A round of applause greeted the announcement last week that Exxon Mobil (NYSE:XOM) has decided to back a pipeline being built by TransCanada (NYSE:TRP) to bring natural gas from Alaska to the lower 48 states. But do we really need that gas given the plethora of shale plays all over the continental U.S.? (For a primer on the oil industry, refer to our Oil and Gas Industry Primer)

IN PICTURES: Eight Ways To Survive A Market Downturn

It's a given in the exploration and production industry that Alaska holds large reserves of natural gas. The industry has never developed these reserves on a large scale because there is not enough demand locally for the production. This gives rise to the term "stranded gas," or gas that is economical to develop, but lacks the infrastructure to do so.

1,700-mile Pipeline
The solution is to construct a pipeline that goes from Alaska across Canada and down to a connecting hub somewhere in the northwest of America. There are two competing pipeline proposals.

First, the TransCanada/ Exxon Mobil pipeline which will run 1,700 miles and cost $30 billion, and second, the Denali project, which is supported by Conoco Phillips (NYSE:COP) and Bp Inc. (NYSE:BP). The Denali pipeline may run as long as 3,500 miles from the North Slope of Alaska to Alberta, and possibly even down to Chicago.

Do We Need it?
What has been lost in all this jockeying for position by the industry giants is the abundance of natural gas reserves located in shale plays in the lower continental United States. The Barnett Shale in the Fort Worth Basin of Texas produced 1.396 Tcf of natural gas in 2008. The Fayetteville Shale in Arkansas is another large source of production in the lower 48 states.

The Marcellus Shale and Haynesville Shale are two emerging shale plays that are still being delineated by the industry, with reported reserves that are staggering. The Department of Energy estimates the recoverable reserves of the Marcellus Shale at 262 Tcf and the Haynesville Shale at 251 Tcf. Not only do these shale plays have huge reserves, but they are economic at current natural gas prices as well.

The Bakken Shale is another shale play that produces oil rather than natural gas. The Bakken Shale has an estimated 3.0-4.3 billion barrels of oil that are recoverable. (Find out how to stay on top of data reports that could cause volatility in these markets. Read Become An Oil And Gas Futures Detective.)

Here's a better idea for the North Slope gas. The industry should build a pipeline right next to the Trans Alaska Pipeline System (TAPS), which runs to Valdez and carries oil from the North Slope. Then, build a Liquefied Natural Gas (LNG) facility and ship the gas to Europe, which is desperate to reduce dependence on Russian sources of energy.

The Bottom Line
The hugely expensive pipeline that is being contemplated by the Oil and Gas industry to bring North Slope gas to the Lower 48 states may be unnecessary as the development of shale plays have the potential to supply our nations natural gas needs for many years. But perhaps there is a market for such a pipeline in another form. (For a related reading, take a look at A Guide To Investing In Oil Markets.)

Related Articles
  1. Investing Basics

    Understanding the Spot Market

    A spot market is a market where a commodity or security is bought or sold and then delivered immediately.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Inverse Transaction

    A transaction that can cancel out a forward contract that has ...
  4. Best To Deliver

    The security that is delivered by the short position holder in ...
  5. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  6. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!