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Reversal of Fortune

United States to Become New Energy Empire

Written by Brian Hicks
Posted January 5, 2011

You know we just don't recognize the most significant moments of our lives while they're happening. Back then I thought, well, there'll be other days. I didn't realize that that was the only day.

— Archibald “Moonlight” Graham, Field of Dreams

“Watch out young fella, it’s always the second person who gets hit,” said Junior, an old, grizzled, barrel-bellied Texas wildcatter who now spent his days recounting his legendary successes and failures at the only gas station in the town of Desdemona (which also doubled as the town’s only restaurant).

“Huh?” I was bewildered.

“Rattlesnakes, son. These fields are crawling with rattlers… some of the biggest in the state. As long as your body,” he said.

He was right.

I looked on the wall inside the restaurant, and there was an old picture — looked to be from the 1970s — of Junior holding up a dead rattle snake, easily six feet long.

He continued, “Just remember, if you come across a rattler, the first guy usually startles the snake… And by the time it’s ready to strike, the lucky bastard is already out of range. But when the second poor son of a bitch comes along, the snake is ready for Freddie. Bang!”

I nodded and thanked Junior for the inside tip.

It was July 2005 in Desdemona, Texas, the southernmost tip of the Barnett Shale.

I came with a group of investors looking to buy some parcels that hadn’t been snapped up by the biggies like XTO and Devon.

Land in the Barnett was still relatively cheap, especially on the unproven outskirts of the formation. And besides, nobody really knew if the new drilling technology — horizontal, hydraulic fracking — would prove to be economical...

That was five years ago.

In that short amount of time, the energy landscape in the United States has changed on an order of magnitude.

Take a look at this chart of natural gas production in the United States:

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The energy industry thought natural gas peaked. I thought natural gas peaked… and gave a speech at a 2007 conference titled “Natural Gas: The Other Peak.”

I couldn’t have been more wrong.

Everybody underestimated the effectiveness of horizontal fracking. Gas from shale has been the difference-maker.

Take a look:

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Although this chart is from 2008 to the end of 2009, you can see that production from shale doubled during that time period.

As I’ve mention in previous Wealth Daily articles, for good or for ill, horizontal fracking is a game-changer. And despite the objections of environmentalists (many of whom are my friends), horizontal fracking is here to stay.

And it’s easy to see why by taking a look at the following chart of America’s shale gas formations:

bminus3The U.S. is home to the four largest natural gas shale formations in the entire world.

With its abundance of shale formations coupled with the success of fracking, the EIA dramatically increased America’s natural gas reserves.

According to the report, the “U.S. net proved natural gas reserves rose 11 percent, or 28.8 trillion cubic feet (tcf), in 2009 to total 284 tcf, underscoring the dramatic impact that new gas pumped from shale rock formations is having on world energy supply.”

Based on the revised reserve figures, the U.S. has an estimated 12 years' worth of natural gas, based on today's consumption rates.

But many in the patch believe this is an absurdly lowball figure. They estimate that with new drilling technologies, America’s natty gas reserves can be measured in centuries — not years.

As a result, the eyes of the energy world are looking to America.

European nations, not wanting to be dependent on Russia for its natural gas supply, are now learning from American companies how to frack shale formations...

Poland, for example, has a vast region of shale gas, and could soon threaten its ancient rival for gas dominance.

The Dragon wants our drilling know-how, too. China itself has abundant shale gas reserves. But China has another objective. Within 10 years, the U.S. will be a major natural gas exporter, shipping natural gas — along with coal — to China.

In fact the United States and China inked the Shale Gas Resource Initiative last year to reflect America’s ascent to the top of the energy pyramid...

“The United States,” the accord notes, “is a world leader in shale gas technology.”

The accord commits the U.S. to deliver this technology to China — and, by implication, requires China to open further its oil and gas industry to Western companies.

It may surprise you to know that with rising gas production from shale fields, the U.S. surpassed Russia last year to become the world’s largest supplier of natural gas. Shale now accounts for 10% of the country’s natural gas production — up from 2% in 1990.

Chesapeake’s production from its next Texas project (expected by the end of 2012) will supply — by itself — the energy equivalent of 500,000 barrels of oil a day.

With horizontal fracking of shale gas a proven success, oil is next.

Take a look at this chart:

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Notice the gap-up in production.

If this were a stock chart, a market technician would say this represents a new movement paradigm. And it’s bullish, baby.

In fact if you look at the history of this chart and its previous gap-ups in production, they almost always indicated a higher production move afterwards.

The current gap-up in production is from unconventional oil shale formations in the Bakken and the surrounding shale fields, oil equivalents.

Take a look at a chart from North Dakota’s oil production. It’s nuts:

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The number of wells drilled in North Dakota in 2011 is expected to double the amount drilled in 2010. So production should increase further.

Now, I’m not suggesting that America will ever reach its oil production peak of 10 million barrels per day in October 1970...

But I believe horizontal fracking will open up bigger shale basins in the United States — bigger than the Bakken.

And this will make early investors a fortune, just as it did for readers who took our advice and got in early in Northern Oil & Gas and Brigham Exploration, both early-stage Bakken plays in 2008.

I didn’t know it at the time, but while touring oil and gas fields in the Barnett in 2005, I was witnessing the rebirth of the American energy industry...

America’s energy renaissance is here. Embrace it.

Profitably yours,

Brian
Publisher, Wealth Daily

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