Lately, I've been on a natural gas kick.

Sure, the only thing you'll hear about today on the news is "America's Oil Crisis" (I wonder if these reporters realize the rest of the world is caught up in it too, but we'll save my ramblings for another day). Oil prices surged today to over $138 a barrel. If you're counting, that's an $18/bbl increase in two days!

Just think back a few years ago when oil cost a mere $20 per barrel.

But like I mentioned, crude wasn't the biggest thing on my mind this afternoon.

I've written before on how important Canada is to our natural gas imports. Since nearly all natural gas markets are on a regional scale, we've got two options: Mexico and Canada.

Before I get any further, please keep in mind that I'll be excluding liquefied natural gas (LNG) for now. The simple reason is that LNG is not even close to making a significant dent in our natural gas demand. The fact is that we're a long ways off from LNG. The cost alone is enough to make me shiver. A decade or more in the future? Sure, I won't dispute it's role down the long road.

When it comes to natural gas imports, however, it's all about the pipelines in Canada and Mexico. When I mention the latter, though, it's more of a formality. According to the Energy Information Administration (EIA), we received about 54 billion cubic feet of natural gas from Mexico. That comes out to less than 1.2% of our total natural gas imports (LNG comes out to roughly 17% of our imports).

Needless to say, dear reader, we're not looking to solve an energy crisis from our neighbors to the south. If we also take into account their failing oil production (specifically at the Cantarell field), it's safe to say they have enough on their minds to worry about.

That leaves us with Canada.

Of the 4.6 trillion cubic feet of natural gas imported to the U.S. last year, 82% of it was piped from Canada. Based on EIA figures, that makes up almost 17% of our annual consumption in the U.S.

Canadian production, however, hasn't been in a good spot. When Canada's National Energy Board (NEB) released their 2008 Summer Energy Outlook last week, they reported that Canadian natural gas production declined by approximately 1 billion cubic feet per day last year. The decline was attributed to lower drilling.

Not only did production drop, but Canada's gross exports of natural gas last year were at record volumes. Meanwhile, gross imports of natural gas into Canada also broke a new record last year, up over 36% compared to 2006, according to the NEB report.

I'll admit, the normal reaction whenever I mention an unconventional play (whether oil or natural gas) is ridicule, especially as a potential investment opportunity. Apparently there are some people out there who can't accept that higher energy prices are here to stay.

Over the last five weeks, I told you about two of my favorite upcoming unconventional natural gas plays in the U.S.: The Marcellus gas formation and the Haynesville shale.

Today, however, our eyes are focused on Canada.

Horn River Basin

Whenever we talk about unconventional resources, using the right technology is one of the most important factors to consider. With the success of horizontal drilling, producers have had tremendous success unlocking the natural gas from shale reserves.

The Horn River Basin, located in British Columbia, is quickly becoming a hotbed for investors. Some have speculated that up to 50 trillion cubic feet of natural gas might be contained within the Horn River basin if future discoveries are similar to the success that some of the major players have had.

Either way, it's enough to catch the everyone's attention. More than $441 million was paid out last month for oil and gas land rights in both Montney and Horn River. If we add Alberta and the red-hot Saskatchewan Bakken plays into the entire picture, then record land sale auctions a pretty regular occurrence in Canada.

The major producers in the area, however, aren't the only choice for investors.

Investing in the Horn River Basin

Let's assume the geologists over in British Columbia can turn the Horn River Basin into a commercial success. If there is one thing lacking in this story, it's a significant infrastructure. It's only profitable if you can bring your natural gas to market.

In other words, pipelines and other facilities will have to be built. The Horn River Basin won't be a massive hit overnight. You can take your chance with some big players like EOG Resources Inc. (NYSE: EOG) and Apache Corp. (NYSE: APA), but don't forget companies set to provide those producers with the means to ship their natural gas.

Try taking a look at companies like Spectra Energy (NYSE: SE), which focuses on the processing, transmission, storage and distribution of natural gas. With a processing plant located in Fort Nelson, British Columbia (just a short distance from the Horn River Basin), Spectra is in a perfect spot to take advantage of the Horn River boom.

Until next time,

Keith Kohl

P.S. Unconventional sources of oil and natural gas have been heating up in the wake of record energy prices. The fact is that producers need to go further and deeper than ever before. I know the majority of my Energy and Capital readers find it better to take this energy bull by the horns, rather than get squeezed at the pump. The $20 Trillion Report is on the verge of making their next play, maybe it's time you receive your fair share of energy prices.

"Energy stocks... The only way a human is going to make any money."

-- Matt Simmons, Peak Oil's first and most vocal proponent,
and founder of the country's last pure play energy investment banking firm.

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