“U.S. Oil Reserves Just Doubled … The Future of Fracking”

By Travis Johnson, Stock Gumshoe, December 22, 2010

This is the latest teaser ad from Brian Hicks for his $20 Trillion Report, which teases us about a new idea in fracking technology that will release more oil and gas with lower environmental costs … all you have to do to learn about his favorite small cap oil stock is to subscribe to his report for $99 … or, if you prefer, just read on and I’ll dig through the clues and tell you who this little company mus be.

This is one of those irritating video ads, one that doesn’t even spit back a lovely transcript when you try to click out of it as some do — so my quoting will be limited, but I’ll share the gist of the tease.

Hicks says this is …

“Used at 236 drill sites and counting…

“One company holds the key to 1.525 trillion barrels of oil and 900% profits for early investors!”

The technology is reportedly “quickly taking over drilling sites all over the US and Canada.”

And they tell us that some of the biggest drillers in the world use this company’s technology, they give us a list, most of whom I’ve heard of:

“Apache
Corridor Resources
Devon
Caltex
Husky Energy
Murphy Oil
Nexen
Paramount Resources
Trilogy”

We’re also told that this particular stock just went public in August, and it’s already up 67%. They’re already capturing market share and he says they’re not “pie in the sky”

We get some numbers, too — and unlike so many small cap teases, they’re actually profitable. They had revenue of $26 million in the last quarter ($55.7 million , versus $9.6 million a year ago. Market cap of $247 million.

As you can imagine, Hicks is convinced that the company is undervalued and unknown (why else would you pay him to learn about them), and has generated zero Wall Street interest.

Hicks has been around for quite a while and teased many stocks for us — he takes credit for being an early analyst to recommend Northern Oil & Gas (NOG), which had a huge run with the growth of the Bakken (I don’t know if he was first, but I can confirm that he was teasing it in ads almost three years ago when it was in the single digits, it’s closing in on $30 now). He compares the two in terms of valuation, which is obviously a bit off because NOG is an oil company and this is a drilling/service company, but apparently this teaser stock trades for far lower PE and Price/Sales numbers than NOG.

There’s even a quote from the CEO, which I can only assume was inserted to make your friendly neighborhood Stock Gumshoe’s sleuthifying a bit easier — here’s what he reportedly said about the last quarter:

“I am very pleased with these results, which demonstrate the increasing adoption of our technology…”

And

“we … more than doubled EBITDA to $5.3 million from $2.4 million in the third quarter of 2009”

So who is this little company? First a couple more details:

He tells us what the technology is — he calls it “Petro-frack Technology” and says that it “uses petroleum to produce more petroleum.”

This is a new technology that apparently enables the fracking “stuff” to be recovered much more fully than older technologies, and which is supposedly much friendlier to the environment than hydraulic fracturing. He includes the video, now gone viral, of the man whose water supply became flammable because of, I presume, the fracking going on in the Marcellus Shale (I haven’t researched the video details, but I’ve seen it a number of times). Having the water flowing into your sink catch on fire is an image that sticks with you, for sure.

So the argument is that although hydro fracking has given us a dramatic increase in natural gas reserves and helped to drive the price down over the last couple years, it is also facing some environmental pushback and it uses a lot of water and folks everywhere are now asking about what kind of chemicals are in the fracking fluid being used to release the natural gas trapped a half mile beneath their towns. And this new petro-fracking technology is, apparently, better because the stuff that’s injected into the hole to fracture the shale formation and release the gas, is also recovered when the gas is extracted. Now, the hydro-fracking complaints I’ve seen are mostly about shale gas, whereas this ad teases shale oil (like what’s being produced in the Bakken), but the technology is similar — and with prices so low, no one is writing a winning teaser about doubling gas reserves. Doubling oil reserves, however, is still sexy enough to get the subscription dollars flowing — and they do go into the gas part of the fracking business in the meat of the teaser video, once they’ve got our attention.

Petro frack technology apparently covers a much larger area underground as well, which helps — and we’re told that the best part is that it holds open the fractured area for longer to drill more efficiently, and uses a petroleum-based liquid that mixes with the gas or oil and is recovered.

So finally can we get at the name? Who is this company that’s at the center of a “new oil profit storm” and which he thinks will bring us 300% gains in the short term, and up to 900% in the long term?

