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Chesapeake Energy Corporation (CHK), Devon Energy Corp (DVN), The Dow Chemical Company (DOW): Is This the Next Natural Gas Hot Spot?

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The development of America’s shale gas reserves has been heralded as one of the biggest technological breakthroughs ever. Not only has cheap and plentiful shale gas revolutionized the oil and gas industry, it has also helped revitalize America’s manufacturing sector.

And with conventional hydrocarbons becoming increasingly scarcer, the rest of the world is also looking to harness its untapped energy sources. Most recently, in what was hailed as the first successful test of its kind, Japanese researchers found a way to extract natural gas from frozen deposits hundreds of feet below the ocean’s surface.

Could this discovery be the next big breakthrough after shale gas? Or will high costs prevent it from becoming economically viable?

Chesapeake Energy (CHK)

America’s success with shale
The rapidity with which America’s shale oil and gas revolution has advanced is truly staggering. Just a decade ago, it looked like we were destined to become a major energy importer. But now, it increasingly appears that we could become a major exporter of energy within a decade or two.

The shale revolution deserves much of the credit for this drastic reversal of fortune. After recognizing shale’s massive potential early on, companies like Chesapeake Energy Corporation (NYSE:CHK) and Devon Energy Corp (NYSE:DVN) led the way in developing the country’s vast reserves of shale oil and gas and helped usher in the current domestic energy renaissance.

For instance, Chesapeake, led by outgoing CEO Aubrey McClendon, rapidly increased its acreage positions in emerging gas plays from 2003 to 2007, in an effort to win what it called the “gas shale land grab.” And Devon has been recognized as the first energy firm to use both hydraulic fracturing and horizontal drilling to extract oil and gas from shale plays.

Not only has the shale revolution brought the once whimsical prospect of attaining energy independence within reach, cheap domestic energy has transformed entire industries and given them a competitive edge in global markets.

Consider U.S. manufacturing, a sector long thought to be in secular decline. In prior decades, several American manufacturers relocated their factories to foreign countries in order to bring down costs. But lured by some of the cheapest natural gas in the world, many are now relocating their operations back to the U.S.

For instance, steelmaker Nucor Corporation (NYSE:NUE), which relocated an energy-intensive facility that manufactured direct-reduced iron to Trinidad in 2004, is now bringing it back. In 2010, the company announced that it would construct a direct-reduced iron-making facility in Louisiana, seeking to capitalize on cheap natural gas, which has “completely changed the economics” of its domestic operations.

And several chemical manufacturers, whose operations are also very energy-intensive, are doing the same. The Dow Chemical Company (NYSE:DOW), for instance, plans to reopen an idled Louisiana ethylene plant this year and built a new ethylene unit along the Gulf Coast by 2017, hoping to benefit from cheap feedstock produced in major onshore shale plays, like the Marcellus and the Eagle Ford.

Swayed by the massive success of America’s shale revolution, other countries are now working to tap hard to reach locations in hopes that a natural gas bounty awaits.

Japanese researchers hit pay dirt… errr ice
On Tuesday, March 12, Japan announced that it had successfully extracted natural gas from deposits of methane hydrate some 1,000 feet below the seabed in the offshore region of the Eastern Nankai Trough. Japanese officials hailed the discovery as a breakthrough that could have major implications for Japanese – and global – energy security in the decades ahead.

Using specialized equipment, a team aboard the drilling ship Chikyu began to extract gas from a deposit of methane hydrate roughly 1,000 feet below the seabed on Tuesday morning, according to the Japanese Ministry of Economy, Trade and Industry.

If the gas hydrate extraction technology can be rendered economically viable, it could be a lifesaver for Japan, a nation that continues to struggle with exorbitantly high energy import costs that have risen even further this year due to a recently weakened yen.

According to Japan Oil, Gas & Minerals, also known as JOGMEC, the Eastern Nankai Trough may hold deposits containing the equivalent of nearly 40 trillion cubic feet of methane. That would be enough to cover more than a decade of Japanese liquefied natural gas (LNG) imports, JOGMEC said.

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