When it comes to energy, natural gas is posited as the greatest thing since ... well, natural gas. For starters, it's billed as being cleaner than coal and oil and safer than nuclear energy. What's more, it's cheap right now because of its abundant supply. And considering the U.S. is loaded with the product, it's seen as vital in making the country more energy independent.

But natural gas is like the George Harrison of commodities--a quiet and often overlooked, yet vital, player overshadowed by stronger personalities. As the prices of many commodities have soared and grabbed headlines, natural gas prices have languished, and there aren't many people who can quote you the latest price per million British thermal units of the stuff.

The profile of natural gas is changing, however, in part because of the Marcellus Shale, a massive formation of dense black shale about one mile deep in the Appalachian belt of West Virginia, Pennsylvania and New York. Some estimates put the Marcellus gas reserves at almost 500 trillion cubic feet, an amount topped only by the South Pars gas field in Qatar and Iran. Not all of that is recoverable, but it's expected that enough will be tapped to create a bonanza.

In a report last year to the American Petroleum Institute, Timothy Considine, an energy economics professor at the University of Wyoming, said the forecast for Marcellus drilling and production in 2020 (18 billion cubic feet per day) could generate almost $25 billion in value-added economic activity and more than 280,000 jobs.

The hubbub surrounding the Marcellus' potential has given investors a reason to take a closer look at the commodity. "Natural gas has gone from being a sunset industry to a sunrise industry," says Tim Guinness, the manager of the Guinness Atkinson Global Energy Fund. "It's gone from looking to peter out to having a huge new lease on life, and it will be profitable for the next 30 to 50 years. Companies that are reasonably positioned in new shale acreage will do pretty nicely."

At the same time, the Marcellus has created a bull market for lawyers, regulators and shareholder activists because of the concerns about potential environmental impacts caused by hydraulic fracturing, the chief drilling method used to extract the region's vast natural gas reserves. Hydraulic fracturing, also known as fracking (or fraccing), injects huge amounts of water, chemicals and sand into subterranean rock formations to extract oil or natural gas.

The high pressure fluid of water and chemicals fractures the rocks, and then sand and other materials are pumped into the fractures to keep them open after the pressure is released to enable trapped hydrocarbons to flow out. The fracturing fluids are diverted into storage tanks to be recycled or disposed of, and wells capture the oil or natural gas.

The chemicals used in high-pressure drilling fluids are a proprietary mix that companies guard as trade secrets. They are used to dissolve minerals, prevent corrosive bacterial buildup and maintain fluid viscosity, among other things. These chemicals can vary depending on the drilling area, and many are toxic. Fears of drinking water contamination have led to numerous regulatory actions and fines against drillers. And in December, New York state put a moratorium on the fracking of horizontally drilled wells (but not vertically drilled ones) until at least July 1, while it finishes an environmental impact review of the process.

Shareholder activists say investors should pay attention to the environmental issues in the Marcellus. "There are environmental hazards involved in every step of the process, and these hazards can result in substantial business risks that could potentially harm shareholder value," says Larisa Ruoff, the director of shareholder advocacy at Green Century Capital Management in Boston, which operates two environmentally responsible mutual funds.

Liquid Market
Natural gas is a multifaceted industry involving onshore and offshore drillers, pipelines and liquid natural gas (LNG), along with ancillary businesses. Most U.S. production goes toward domestic consumption, and increased drilling--aided by hydraulic fracturing, which has opened up previously hard-to-tap fields and extended the life of older wells--has flooded the market. According to the U.S. Energy Information Administration, American natural gas reserves are at their highest level in 40 years.

Consequently, natural gas prices quoted on the New York Mercantile Exchange hovered in the $3 to $5 range last year, or way below the nearly $16 price in late 2005 after hurricanes Katrina and Rita rocked the Gulf of Mexico and caused supply-and-demand imbalances in the opposite direction.

In early May, when oil traded at roughly $114 per barrel and natural gas was priced at about $4.70 per million BTU, the price ratio of oil to gas was about 24 to 1, or two to three times greater than normal.

In other words, natural gas is dirt cheap vis-à-vis oil. And with more gas coming from the Marcellus Shale, as well as from other shale developments in Texas, Arkansas and Louisiana, along with other unconventional gas plays throughout North America, it would seem prices will get cheaper and the market will remain depressed.

Not so, say some observers. "Everyone on the planet is bearish on natural gas, so it's the perfect time to be buying," says Shawn Hackett of Hackett Financial Advisors, a Boynton Beach, Fla.-based money management firm focused on commodities. His rationale: Booming production will enable the U.S. to become an exporter of natural gas and tap into the LNG markets of Europe and Japan, where he says natural gas is consistently priced in the $10 to $12 range.