Seven bucks a share, 11 major clients … Toss all that info into the mighty, mighty Thinkolator, along with a couple tankers full of fracking fluid to dislodge the frozen synapses, and we learn that this must be:

GasFrac Energy Services (GFS in Canada, GSFVF on the pink sheets)

This is an oil service company that has indeed invented and produced the equipment for “fracking” that uses a petroleum product as a base instead of water — they add chemicals to Liquefied Propane Gas (LPG) and inject that into the well, which apparently covers a larger area, means no water is needed, does less geological damage, and has smaller environmental impact because the LPG is naturally present in these formations anyway, and mixes with the oil, gas or natural gas liquids and is extracted when they’re pumped out of the well.

I had never heard of the company before, but from their investor relations presentations it seems like a no brainer (that being, of course, the point of an investor relations presentation). The shares aren’t at $7 anymore, thanks in part, I’m sure, to Mr. Hicks — but they’re not that far away, just under $9 at the moment — and the market cap has climbed a bit due both to price improvement and another big equity financing at the end of November (they raised almost $100 million more for their capital program at $8.45/share), it’s now a bit over $400 million. The company went public on the Canadian Venture exchange at $5 in August, after which it remained pretty ignored until their news flow and revenue growth started to get attention back in October. They also had a private placement this summer in part to fund their capital investment program, which is bringing more equipment on line so they can market their services in new oil and gas fields and to more clients, it sounds like they were pretty maxed out with existing equipment even though this is an extremely new technology and small company (the company is only five years old, and they commissioned their first set of equipment just three years ago).

Things do look pretty good for GasFrac as far as I can tell, assuming that they are able to drive wide acceptance for their new technology (which may not be easy, even if it logically sounds better — you can see their last quarterly report, which does match the teaser clues precisely, right here. I have no idea what the difference in cost might be, change comes slow for many industries, and I imagine there are also lots of other folks coming up with and developing new fracking technologies to compete with hydro-fracking and with this newer petro-fracking). But that’s not to say their dramatic success is guaranteed — they are still largely reliant on the natural gas industry, and a big test with a US client for a natural gas field recently apparently went well, but with natural gas prices so low the client decided not to go forward with it for economic reasons. They’re trying to build up the business in natural gas liquids (which are in higher demand than gas) and in oil production so that the mix becomes roughly evenly divided between natural gas, natural gas liquids, and oil, but as of earlier this year they were still about half natural gas (which was an improvement over previous years).

I’ve only quickly checked out their (dated) investor presentation [pdf file]and their recent press releases to get a basic understanding, but it sounds like the keys for the company will probably be the continued level of deep and unconventional fracking demand in Canada, where they already have an established presence and some customer acceptance, and the driving of acceptance by US operators next year, which I assume will start by trying to target a couple specific fields so they can bring in equipment that doesn’t have to move around that much. They have been profitable in most of the past several quarters, but not overwhelmingly so — they’re still building up economies of scale, and have significant need to spend money on capital investment, geographic expansion, and client acquisition.

If you’re curious about the underlying technology and idea, they also have a pretty good section of their website that explains it — and yes, also matches the images and data from the teaser quite perfectly.

So … color me curious, though I have no idea how quickly their actual per-share profitability will ramp up — the business is seasonal and changing fast with the rapid growth from new equipment and a big jump from what were pretty weak numbers in 2009, and there has also been a lot of dilution this year to fund capital investment, so the per-share numbers might not look dramatic in terms of income for at least a little while, even as overall net income and EBITDA seem likely to continue growing if you believe management’s optimistic prognosis for the future. You can’t really peg a useful current PE on these shares right now, we can conclude that they’re profitable and in a capital-intensive growth phase, and not yet ready to be valued based on per-share earnings (the trailing PE would be at least 150). Your bet on GasFrac is essentially a bet that unconventional oil and gas drilling will continue to grow in the US and Canada (meaning, oil and gas prices don’t collapse), that GasFrac’s proprietary technology will continue to gain acceptance and drive higher revenue, and that management will steer this growth well over the next year or two — line that up with heavy fixed and equipment costs, and one can probably see a path to higher profit margins and meaningful per-share profitability in the future.

Does that sound likely? Sound like a technology you want to jump on, or do you think there’s a problem that I (and GasFrac and Hicks) haven’t mentioned? If you get a chance to dig into GasFrac a bit on your own, let us know what you think with a comment below.

Oh, and if you’ve ever subscribed to the $20 Trillion Report, please click here to let us know what you thought — we’ve received only two reviews on this one, and both are quite dated at this point. Thanks!

P.S. Stock Gumshoe HQ will be closing down for the holidays quite soon, and we may or may not be able to finish any more new teaser-iffic stories for you between now and the new year … in case I don’t catch you, have a wonderful Christmas if that’s your holiday of choice, and best wishes for 2011!

