Is This the Next Natural Gas Hot Spot?


The development of America's shale gas reserves has been heralded as one of the biggest technological breakthroughs ever. Not only has cheap and plentiful shale gas revolutionized the oil and gas industry, it has also helped revitalize America's manufacturing sector.

And with conventional hydrocarbons becoming increasingly scarcer, the rest of the world is also looking to harness its untapped energy sources. Most recently, in what was hailed as the first successful test of its kind, Japanese researchers found a way to extract natural gas from frozen deposits hundreds of feet below the ocean's surface.

Could this discovery be the next big breakthrough after shale gas? Or will high costs prevent it from becoming economically viable?

America's success with shale
The rapidity with which America's shale oil and gas revolution has advanced is truly staggering. Just a decade ago, it looked like we were destined to become a major energy importer. But now, it increasingly appears that we could become a major exporter of energy within a decade or two.

The shale revolution deserves much of the credit for this drastic reversal of fortune. After recognizing shale's massive potential early on, companies like Chesapeake Energy and Devon Energy led the way in developing the country's vast reserves of shale oil and gas and helped usher in the current domestic energy renaissance.

For instance, Chesapeake, led by outgoing CEO Aubrey McClendon, rapidly increased its acreage positions in emerging gas plays from 2003 to 2007, in an effort to win what it called the "gas shale land grab." And Devon has been recognized as the first energy firm to use both hydraulic fracturing and horizontal drilling to extract oil and gas from shale plays.

Not only has the shale revolution brought the once whimsical prospect of attaining energy independence within reach, cheap domestic energy has transformed entire industries and given them a competitive edge in global markets.

Consider U.S. manufacturing, a sector long thought to be in secular decline. In prior decades, several American manufacturers relocated their factories to foreign countries in order to bring down costs. But lured by some of the cheapest natural gas in the world, many are now relocating their operations back to the U.S.

For instance, steelmaker Nucor , which relocated an energy-intensive facility that manufactured direct-reduced iron to Trinidad in 2004, is now bringing it back. In 2010, the company announced that it would construct a direct-reduced iron-making facility in Louisiana, seeking to capitalize on cheap natural gas, which has "completely changed the economics" of its domestic operations.

And several chemical manufacturers, whose operations are also very energy-intensive, are doing the same. Dow Chemical , for instance, plans to reopen an idled Louisiana ethylene plant this year and built a new ethylene unit along the Gulf Coast by 2017, hoping to benefit from cheap feedstock produced in major onshore shale plays, like the Marcellus and the Eagle Ford.

Swayed by the massive success of America's shale revolution, other countries are now working to tap hard to reach locations in hopes that a natural gas bounty awaits.

Japanese researchers hit pay dirt... errr ice
On Tuesday, March 12, Japan announced that it had successfully extracted natural gas from deposits of methane hydrate some 1,000 feet below the seabed in the offshore region of the Eastern Nankai Trough. Japanese officials hailed the discovery as a breakthrough that could have major implications for Japanese - and global - energy security in the decades ahead.

Using specialized equipment, a team aboard the drilling ship Chikyu began to extract gas from a deposit of methane hydrate roughly 1,000 feet below the seabed on Tuesday morning, according to the Japanese Ministry of Economy, Trade and Industry.

If the gas hydrate extraction technology can be rendered economically viable, it could be a lifesaver for Japan, a nation that continues to struggle with exorbitantly high energy import costs that have risen even further this year due to a recently weakened yen.

According to Japan Oil, Gas & Minerals, also known as JOGMEC, the Eastern Nankai Trough may hold deposits containing the equivalent of nearly 40 trillion cubic feet of methane. That would be enough to cover more than a decade of Japanese liquefied natural gas (LNG) imports, JOGMEC said.

But can it be made economical?
While frozen gas deposits could provide Japan with an energy source to call its own and a greater degree of independence from LNG imports, the cost issue remains the largest hurdle to cross. Until extracting gas from methane hydrate can be made economically viable, those vast reserves of undersea frozen gas are pretty much useless.

In its latest breakthrough, the team aboard the drilling ship used a depressurization method, a technology first utilized by Japan and Canada when they joined forces in 2008 to test production from frozen gas in northern Canada's permafrost. According to JOGMEC, Japan aims to make the technology commercial by 2018.

Final thoughts
There are some obvious similarities between Japan's recent discovery and the beginning of the shale revolution in that researchers have long known that gas hydrates under the ocean existed, just as they knew for decades that some shale formations held massive quantities of oil and gas. So, in that sense, the fact that we now know it's possible to extract gas from these frozen deposits is a major step forward.

However, the future of gas hydrate extraction technology will depend crucially on bringing costs down so as to make it economical. If and how fast that occurs will largely be determined by the results of current tests, such as those being conducted by Japan, as well as projects being carried out by the U.S. Department of Energy as part of its broad investigation into the potential of gas hydrates as a future energy supply.

While most commentators have hailed Japan's breakthrough as a promising development, few expect gas hydrate extraction technology to gain commercial popularity within the next few years. But then again, very few saw the shale revolution coming, either, so who knows what the future will hold.

One of the companies that did see the shale revolution coming was Chesapeake Energy. The company's foresight allowed it to scoop up massive acreage positions in budding shale oil and gas plays that are now in high demand. Though the company has had to part with many of these properties in its efforts to raise much-needed cash, few would question the superb quality of Chesapeake's remaining oil and gas assets. The important question is whether Chesapeake's current share price reflects the true value of its assets. To answer that question and to learn more about Chesapeake and its enormous potential, you're invited to check out The Motley Fool's brand-new premium report on the company. Simply click here now to access your copy, and as an added bonus, you'll receive a full year of key updates and expert guidance as news continues to develop.

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Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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