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The Marcellus Formation

Written By Brian Hicks

Posted May 1, 2008

With all of the attention being paid lately to the skyrocketing prices at the pump, the sudden rise in the cost of natural gas has gone practically unnoticed.

But like its counterpart, oil, the price of natural gas has gone through the roof too— jumping 97% since last August.

I mean… take a look at this natural gas futures chart. It is as ugly as it gets.

Marcellus Formation Natural Gas Chart


Even so, big price jumps like these never managed to make the front pages anywhere.

Of course, I guess if the price of natural gas was posted on nearly every corner in America—much like gas is—it would have been plastered all over the place, but it’s not.

The net result, though, is the same—more money out of our pockets every month for the energy we need to consume.

So quietly now, the price of natural gas has nearly reached heights not seen since the months after Hurricane Katrina.

So what is the culprit? Well it’s not the weather this time. Remarkably, the Gulf of Mexico has been quiet for two years now.

Instead, it an extremely tight supply and demand situation, similar to what is going on with oil. We simply consume too much natural gas in comparison to what we actually bring out of the ground.

The Marcellus Shale Formation

But as we discovered recently here at home with the Bakken oil find, the massive gas reserves confirmed within the Marcellus Formation may be part of the answer to those increasingly inadequate supplies.

All that needs to be done now is to successfully develop those reserves.

That was part of what was on President Bush’s mind on Tuesday in a press conference that touched on rising energy prices. America, he suggested from the Rose Garden, should take a hard look in the mirror when it comes to them.

In fact, he said that ""If Congress is truly interested in solving the problem, they can send the right signal by saying we’re going to explore for oil and gas in the US territories, starting with the Arctic National Wildlife Refuge."

And while he didn’t exactly mention the massive natural gas formation by name his implication was crystal clear: America desperately needs to develop the resources within its own borders.

The development of the Marcellus formation, of course, is big part of that task. That’s how huge it is.

The shale formation actually covers an area of roughly 54,000 square miles, making it bigger than the state of Pennsylvania. It runs from upstate New York, across Pennsylvania into eastern Ohio and across most of West Virginia.

In fact, in terms of the scale of the development, the Marcellus gas formation would add up to 20% to the known natural gas reserves within the U.S. That dwarfs another important piece of the natural gas puzzle, the Barnett Shale.

The Marcellus formation, however, isn’t new at all. In fact, they have been drilling for natural gas in those same Appalachian Mountains for years now. The holes are everywhere.

But what is completely new to the region are the estimates of exactly how much natural gas there is within Marcellus. Gas that can now be recovered with deeper wells and better technology.

That’s because in January, two geosciences professors rocked the natural gas industry when they estimated the Marcellus Shale reservoir contains 168 trillion cubic feet of natural gas and could contain as much as 516 trillion cubic feet.

That, according to conservative estimates would yield as much 51 trillion cubic feet of natural gas.

By comparison, the entire U.S. production of natural gas is only some 30 trillion cubic feet per year. Moreover, at the top end of the range, the Marcellus formation would be twice as big as the Barnett Shale, the busiest natural gas field in the country.

The "New" Super Giant Marcellus Spurs a Land Rush

The Marcellus formation, in other words could now be classified as a "Super Giant"

That is a complete reversal of a U.S. Geological Survey from only six years ago that estimated there may only be 1.9 trillion cubic feet of product within the area.

The result has been a virtual land rush by numerous natural gas companies looking to cash in on those reserves, even though the expensive horizontal drilling needed to tap the resources has been limited so far.

Nonetheless, these companies are making big bets that the natural gas pulled out of the Marcellus will means billions of dollars to their companies and their shareholders in the long run.

So here is the bottom line on the Marcellus shale formation: it has gone from a complete has-been to a game changer in only five months. That is turning heads on Wall Street, especially with the price of natural gas headed to new highs.

In fact, the Marcellus upgrade is probably the biggest energy story that you will never read about in your favorite newspaper.

But that’s the story in natural gas, we don’t really notice it until the bill rolls in.

Next week, I’ll take a look some of people that have already hit it big in this newfound land frenzy and the companies that have been more than happy to pay them.

After all, that’s where the pay off for investors is to be found.

Your natural-gas-loving analyst,

steve sig

Steve Christ

Chief Investment Analyst

The Wealth Advisory

PS. Speaking of the big news in the Bakken oil formation, it is definitely not too late to make an energy investment in this massive field. To find out the best way to play it click here