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42 Comments on "“U.S. Oil Reserves Just Doubled … The Future of Fracking”"

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turnipseed
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turnipseed
December 22, 2010 2:04 pm

Travis,
Canadian listing is GFS on ventures exchange – GFS.v on yahoo.

Tom Tinacci
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Tom Tinacci
December 22, 2010 2:43 pm

I may not know too much about GasFrac, and their new method of fraccing, but I do know about the pumpability of water as opposed to petro fraccing. Water is incompressable, so the pressures required to open the rockand uderground formations are much lower to get results.Unfortunatly a lot of water must be used along with chemicals. the petro process uses even more liquid and must be pumped to higher pressures since the oil is compressable.The equipment is pretty sophisticated.I'm not sure thier new mousetrap is going to do what they claim.

bjarti mohr
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bjarti mohr
December 22, 2010 3:10 pm

I´ve only got one thing to say:
Merry Christmas everybody at Stockgumshoe : regulars and all the crazy irregulars. Best of regards Bjarti – Faroe Islands ( a bounce of rocks in the midlle of the North Atlantic )

fireball
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fireball
December 22, 2010 3:12 pm

merry christmas gumshoe.

Mike
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Mike
December 22, 2010 3:44 pm
HI – I would love to see this viral video of the man starting his water on fire because my neighbor (I live is one of the thickest parts of the Marcellus Shale in Windsor, NY) who has since passed – was on the front page of the Press and Sun Bulletin about 2 years ago (he has since passed) but his name is Ray Osterhought (big philanthroper in our area) and he could light his water on fire 2 years ago and there hasn't been ANY drilling allowed here because of NYS politics.So that is BS – there has… Read more »
lester
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lester
December 22, 2010 5:01 pm

apparently gas in water is common my well{near oshawa} had to stop at 78 feet on the advice of the well driller .There were bubbles in it and a very faint smell of sulphur no fracking in the area

bwl123
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bwl123
December 22, 2010 7:30 pm

Gasfrac has successfully drilled oil wells in Canada.

Paul
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Paul
December 22, 2010 9:21 pm

Gas Frac is perking the interest of many of my peers (in the oil and gas business). It seems the most successful applications are in very sensitive rock that do not perform economically after being hydraulically fractured. So, depending on the premium to conventional frac'ing it may only have application in a fixed number of reservoirs…and I have no idea how many. The frac business if very undersupplied right now, and looks to stay that way for another 12-24 months…so the sooner they get their equipment the better off their prospects will be.

Tom Tinacci
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Tom Tinacci
December 22, 2010 9:45 pm

In answer to JimW, every piece of heavy equipment ,for mining drilling , car and vehicle brakes use various types of oil to perform thier desired intent. A reservoir is used to store large quantities of hydraulic oil. Hydraulic pistons used on all this equipment is capable of operating at very high pressures, hundreds to thousands of pounds of pressure. Since it is of an oil base there is little to no corrosion. If water was used there is the corrosion factor, the freezing factor, but it would do a more efficient job.Physics 101- water is incompressable.

John
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John
December 22, 2010 10:31 pm
I am very familiar with GasFrac's equipment and technology, and actually worked for the operating company and designed the first multistage openhole packer/ported liner frac they ever performed several years ago. Their field staff are top notch as their recruited experienced field staff from other fracturing service companies in Canada. The main driver for their activity now is the huge shortage of fracturing equipment in Canada. They are a comparable priced alternative to Oil based fracturing fluids but if the industry did turn around again with depressed oil and even lower gas prices, they would have a more difficult time… Read more »
dale
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dale
December 23, 2010 8:24 am

So even with this happening does that mean we are going to run out of oil within 50 years instead of a 100 years from now? We are going to run out maybe not in my life time but my children's. I'd agree investing in oil is a good idea for the time being. But that being the case I'd rather invest into a foreign currency or a precious metal before i invest anymore of my money into companies rushing to deplete the world of what oil we have left.

blackjack
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blackjack
December 23, 2010 9:05 am

any idea what Stansberrys talking about http://www.stansberryresearch.com/pro/1011PSIENDV
the worlds most valuable asset in a time of crisis

el dunn
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el dunn
December 23, 2010 3:38 pm

Folks, the old school idea that oil is created from dinosuar a bones and decaying vegetation is a myth. It is made veryday by nature and continuouslyforms uinder the right circumstanes. We will never run out of it, just that the easy stuff to get to, has been gotten to. Leave these old oil fields a;lone for a few years and watch them comeback. Not at their previous volum,es, but thet do replace. Ask an old fox Likw T. Boone and esa Petroleum.

blackjack
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blackjack
December 23, 2010 10:30 pm

new forms of energy are coming into the market everyday
its the big oil companies that keep the myth rolling that we need oil to make energy
they keep buying up new inventions to keep them from the market
thank god for the asian brain that is now making alternatives a reality

Myron Martin
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Myron Martin
December 23, 2010 10:34 pm

If they truly have a superior method of stimulating wells it could in deed be quite lucrative.

