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Low prices cause shifts in Marcellus workCentral Pennsylvania companies say they're adapting

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Local firms involved in the Marcellus Shale are keeping a close eye on reports of widespread production cutbacks among drillers, the reaction to a glut that has sent natural gas prices briskly downward.

They don't think they'll get less work as a result, they said. However, the location may change.

"Our workload has been shifting west," said Bob Tellish, director of oil and gas for Herbert Rowland & Grubic Inc., an engineering firm based in Swatara Township.

That's because the chemical-rich "wet gas" in southwest Pennsylvania, northern West Virginia and Ohio fetches a premium compared with the "dry gas" of the Northern Tier, which is used solely for fuel. Drillers aren't just cutting back, they're shifting rigs to the more profitable wet gas fields, Tellish said.

About 20 to 30 percent of HRG's clients have ramped up in wet gas regions in the past six months, Tellish estimated.

Nationwide, record high natural gas supplies and a warm winter have led to the lowest natural gas prices in a decade. Prices ended last week at $2.60 per 1,000 cubic feet, down from above $4.50 in January 2011.

U.S. production grew 7.4 percent in 2011, the largest one-year increase in history, the U.S. Energy Information Agency reported.
The amount of natural gas in storage is 3.1 trillion cubic feet, more than 20 percent above recent average levels, the EIA said.

Several major drilling companies announced production cuts to cope with the glut, including Chesapeake Energy Corp., Consol Energy and ConocoPhillips.

"There's just a lot of gas on the market," said Bill Holland, associate editor at trade publication Platts Gas Daily. "The shale gas players are in a way the victims of their own success."

That makes the price premium of wet gas highly attractive. Wet gas components fetch about three times the price of dry gas, Holland said.

Those components include butane, propane and other hydrocarbons that serve as feedstock for the chemical and plastics industries. Dry gas is almost 100 percent methane.

Shale with wet gas can also contain oil, which is fetching about $100 a barrel, Holland said.

The giant "cracker" plants that do feedstock processing are in the Gulf Coast and Ontario, Canada, so Marcellus gas must be sent through hundreds of miles of pipeline to reach them.

To reduce transportation costs, Shell announced last year it plans to build a cracker in the heart of the Marcellus. The $1 billion facility would create thousands of jobs, and Pennsylvania, West Virginia and Ohio are competing fiercely for it.

The cracker will give a huge additional lift to demand for the southwest Marcellus' wet gas, Tellish predicted.

It's important to realize the Northern Tier remains profitable, even at prices of $2.60 per 1,000 cubic feet, thanks to its proximity to market, particularly New York City, Holland said. Chesapeake last year reported drilling and completion costs of $1.29 per 1,000 cubic feet of gas for its wells.

Still, industry analysts expect wet gas regions to be companies' main focus over the next two years or so, Holland said. That means drilling will continue, so the volume of work for supply chain companies and professionals such as engineers should remain fairly steady, he said.

Rettew Associates Inc., a Lancaster County engineering firm, is paying close attention to the shift, President Mark Lauriello said.

"We haven't gotten an indication there will be immediate impact on our workload," he said.

Rettew has offices in both Williamsport and Pittsburgh. The company hired 200 people last year and expects to hire about 75 this year, Lauriello said.

Industry lobbyists said the production cutbacks highlight the need for Pennsylvania to keep its taxes and regulations competitive with other states.

Pennsylvania remains the sole major gas-producing state without a severance tax or impact fee. The state House and Senate each passed Marcellus bills last fall, but haven't reconciled them.

Gas prices aren't within Harrisburg's control, but Pennsylvania's competitive position is, said Steve Forde, spokesman for the Marcellus Shale Coalition.

"From a policy perspective, I think this is further indication of how critical the stakes really are," he said. Any additional cost "is potentially disruptive," he said.

But the industry said the same thing when prices were higher, said Michael Wood, research director at the Pennsylvania Budget and Policy Center, which advocates a robust severance tax.

The fees in the House and Senate bills are too low to make or break companies' production decisions, Wood said. A tax is a comparatively small part of overall drilling costs; other states are still seeing plenty of industry development, he said.

It's important not to overreact to short-term price movements, he added.

"This is a resource that's going to get developed over time," he said.

HRG's Marcellus work doubled last year, and the engineering firm expects it to double again in 2012, Tellish said.

Commodities markets shift, he acknowledged, so it's important for companies to stay flexible.

Lauriello said the drilling industry has factored a tax or impact fee into its projections, and will be able to absorb one as long as it's fair and reasonable.

"We're still bullish on the oil and gas market," he said. "Absolutely."

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