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Marcellus Shale Guide 2012: Shifting strategies

Speed of drilling could begin to slow

A Nomac Drilling rig rises from a Chesapeake Energy Corp. natural gas well pad in Leroy Township, Bradford County. Nomac Drilling is an affiliate of the Oklahoma-based company that was a top producer of natural gas in Pennsylvania in 2011. Photo/Amy Spangler

Pennsylvania’s Marcellus Shale natural gas drilling industry has been expanding at breakneck speed for several years now, but there are indications the pace could begin to ease.

A worldwide glut of natural gas helped push prices to their lowest levels in a decade, leading major Marcellus drillers to announce significant production cutbacks.

Well starts decreased about 25 percent statewide in the first two months of 2012, said former state Department of Environmental Protection Secretary John Hanger, citing statistics from

Production will continue to grow, but at a slower rate, analysts say. In particular, expansion is expected to slow down in the Northern Tier, home to major deposits of “dry gas,” which consists mostly of methane.

Instead, drillers are shifting rigs and personnel to southwest Pennsylvania and eastern Ohio.

There, “things are ramping up,” said Mark Lauriello, president of Rettew Associates Inc., a Lancaster engineering firm that has seen major expansion since getting involved in shale work.

The “wet gas” in those regions contains ethane, propane, butane and other compounds that can be extracted and sold at a premium for various uses.

Ethane, in particular, is a valuable raw ingredient for the chemical industry. In March, Shell signed an option agreement for a site north of Pittsburgh where it hopes to build a massive ethane processing plant known as a cracker.

The company chose Pennsylvania over Ohio and West Virginia for the $1 billion plant, which is expected to spur substantial ancillary investment and create thousands of high-paying jobs.

“That’s a sign this play remains vibrant,” Marcellus Shale Coalition vice president Steve Forde said of Shell’s plans.

Low natural gas prices have both positive and negative consequences for the industry, Forde said. Though drillers must adapt their strategies to a lower expected return, low long-term prices will attract other industries to Pennsylvania, eager to pay less for the energy they use, he said.

Also, drillers typically hedge their prices in the energy futures market, so they may be getting higher rates than you see in the headlines, said Dave Yoxtheimer, a hydrogeologist with Penn State’s Marcellus Center for Outreach and Research.

Drillers produced 607 billion cubic feet of natural gas in the second half of 2011, according to the state Department of Environmental Protection.

That’s up 40 percent compared with the first half of the year and up 123 percent from the 272 billion cubic feet produced in the second half of 2010. The state now has more than 2,200 producing wells, the DEP said.

Pennsylvania’s total gas production crossed the 1 trillion cubic foot per year threshold in 2011. Based on current estimates of recoverable gas, Pennsylvania can double its annual output to 2 trillion cubic feet and still produce gas for
70 years, Hanger wrote on his blog. 

Two trillion is a plausible annual long-term output figure, Hanger wrote. Even at 3 trillion cubic feet per year, “an extraordinary number,” Pennsylvania can produce gas for 50 years, Hanger wrote.

Meanwhile, reported environmental violations have declined slightly. Drillers incurred 1,178 violations in 2011, compared with 1,273 in 2010, according to an analysis of DEP data by the advocacy group PennEnvironment.

Updating the environmental regulations that govern the shale industry was one goal of Act 13, the comprehensive Marcellus Shale legislation Gov. Tom Corbett signed on Feb. 13.

By providing certainty on numerous regulatory issues, the law enables companies to weigh costs accurately against the value of the shale play and make business decisions accordingly, said Scott Baker, co-chair of the oil and gas practice of Pittsburgh law firm Buchanan Ingersoll & Rooney.

The law increases required setbacks for well pads near waterways, makes drillers liable for replacing any drinking water sources they contaminate and increases disclosure requirements for chemicals used in hydraulic fracturing, among other changes.

On the other hand, Act 13 sharply circumscribes the power of municipalities and counties to enact their own regulations or challenge DEP decisions on well permits.

The industry pushed hard for the change. It’s expensive and cumbersome for drillers to contend with a patchwork of differing rules from municipality to municipality, Forde said.

Generally, county officials think the limits are acceptable, said Doug Hill, executive director of the County Commissioners Association of Pennsylvania. Many environmental groups disagree, he acknowledged.

Act 13 provides for an impact fee, an alternative to the severance tax proposed during the Rendell administration. Counties had until April 13 to pass an ordinance enabling the fee on wells in their jurisdiction. Municipalities have a chance to override any county that declines to do so.

The bill’s sponsors estimate retroactive impact fee collections of $180.5 million for 2011, rising to $311.5 million by 2014. NPR’s State Impact project published a map of county-by-county estimates.

The state will use the first
$23 million to fund a mix of environmental and regulatory initiatives related to shale. The rest of the money will be split 60/40 between local and county governments and the state and is mostly targeted toward ameliorating industry impacts, as the term “impact fee” would suggest.

The impact fee is equivalent to a tax of roughly 2.6 percent, according to the Pennsylvania Budget and Policy Center, well below the rates in other gas-producing states.

Legislators “missed an opportunity” by not enacting a severance tax, said Sharon Ward, the center’s executive director.

Any time an industry incurs a cost increase, that affects its investment decisions, Forde said. The fee represents “a balanced approach,” he said.

Lawmakers likely aren’t finished dealing with the Marcellus Shale, Baker said. As the natural gas industry evolves, unforeseen issues will arise, he said.

“Anything of this magnitude will probably require some kind of follow-on legislation,” he said.