Have read numerous reports that up to DOUBLE the amount of fluids can be profitably extracted through fracking so there are many abandoned or low producing wells that could be reactivated. Appears they are well financed so this might be a stock worth looking at.

I subscribed to the 20 Million report years ago and it was about average for such newsletters, a few recommendations that did not work out, some that gave excellent returns and lots of so-so stuff in the middle.

michael
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michael
December 31, 2010 7:43 am

As far as I could find on Google, the gas fracking technology was developed by Chevron, so question is, does GasFrac Energy Services have an exclusive license or who else can use it and sell services employing this technology ? The answers to these questions would probably define the economic potential of the firm.

Erwin
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Erwin
January 4, 2011 8:01 pm
oil and gas prices will never be lower than they are today. will we run out, probably not, the stone age didn't end because we ran out of stones nor did the bronz age. reserves have increased every year since they were first known about and more importantly there are billions (thats with a b) of bbls that have not been developed because the technology and price is not right. this new way of fracing will be the future and soon. actually nothing compresses once it becomes liquid, of lpg once it is a liquid will not compress any further… Read more »
Christianah
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Christianah
January 8, 2011 10:57 am

One thing that I know about stock investment is that, any stocks related to what people drinks, eats, put in our automobiles and use as a source of contructing shelter is never a bad investment. Note, all aforementioned form the necessity of life. As long as we have a trading strategy involving the necessity of life you can never go wrong. For example, Coca Cola, Oil companies such as BP or Exxon, major building materials (Steel or wood) will forever remain the best choice of investment for a long haul.

Doug Nash
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Doug Nash
January 11, 2011 3:18 pm
Here's my quick assessment of Energy and Capital and Angel publishing. One of their methods involves gratuitous promotion without due diligence. The latest example is AEHI which is on the pink sheets. They promoted this stock heavily and as a result the stock rocketed to $1.40 at which point the CEO and his cohort began selling without reporting and the SEC eventually called a cease trade order and the lights went out. I'm not going to say that Gasfrac is like that, but in the case of AEHI all of the signs of BS were there to see before the… Read more »
Lisa
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Lisa
January 11, 2011 4:17 pm

Hi,
I'm trying to open a brokerage account. I'm not a US citizen and work in Kuwait. Any good and reliable brokerage you can recommend?
Thanks

iman
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iman
January 12, 2011 10:40 pm

same company I'm guessing? : http://www.oilandgas-investments.com/freereport/t

Hunter
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Hunter
January 19, 2011 7:28 pm

I work in the oil field in ND. They are not here yet but is a great technology that should do very good. I am buying in

Danish
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Danish
February 10, 2011 7:51 am
The gas in the Dimmock video is Methane from the upper surface layers. It is released independent of drilling method and have been known for a hundred years. Much of the quickly growing shalegas drilling in 2009 and 2010 has to do with securing the leased acres by producion before 5(10) years of lease. Thats why many of the frontrunners like CSK have had to make big Joint Ventures or farm out. At the moment it seems that growth will not be that quick in 2011 due to the low price on gas and less growth in new acres being… Read more »
Tim
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Tim
March 18, 2011 6:29 pm

Just checked the close price of Gas Frac and it closed at 12.30
Looks like it went up to around 14 and sold off but is building a base to go back up again. With the continued unrest in the Mid East gas a nd oil prices look poised to go even higher, This company looks to be in the right place and time.

Guest
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Guest
March 19, 2011 2:20 pm
I wasn't aware of your site in December or I would have commented earlier. The Gas Frac technology involves using something closer to liquid propane, not oil. The sales pitch in the oil patch is that the liquid will carry the proppants down hole, then vaporize at the higher bottom hole temperatures. Thus there is no water to 'water block' the oil by filling the capillaries or small pathways to the fracture they've just created. Water blockage is a concern in fracturing tight or low permeability reservoirs — virtually all shales qualify. IN 'oil wet' reservoirs this is a particular… Read more »
Gary Silby
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Gary Silby
April 1, 2011 10:17 am

hello

Gary Silby
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Gary Silby
April 1, 2011 10:25 am

Using petro for fracking is enviromentally toxic to underground water. Flotek has solved the problem with their patented complex nano-fluids or micro emulsifier algaes that feed on impurities. As departments crack down on oil companies using anything other than micro emulisifiers you will see more and more companies looking to Flotek and a few other companies dealing in the area of fracking emulsifiers.