Most U.S. natural gas is shipped domestically in a raw, gaseous state through pipelines. The product is composed primarily of methane, but can also include ethane, propane, butane and pentane. The gas can be converted into a liquid through cooling, to about -260 degrees Fahrenheit. This reduces it to 1/600 the volume of gaseous gas, which makes it easier to ship abroad.

The U.S. is beefing up its LNG exporting capacity with three shipping facilities approved and under construction in Louisiana, Mississippi and Georgia. Twelve others have been approved around the country but not yet started. Hackett believes selling U.S. gas into foreign markets and exposing it to global pricing will create a permanent structural shift in the market. "We'll never see prices below $4 again once the global market takes root," he says.

One of the companies Hackett likes is Cheniere Energy Inc., a company that's developing LNG export facilities along the Gulf Coast. Appropriately, its ticker symbol is LNG. Among his other top natural gas picks is Heckman Corp., a diversified water company that treats fracking water used in shale-drilling operations.

Among drillers, one of Hackett's top picks is Chesapeake Energy Corp., which he considers a blue chip company in the space. He also likes Galleon Energy, a smaller, under-the-radar oil and gas driller in Western Canada. "It's highly leveraged to rising gas prices, and if gas went to $6, $8 or $10, they'd be hugely profitable."

Tim Atkinson at the Guinness Atkinson Global Energy Fund says aside from drillers with significant natural gas assets such as Chesapeake, Devon Energy Corp., Apache Corp. and Noble Energy Inc., another way to play the gas patch is through companies with a lot of pressure pumping assets, such as Halliburton Co. and Patterson-UTI Energy Inc. "Pressure pumping is a big beneficiary of shale gas development," Atkinson says.

Natural gas is touted as a cleaner and--at least for now--cost-effective alternative to cheap but dirty-burning coal, while concerns over nuclear safety in the wake of the recent disaster in Japan have boosted the attractiveness of natural gas as an energy source. Texas billionaire oilman T. Boone Pickens is pushing a plan to convert 8 million U.S. trucks from diesel to compressed natural gas as a way to help cut our dependence on foreign oil.

The use of natural gas as an energy source is likely to grow. A Massachusetts Institute of Technology study released last year projected that the commodity would boost its share of the nation's energy market to 40% by 2050, up from the current 24%.

A Shale Tale
The Marcellus runs under most of West Virginia, roughly 60% of Pennsylvania and a large chunk of New York state. It also laps into eastern Ohio, western Maryland and the extreme western edge of Virginia. Named after a distinctive rock outcropping at Marcellus, N.Y., near Syracuse, the total area is roughly 95,000 square miles. By contrast, the country's largest natural gas field in terms of production, the Barnett field in the Dallas-Fort Worth area, is only about 5,000 square miles.

Marcellus drilling started to take off in the middle of the last decade. For now, activity is centered in Pennsylvania, the birthplace of the modern petroleum industry where Edwin Drake drilled the first commercial oil well in Titusville in 1859. One reason for Pennsylvania's pre-eminence is that the state's shale has greater amounts of organic matter that--through the slow process of geologic alchemy--morphed into natural gas. Another reason is that Pennsylvania remains the lone major gas-producing state to not hit drillers with a severance, or extraction, tax. Supporters of the tax say it's a logical way to help plug a gap in the state's yawning budget deficit.

But a wider debate centers around fracking's potential impact on water quality. After gas migrated from a Cabot Oil & Gas well in Dimock Township, Pa., in April 2010, the state made the company pay a $240,000 fine and install water treatment systems in 14 homes where water contamination occurred, and the state barred the company from drilling new wells in the township for a year.

Last June, after a blowout of an EOG Resource Inc. well that reportedly spewed gas and wastewater for 16 hours, Pennsylvania halted the company's operations in the state for 40 days and levied fines of $353,400. And in August, the state fined Atlas Resources more than $97,000 after fracking fluids overflowed a wastewater pit and contaminated a nearby watershed.

More recently, a blowout at a Chesapeake well in northeast Pennsylvania this past April caused thousands of gallons of chemical-laced fracking fluid to spew from the site for about a day. In response, the company voluntarily supsended all well completion operations in the state while it investigated the incident.

