New Van Eck fund FRAK targets oil and gas in unusual places.
(Updates with details and quotes from Van Eck executive.)
Van Eck Global, the New York-based money management firm known for its commodities-related investment strategies, today launched an energy-related ETF focused on companies that look for and produce “unconventional” sources of oil and gas, such as oil sands.
The Market Vectors Unconventional Oil & Gas ETF (NYSEArca: FRAK) comes with a net expense ratio of 0.54 percent, which includes an 8 basis point fee waiver in effect through May 31, 2013.
Unconventional drilling technology already had unlocked vast energy resources and is changing the energy outlook for the United States, said Shawn Reynolds, a senior analyst with Van Eck Global Hard Assets Fund, at a press conference announcing the launch.
“Ten years ago, as we all know, natural gas seemed to be in short supply in North America—we were talking about a long-term outlook of $10-$15 natural gas,” Reynolds said. “But as we know, today we are sitting here at $2.50 [per million BTUs] and that has primarily been driven by a massive supply in natural gas resources.”
Van Eck defined unconventional oil and natural gas as oil shales, tight sand, coal-bed methane and shale gas, among other sources. It said such resources may be geographically extensive or deeply embedded in underground rock formations and can be difficult to extract and maintain profitably without the use of developing technologies.
The “developing technologies” include hydraulic fracturing—often referred to as “fracking”—as well as horizontal drilling. The fund’s prospectus described fracking as the process of creating or expanding cracks in underground rock formations by pumping a high-pressure mixture of water, sand and/or other additives into them, and said horizontal drilling is a method of drilling a well to reach a reservoir that is not directly beneath the drilling site.
Gas—And Oil—Production Growing
The launch comes at a time when many analysts are saying that vast resources, particularly of gas, are on the verge of being unlocked through processes such as fracking. While environmental challenges stand in the way of the full development, analysts say that the potential supplies could alter the U.S. energy supply dramatically in coming years, and could even affect energy-related geopolitics.
Even U.S. crude supplies are proving to be more plentiful than previously thought. "It doesn’t stop with natural gas,” said Reynolds. “That is really where a lot of the excitement is—in using some of those technologies to unlock new oil plays.”
In a recent Wall Street Journal article, Pulitzer Prize-winning author Daniel Yergin noted that the U.S. now imports just under half of the oil it uses, down from more than 60 percent a decade ago. That change is due in part to more sophisticated extraction technologies that are breathing new life into mature oil fields, Yergin argued.
Indeed, according to Reynolds, in 2005, oil production in the United States was about 7.3 million barrels a day, and in 2011 averaged about 8.3 million barrels.
The increase in production, says Reynolds, is entirely driven by the unconventional story in the United States. Reynolds says that the increase in production was even more astounding considering the ban on oil drilling in the Gulf of Mexico following the BP Oil spill two years ago.