Tom
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Tom
April 1, 2011 2:59 pm

Bought gas frac @7.45 and love it. The whole idea sounds great.

Gravity Switch
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December 22, 2010 2:44 pm

Man oh man, when will I ever reach the state of nirvana that prevents typos? Sorry, and thank you — will fix above.

Gravity Switch
Admin
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December 22, 2010 4:01 pm
Mike, I think this particular video is an excerpt from the fracking-critical "Gasland" documentary from HBO. I think there was some controversy about whether the gas was naturally occurring or not, one version of the video is linked on YouTube here: http://www.youtube.com/watch?v=9RWmi25YP4I , but there are several similar ones out there. And my apologies, I probably made a mistake in calling him a "NY Man", I suspect it was actually in PA, will clarify. There has been plenty of hydraulic fracturing in NY over the years, though not specifically in the Marcellus, and it's not currently allowed in the Marcellus… Read more »
Jim W.
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Jim W.
December 22, 2010 8:40 pm

I am a novice concerning the oil and gas industry but I do not believe oil is compressible to any reasonable degree.

David M
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David M
December 29, 2010 11:04 am
The bulk modulus of LPG and water are actually quite close 1.36 GPa versus 2.2 GPa. However it is really irrelevant since both mixtures are foamed using entrained nitrogen which is is highly compressible. The keys here are the LPG mixture has a lower viscosity meaning it more easily flows into the formation (hopefully carrying the prop material with it) and lower density which means you do not need to unload the well. Finally, relative to the formation the LPG is a benign. Water and oil will always damage the permeability of the formation. Did a lot of work in… Read more »
rrgy2k
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rrgy2k
January 23, 2011 2:49 pm
Most liquids are almost incompressible, varying by only tiny amounts, including water, oil, and LPG (Liquified Petroleum Gas). The same pressure would be required in every case to have the same effect on rock fissures whether using gas or liquids (one of the properties of static (not flowing) fluids is that they have the same pressure everywhere). As a fracking fluid, LPG has important advantages over water in that it's like the gas already in the well, and is easily recaptured and used instead of generating the hundreds of thousands of gallons of contaminated water they need to separate from… Read more »
ifixa320s
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ifixa320s
December 23, 2010 12:40 pm

he's talking about farm land

Tom Tinacci
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Tom Tinacci
December 23, 2010 4:03 pm

You have companies like Chesapeak ,and others to thank for that.

Jim W.
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Jim W.
December 24, 2010 1:16 am

We have plenty of oil. More is being discovered all the time. Much of it is too costly to recover with the present price of oil but as the price of oil goes up it becomes available.Oil is also valuable as a raw material in the manufacture of plastics and solvents and in the far future (100 or 200 years from now) I think it will be reserved just for this purpose.

Jim W.
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Jim W.
December 23, 2010 10:12 pm

I understand that water cannot be compressed, Tom. What I said was hydraulic oil cannot be compressed either.

Jim W.
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Jim W.
December 23, 2010 10:27 pm

Oil is composed of chains of carbon with hydrogen attached called hydrocarbons. It only comes from organic material that has broken down. We can eventually run out of it but perhaps not before we have seriously harmed our atmosphere.

wgmeisheid
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wgmeisheid
December 27, 2010 3:53 pm

Try reading this: http://www.wnd.com/news/article.asp?ARTICLE_ID=38

It is not as clear cut as you would like and could be an inorganic, natural process occuring deep in the earth.

Dlst
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Dlst
January 7, 2011 9:20 pm

Fascinating–thanks for the ref. It's incorrect to refer to the process as "inorganic" if the starting material is methane, an organic molecule. "Organic" usually means "carbon-based substances associated with living systems" but it doesn't necessarily mean *created* by living systems. Methane is methane, regardless of the source, and ditto the larger hydrocarbons that are (possibly) formed from it. Cheers…

Dlst
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Dlst
January 7, 2011 9:27 pm

>>oil and gas prices will never be lower than they are today.<<

They will be if there's a double dip in our future. 😉

rayray
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rayray
January 18, 2011 3:10 pm

Hey David, right on with the NOWSCO realtionship. I have sat in on a presentation regarding this technolgy, they don't use nitrogen to foam, it is a cross linked gel. The nitrogen creates a blanket and is used for pressure testing of system.

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