Statewide, Marcellus Shale development generated roughly 23,000 jobs in 2009 and 44,000 jobs in 2010, according to researcher Tim Kelsey and his team at the Marcellus Shale Education and Training Center, based at the Pennsylvania College of Technology in Williamsport.

Other estimates have been more robust: The Marcellus supported nearly 140,000 jobs and provided a direct economic impact of $10.4 billion in 2010, according to a July 2011 report authored by former Penn State professor Timothy Considine.

Economic growth in shale-producing counties could produce an extra 200,000 jobs statewide by 2020, according to an analysis by the Economics Group at Wells Fargo Securities.

In gauging Marcellus Shale impacts, it’s important to realize that much of the spending takes place outside Pennsylvania, Kelsey said.

Companies bring pipe, rigs and other equipment from out of state. Landowners boost sales at local car dealers and home improvement stores, but pickup trucks and building products are made in other states and other countries. 

“There very clearly are economic impacts, (but) it’s not the tremendously large numbers that a lot of the rhetoric would imply,” Kelsey said.

Much of the impact will ebb once drilling is completed and wells enter their production phase, Kelsey said in a January study of the industry in five Northern Tier counties.

“The direct economic impacts from Marcellus Shale development will be transitory because this is a nonrenewable natural resource. When the gas is gone, the direct economic impacts likewise will be gone,” he wrote.

Communities should find ways to use the boom while it lasts to strengthen their economies while preserving the environment and quality of life, he said.

From Kelsey’s point of view, even a modest slowdown in the pace of development will give communities more time to plan for and absorb changes.

“A lot of what we’ve been doing up to now has been playing catch-up,” he said.

The Marcellus effect

Marcellus Shale natural gas development has brought “exponential growth” to Harrisburg-based Stephenson Equipment Inc., President and CEO Dennis Heller told members of Congress earlier this year.

Stephenson purchased 55 cranes for sale and rental in 2011, compared with 17 in 2009, Heller said Feb. 17 at an Ohio hearing convened by the U.S. House’s Natural Resources Committee’s subcommittee on energy and mineral resources.

“The reason for the jump in sales is simple — the Marcellus Shale,” Heller said.

The Marcellus Shale has drawn national and international drilling companies to the commonwealth: Chesapeake Energy from Oklahoma City; Cabot Oil & Gas from Houston; Talisman Energy from Calgary, Canada; Royal Dutch Shell in the Netherlands and many more. 

Nevertheless, “we’ve seen an intense focus on ensuring the dollars are staying in Pennsylvania,” said Steve Forde, vice president of the Marcellus Shale Coalition industry group.

The coalition has a supply chain committee that works to connect Pennsylvania businesses with shale opportunities, Forde said. It organizes expositions and seminars several times a year at locations from Erie to Philadelphia.

Drillers have partnership programs with supplier companies in gas regions. Talisman Energy sets goals for local sourcing as part of its company mission.

In March, the coalition launched “Marcellus on Main Street,” an online directory designed to give companies access to supply chain opportunities. Companies search the website to find potential business leads and can register so other firms can find them.

Several midstate engineering firms have seen upticks in business thanks to the Marcellus. Perhaps the most notable is Lancaster County’s Rettew Associates Inc., where revenue grew from $23 million to $47 million and employment grew from 215 to 350 from fiscal 2010 to 2011. Rettew’s fiscal year runs from July to June.

Most of the growth is due to Marcellus work, company President Mark Lauriello said. The company plans to hire about 75 people this year, he said.

Rettew developed a mobile water treatment system and set up a subsidiary, Rettew Flowback, to handle that business. Rettew deployed its second treatment unit in March, Lauriello said.

Both units are being used in Ohio, where they are treating 10,000 barrels of frackwater a day, he said.

In Lancaster, specialty manufacturer Mount Joy Wire Corp. has seen a jump in demand for wire used to make brushes for cleaning pipelines.

The company has added several jobs at its headquarters in its namesake borough, where all its products are made, as Gov. Tom Corbett noted in a statement accompanying a visit there earlier this year.

Luxembourg-based ArcelorMittal, which has a rail plant in Steelton, makes steel for exploration, production and gas-distribution equipment, according to the company.

Economic gains from natural gas development have been seen indirectly in many other industries, ranging from restaurants to vehicle sales to legal advice and wealth management. Local banks, including Fulton and Susquehanna, have keyed on the latter, developing specialized wealth management services, while law firms such as McNees Wallace & Nurick have seen Marcellus business bolster their oil and gas practices.

Educational institutions are doing their part to nurture the industry by stepping up workforce development, Forde said.  

“We’re seeing more individuals who are well trained in our industry becoming available,” he said.

In Williamsport, the Pennsylvania College of Technology set up the Marcellus Shale Education and Training Center. Thousands of students already have taken courses there, credit and noncredit, and the college is completing work this spring on a 5-acre mock drill pad site that will be used for hands-on training, said Larry Michael, Penn College’s assistant vice president for workforce development and special projects.

Penn College is partnering with other state colleges and technical schools to create and teach Marcellus-related coursework, Michael said. Staffers have ventured as far south as York to conduct sessions, he said.

On the user side, Reading-based UGI Corp.’s proposed Commonwealth Pipeline could catalyze significant business development by providing inexpensive natural gas directly to the midstate, local business leaders said.

The line would run from the Northern Tier drilling areas south past Harrisburg and between Lancaster and York into the Baltimore-Washington metropolitan area.

That could make the area more attractive to manufacturers, said David Black, president and CEO of the Harrisburg Regional Chamber and Capital Region Development Corp.

“We’re seeing many more opportunities for the use of natural gas,” Forde said.

—Tim Stuhldreher

Tim Stuhldreher

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