extraction?  More importantly, how can you make money in shale gas?

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What Is Shale Gas and Fracking?

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Shale gas is a type of unconventional gas asset with significant deposits in both the Canadian and U.S. gas markets.  Shale gas drillers produce it from horizontal, rather than vertical, wells into hard rock deposits.  Fracking is the new technique that these oil and gas drillers use to get at the hard-to-extract oil and gas.  Because of the well’s horizontal exposure, more of the well is exposed and capable of being produced.

Fracking refers to the process of horizontal hydraulic fracturing.  The “frack” is a formation that the shale drillers put into the cracks in order to help split the rock.  These are often high-pressure water fracks.  John Wright, CEO of Petrobank Energy & Resources (TSX: PBG) explains that when they drill a well,

“we drill down to the target zone; we run a steel pipe beside the hole and cement it in place, then we put perforations in that pipe in the area that we want to produce the oil or gas from, and in the case of a fracture-stimulated well we actually will go in and pump fluid under high pressure into the formation and that effectively cracks the rock…and we pump in some sand… that will hold those cracks open.  And what those cracks become are the flow-channels through which the oil and gas can reach the well bore.”

Many big oil companies, such as ExxonMobil and Total have decided that shale gas “is a good growth engine for them in the future,” says Laura Lau, energy analyst at Sentry Select.  “Longer term they believe in higher gas prices, or the ability to get more gas out of these shales in the future.”  Lau notes that with better technologies, historically, it has been easier to get more gas out of the ground and that this will help Exxon and Total’s return on investment.

The New Unconventional Oil and Gas Industry

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Traditional, conventional oil and gas were easy to drill and extract.  Typically you could drill relatively porous and permeable wells and the oil and gas hydrocarbons would easily and naturally flow into the well bores.  But Wright explains that there are “fewer and fewer places on earth where we can find conventional oil and gas.”

All that’s left for the industry to develop are these shale gas basins that are usually trapped in low-porosity, hard-to-reach rock.  The gas would remain trapped there forever or until something comes along that would stimulate the rock and release it.

Wright explains that the Bakken Formation, which contains about 5 billion barrels of oil, has been known about for the past 50-60 years, but only recently (about 3 years ago) have they developed the technology that can extract the trapped oil.

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Investing In the Shale Gas Boom

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One idea for making money in the shale gas sector is to look at directional drillers such as Phoenix Technologies and Cathedral Energy Services (TSX: CET) (whose share prices doubled within fall 2009) – and companies involved in oil and gas well services, such as CalFrac Well Services (TSX: CFW).

According to Lau, any oil and gas services companies should do well because shale gas drilling is very service-intensive.  “We wouldn’t suggest playing the rig companies, we would suggest playing the fracking companies, because the frack-intensity goes up with these shale plays.”

Mark Bentsen, CEO of Cathedral Energy, reports that of the various gas interests Cathedral has, shale gas is becoming a more prominent activity.

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Environmental and Regulatory Issues Around Fracking

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Fracking has also emerged as an environmental threat with potentially negative consequences for local drinking water, according to reports by Andrea Mandell-Campbell (BNN, Canada).  New York State has a moratorium on fracking in-state because of threats of chemical seepage, which they are working to investigate.

Lau suggests that if a well is properly completed and cemented in, there should be no issues and that it is quite safe.  But the concern shown by many states will force fracking companies to be more transparent about which chemicals they use in their fracturing fluid.

Andrew Beyers is an anti-fracking activist who argues on behalf of community concerns over profit-taking by corporations who are not resident in their state or even in their own country coming in and leaving their footprints, changing the quality of local air and topsoil.  Beyers runs and maintains Shaleshock Action Alliance at shaleshock.org, around which he gathers critique and growing backlash sentiment towards the fracking process.

Beyers explains that in addition to sand, toxic chemicals are added to the fracks which can cause harm to human reproductive systems and that this is well-documented information.  It also damages the health of surface water – Beyers cites cases that have occurred throughout the United States – Fort Worth, Pennsylvania, Wyoming and Colorado.

John Wright explains that not only is the fracking technology improving, but that there are ways to frack that are also environmentally sensible.

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Natural Gas Price Profitability

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Some have argued that fracking, which has allowed companies to extract more gas than would otherwise be available, has increased the supply of natural gas to such an extent that it has contributed to the recent bear market for natural gas (since with more supply than demand, the prices drop).

Wright agrees that fracking has changed the natural gas landscape and has also created a new disparity between the energy value of natural gas versus the energy value of oil.  Hence, Petrobank has focused on oil, where there might be higher returns.  Wright thinks demand for natural gas will pick up to meet the new supplies.

At least in the short term, he might be right.  Recently it has climbed to the mid-five-dollar range from recent lows near two dollars. But natural gas prices rally when the weather becomes unseasonably cold, even if there is a lot of gas in storage – and analysts expect us to see colder than usual weather in the middle of the month.

Natural Gas Industry Price Forecasts and Update (August 25, 2009)

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