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Schork Oil Outlook: Methane Hydrates—the Next Shale Gas?

In their weekly update yesterday, the EIA referenced the U.S. Department of Energy’s Office of Fossil Energy confirmation that gas hydrate occurs in high saturations within reservoir quality sands in the Gulf of Mexico. The DOE’s findings are the initial result of an expedition that the National Energy Technology Laboratory conducted in May 2009.

Analysts at The Schork Reporthave been reviewing methane hydrates as part of an overall “conventional energy” outlook and are thus intrigued by the timeliness of this mention.

Methane hydrates are natural gas formations trapped in ice in the ground, mainly in the arctic permafrost and on ocean bottoms, beneath continental shelves. Because of its dispersion in the geological strata, exploration and extraction is currently not commercially viable, but then again, ten years ago exploration and extraction of shale gas was economically untenable as well.

The DOE notes that gas hydrate is thought to exist in great abundance in nature and has the potential to be a significant new energy source to meet future energy needs. Indeed, according to the December issue of Scientific American, Russian scientists claim that 1,000 billion tons (1,000×109) of methane lie beneath the Siberian shelf alone.

Of course, the tenor of this article centered on the deleterious impact of escaping methane as the hydrate melts… because of “global warming” of course. In fact, the scientists at Scientist American tried to write off the commercial potential of hydrate, stating categorically, “… very little of it would ever be economically recoverable…”

Who knew scientists could be so insipid? Anyway, the article then goes on to cede (somewhat begrudgingly) that one potential solution to counteract the theoretical threat of geological methane releases in large quantities is to burn it commercially before the hydrate (theoretically) melts.

To wit, Japan, South Korea and China are making investment in new extraction technologies to tap into potential domestic deposits. Furthermore, both BP and ConocoPhillips are assessing the commercial feasibility of hydrates in the U.S. The article also estimates that the global supply of hydrate “… would produce more energy than all the natural gas, oil and coal deposits on earth combined…” (!)

Given that we missed out on the land boom in the western part of The Schork Report's home state, in places such as Wellsboro, PA, thanks to the (black) gold rush generated by the Marcellus Shall… we thus wonder what land values in Siberia are going for today?

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.