Annual Energy Outlook

By Eric Fox | May 01, 2009 AAA

Every year, the Department of Energy releases its annual energy outlook, a report that contains the government's best estimates of demand, supply and prices over the next two decades for oil and natural gas. The report also is a good place to review macro trends in energy and to see the impact of said trends on publicly traded companies.

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Natural Gas

The report concludes that natural gas production from unconventional resource areas will continue to increase, eventually reaching 56% of domestic supply by 2030. Although natural gas in tight sands formations is the largest source of unconventional resources, gas from shale is growing the fastest and will total 18% of all supply by 2030. This is obviously good news for companies that have locked up large acreages in these promising plays:

Barnett Shale - Devon Energy (NYSE:DVN) and EOG Resources (NYSE:EOG)

Fayetteville Shale - Southwestern Energy (NYSE:SWN) and Chesapeake Energy (NYSE:CHK)

Haynesville Shale - Goodrich Petroleum (NYSE:GDP) and Petrohawk Energy (NYSE:HK)

Marcellus Shale - Range Resources (NYSE:RRC)

The report also predicts that net imports of natural gas into the U.S. will fall from 16% of supply in 2007 to 3% in 2030 due to potential increased domestic production and exportation to Mexico. Also, a decrease in imports from Canada would contribute to the decline in net imports.

More importantly, Mexico would take a larger share of our production as its economy grows, possibly helping companies that currently export gas to Mexico. Both Sempra Energy (NYSE:SRE) and El Paso Corp. (NYSE:EP) operate pipelines into Mexico that may need to be expanded to handle future exports. These increased exports also may benefit operators with properties contiguous to the Mexican border. Petrohawk has substantial, albeit underdeveloped, assets in the Eagle Ford Shale in South Texas. (Hedge against energy prices and diversify your portfolio. Learn about these funds in ETFs Provide Easy Access To Energy Commodities.)

The report also makes some surprising predictions on oil supply in the U.S., where higher prices and increased drilling domestically will move production from 4.3 million barrels per day in 2007 to 6.8 million barrels per day by 2030. Don't get too excited about this future growth, however, as it is predicated on shale oil production in the Rocky Mountains. In addition, drilling after 2014 will take place on the Western and Eastern Continental Shelves and the Eastern Gulf of Mexico near Florida.

Much of this growth is powered by deep offshore projects that take billions of dollars and many years to develop. The report mentions several offshore projects:

Shenzi - BHP Billiton (NYSE:BHP), Repsol YPF (NYSE:REP) and Hess (NYSE:HES) are operators on this project, with estimated recoverable reserves of 350 million to 400 million barrels.

Thunder Horse - Exxon Mobil (NYSE:XOM) and BP (NYSE:BP) produce in excess of 200,000 barrels per day from this area.

Onshore, the Bakken Shale is touted as a large source of future growth. Companies with leading positions here include Continental Resources (NYSE:CLR) and Whiting Petroleum (NYSE:WLL)

Bottom Line
Although some may consider the annual energy review from the Department of Energy to be irrelevant due to the difficulty of predicting long-term trends, the publication can be used to examine macro trends in the energy sector that are investable. (To learn the measures that affect your investments and how to analyze them, read Peak Oil: Problems And Possibilities and Consumer Confidence: A Killer Statistic.)

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