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. Stock Analysis

    How Toyota Succeeds at Home and Abroad (TM)

    Japan's biggest car manufacturer is also one of North America's biggest, delighting shareholders with its high profit margins.
  2. Options & Futures

    How To Buy Oil Options

    Crude oil options are the most widely traded energy derivative in the New York Mercantile Exchange.
  3. Stock Analysis

    Starbucks: Profiting One Cup at a Time (SBUX)

    Starbucks is everywhere. But is it a worthwhile business? Ask the shareholders who've made it one of the world's most successful companies.
  4. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  5. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  6. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  7. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  8. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  9. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  10. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  3. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  4. Can mutual funds invest in options and futures? (RYMBX, GATEX)

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center