Profit From the Natural-Gas Gusher

U.S. natural-gas fields are suddenly gushing. Employing cutting-edge technologies, energy companies are extracting gas from newly discovered shale deposits buried thousands of feet beneath the earth's surface.

Natural gas is likely to play a huge role in solving the nation's energy problems -- a much bigger role than was recently thought. Gas is much cleaner than other fossil fuels and is believed to contribute less to climate change. Greater reliance on gas could also help decrease U.S. dependence on foreign oil.

Enormous fields of shale gas have been discovered in Texas, Louisiana, Oklahoma, Arkansas, and even New York and Pennsylvania. "It's a real big deal -- there's a lot of gas there," says Gary Long, a Dallas-based petroleum engineer with the U.S. Energy Information Administration. "Some people call it a transition fuel" -- that is, the fuel of choice as the economy transitions from its reliance on dirty fossil fuels (think oil and coal) to greater use of renewable energy sources.

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For just one new field in Louisiana, estimates of natural gas range from 200 trillion cubic feet to as high as 500 trillion cubic feet. How big is that? Big. Indeed, not including that field, the U.S. Geological Survey (USGS) recently estimated that the entire country had just 743 trillion cubic feet of recoverable natural gas.

At the same time, the Energy Information Administration and the USGS advise caution regarding these early estimates. "Shale represents huge potential on the supply side," says Kobi Platt, an Energy Information Administration economist. "There's definitely a lot of gas that's accessible. But only time will tell how much there is. We just don't have a lot of data yet."

Deep deposits of natural gas

To get to the gas, energy companies drill deep wells of 9,000 feet or more into hard shale deposits. They then drill horizontally along the deposits. At points along the horizontal pipelines, they pump water and chemicals into the shale, fracturing it. They then shoot sand into the fissures so that they can pump out the natural gas.

Natural gas isn't perfect. While it produces few pollutants, its use emits carbon dioxide, which is said to contribute to global warming. Gas produces about 40% less carbon dioxide than coal and about 25% less than oil, according to the USGS.

Few people aside from Texas oilman T. Boone Pickens believe we'll end up with natural-gas pumps at neighborhood service stations. Rather, advocates see it replacing coal, particularly for fueling electrical power plants.

At the very least, the new discoveries are likely to remove the need for the U.S. to import liquefied natural gas. Charles Ebinger, an analyst at the Brookings Institution, says he and other experts were predicting a few years ago that we'd soon import 40% of our natural gas. "Instead of seeing U.S. natural gas production go down, we'll be able to raise it 12% to 20% and keep it there for 15 years," he says.

A new report from ExxonMobil predicts that by 2030, the U.S. will get 34% of its energy from oil and 25% from natural gas -- with coal falling to third place. Renewable-fuel advocates see wind, solar, biofuel and, perhaps, nuclear power making up a far bigger portion of U.S. energy consumption by then.

Not surprisingly, with the U.S. now awash in new supply, the price of natural gas has plunged -- dragged down, too, by the recession. From a high of nearly $12 last summer, natural gas has fallen to about $4 per million BTUs. Gas now sells at a 20% discount to oil on an energy-equivalent basis -- a much deeper discount than usual.

How can you profit from the natural-gas discoveries? One good way is through RS Global Natural Resources A (symbol RSNRX). The fund faltered 41% over the past year through May 8, but it returned an annualized 13% over the past ten years, putting it in the top 18% of natural-resources funds, according to Morningstar. A bigger concern is that the fund charges a 4.75% sales fee.

So, this is one instance in which you may do better buying some of the fund's top picks. Ken Settles, co-manager of the fund, recommends Southwestern Energy (SWN) and XTO Energy (XTO). The two exploration-and-production companies are finding and developing gas for $1.50 to $2 per million BTUs, Settles says, compared with an industry average of $3. They also boast savvy management teams and reasonably strong balance sheets.

Another Settles pick is Schlumberger (SLB), the world's leading energy-services company. It generates a growing percentage of its revenues from providing the highly sophisticated gear and know-how to pump natural-gas deposits out of deep shale deposits.

Steven T. Goldberg (bio) is an investment adviser.