Chesapeake's drilling operations have racked up so many citations in the Marcellus that Harrington Investments, a Napa, Calif., asset management firm focused on socially responsible investing, in March divested all of its 56,025 shares of Chesapeake stock, valued at the time at about $1.9 million. "One of our screens is if a company continues to violate EPA standards, we have to divest the company," says Dale Wannen, a portfolio manager at Harrington.

Wannen says Harrington is searching for other natural gas companies to invest in. "The whole hydraulic fracking issue is a big concern of ours," he says. "We're still looking, but we haven't found a company yet we'd invest in."

Larisa Ruoff from Green Century Capital Management says her company started tracking fracking in 2009. It filed its first shareholder resolutions the following year and enlisted the help of the Investor Environmental Health Network (IEHN), a partnership of investment managers concerned about the financial and public health risks associated with corporate toxic chemicals policies.

The shareholder campaign seeks better disclosure about the business, regulatory and environmental risks of natural gas hydraulic fracturing by seeking adoption of best management practices in the areas of recycling and reusing waste waters, reducing the volumes and toxicity of chemicals, disclosing the chemicals used in fracking operations and ensuring well integrity.

The IEHN coalition filed 12 fracking-related shareholder resolutions last year, and all of those that went for a vote got enough votes to qualify to be refiled this year.

"On average, the proposals received about 30% of the vote, which is substantial for a first-year environmental proposal," Ruoff says. "It took many years for issues to get that many votes, including global warming. That shows how important the issue is to the companies and their shareholders." She notes that 2011 will be another active year for shareholder resolutions.

For its part, the gas industry says it's trying to be environmentally responsible. It's also quick to point out what it perceives as misconceptions about fracking. For starters, fracking in the Marcellus is done a mile beneath the surface, which the industry says is far too deep to affect aquifers that typically are no more than 300 feet deep. And industry groups say numerous independent studies conducted by the Environmental Protection Agency and the Ground Water Protection Council have concluded that fracking doesn't contaminate groundwater.

"You don't see a vertical migration of fractures and their contents up a mile to the subsurface," says Kathryn Klaber, executive director of the Marcellus Shale Coalition, a Canonsburg, Pa.-based trade group for the drilling, pipeline and service companies working the Marcellus region.

But accidents happen in the drilling process at the surface level. Klaber says her group, as well as government regulators, are focusing most of their attention on minimizing surface spills. She also notes that increased disclosure requirements about chemicals used in fracking have led to improvement in that area. "When you get pressure and scrutiny, you get innovation, and that's resulted in fewer--and more innocuous--compounds to do the job," she says.

Fracking critics say that's a step in the right direction, but still more needs to be done. "None of them do full disclosure on the chemicals used in fracking," says Michael Passoff, a senior strategist at As You Sow, a San Francisco-based shareholder advocacy group that's a leading player in the IEHN coalition. "In many ways, that's the bottom line for the whole issue."

Keep It Clean
Can fracking be environmentally friendly? And how is that defined? After all, this is about extracting a commodity from the earth, which is inherently dirty work.

Fracking isn't a newbie technology. It was first used in 1947, and it's estimated that 90% of the wells currently operating in the U.S. have been fracked. According to the National Petroleum Council, 60% to 80% of new wells might have to be fracked to remain viable. But environmental concerns about fracking are legitimate, and reveal the awkward trade-off that is being made-possible environmental degradation-in pursuit of a so-called clean energy source.

As for greenhouse gas emissions, natural gas releases less carbon dioxide, nitrogen oxides, sulfur dioxide, particulates and mercury than oil or coal. But its high methane content raises concerns because methane traps heat more than 20 times more effectively than carbon dioxide. Still, a study conducted by the EPA and the Gas Research Institute (now the Gas Technology Institute) in 1997 concluded that the reduced greenhouse emissions from natural gas use outweigh the impact from increased methane emissions.

In Pennsylvania, the fracking issue has pitted farmers, landowners and towns happy to lease their land to drillers against environmentalists and others, including the city of Philadelphia, which is far removed from the Marcellus but fears contamination of the Delaware River watershed that supplies drinking water to millions of people. The city has urged a ban on fracking in the upper Delaware River basin until environmental studies are finished.

And while the Obama administration has prodded the gas industry to provide more disclosure about its fracking chemicals, it has indicated its support for Marcellus drilling as a way to boost domestic energy production. And for investors, a growing natural gas industry could prove to be a gusher for their portfolios.

Shareholder activists say they don't want to ruin the party; they're just trying to ensure that it doesn't get out of hand. "Right now, we're not asking companies to stop fracking," Ruoff says. "We want to make sure it's done in a way that minimizes both risks to drinking water and surrounding communities while protecting the companies' bottom lines."