Sunday, December 6, 2009

Pennsylvania Natural Gas Fever

When event coordinators for Hart Energy Publishing began planning a Pittsburgh conference for natural gas producers, they reserved space in the Westin William Penn Hotel for the gathering.

"We thought we'd be doing extremely well if we had 300 people," said Leslie Haines, editor in chief of Hart's trade journal, Oil and Gas Investor.

A month before the Oct. 19 conference date, the Houston company had a problem -- registrations exceeded the hotel's capacity. Rather than turn away registrants, it moved the conference to the David L. Lawrence Convention Center.

The conference turned into the largest one that Hart has ever produced, with some 1,400 attendees from across the country.

"It was an amazing thing," Ms. Haines said, and a small indicator of surging interest in the Marcellus Shale, a geological formation that sprawls from midstate New York across more than half of Pennsylvania and into Ohio and West Virginia. Little regarded five years ago, the Marcellus Shale is now viewed as one of the world's leading reservoirs of recoverable natural gas.
Untapped Riches

It was only in 2008 that interest in the Marcellus Shale exploded, a development triggered by the release of two reports.

In December 2007, Fort Worth, Texas, natural gas giant Range Resources released quarterly operating results documenting production from the first modern natural gas wells drilled in the Marcellus, thus giving Wall Street its first glimpse of the formation's profit potential.

The next month, an announcement by Penn State University geoscience professor Terry Engelder and City University of New York, Fredonia, geology professor Gary Lash made that potential appear much greater. In 2002, the U.S. Geological Survey had estimated the shale contained some 1.9 trillion cubic feet of natural gas. The professors estimated it contained between 168 trillion and 516 trillion cubic feet, between 80 and 250 times the government estimate.

The rush was on.

"That's when the bulls eye got painted on Pennsylvania," said Ray Walker, vice president of Range's Marcellus Shale division.

Suddenly investors and producers from all over the country and abroad swarmed into the state to lease land and to drill wells, more than 300 by year's end.

"It's always about capitalism and making money," Mr. Walker said. "That's why it all works."

At the October conference in the convention center, analyst Ray Deacon, with Pritchard Capital Partners LLC, presented a list of producers with leases or wells in the Marcellus Shale that read like a "Who's Who" of natural gas.

With rights to 1.45 million acres, Chesapeake Energy, based in Oklahoma City, Okla., edges out Range, with 1.4 million, as the biggest player in the Marcellus Shale. Third-place Cabot Oil & Gas holds 1.2 million acres.

In terms of company size, Norwegian colossus StatoilHydro Asa, with an $81 billion market cap, is the biggest kid on the block, towering over $30 billion Anadarko Petroleum of The Woodlands, Texas, and Houston-based $22 billion EOG Resources, and dwarfing everyone else.

Local companies involved in the gas rush include Atlas America Inc., with offices in Moon, which has 532,000 acres; Downtown-based EQT Corp., with 400,000 acres; and Cecil's CNX Gas, with 400,000 acres.

But there's still room in the Marcellus for little guys. Or at least there has been.

Petrol Development Corp., in Denver, holds 46,000 acres, and Houston-based Gastar Exploration Limited has leased 42,000 acres. Both have market caps of less than $500 million.

Talk to anyone in the industry about the Marcellus Shale and the conversation is likely to turn to its potential economic impact -- not just the money that a company hopes to make, but the jobs that could be created and the tax revenues that could be generated.

According to a report released in July by Penn State's College of Earth and Mineral Sciences, the Marcellus Shale helped create more than 29,000 new jobs in Pennsylvania in 2008. Of those, about 14,000 were directly related to Marcellus development. The remainder were created by what the study calls "indirect and induced impacts," such as a restaurant near a drilling site hiring more staff because it is serving a larger lunchtime crowd.

The study predicts more than a decade of dramatic growth, with more than 48,000 new jobs this year, then another 98,000 in 2010.

By 2020, the study says, Marcellus development could add $13.5 billion to the state's economy and create more than 176,000 new jobs in a single year.

As for tax revenues, the study predicted the Marcellus Shale would send $800 million into state and local coffers next year, and $1.4 billion by 2020.

Local executives already see evidence of that beginning.

At Range, Mr. Walker said local operations have grown from a one-person office to an office staff of about 150 in Southpointe, Cecil, with another 100 people working in the field in Washington County. He said Range was still "on our way to doubling or tripling" its presence here.

Nicholas J. DeIuliis, chief operating officer of CNX Gas and its largest shareholder, Consol Energy, said his business had added about 50 people over the past year to the Marcellus business unit, which was "three people in a trailer" four years ago, and he anticipates additional hiring across a range of job specialties within both companies. CNX has wells in Greene County.

In a meeting with news media at the October conference, EQT chairman and CEO Murry S. Gerber, credited Marcellus exploration with about 2,000 jobs within the company, and said it could produce 12,000 to 15,000 additional jobs within the next year and a half. EQT is drilling in Washington County.

Mr. Gerber also noted that so far much of the field work, as opposed to the administrative work, has not been done by Pennsylvanians but by migrants from states with more history and expertise in shale gas.

"We're mostly working with Texas crews, Oklahoma crews," he said. "They're coming here, working, then going home."

Even before those critical reports came out, it took a natural disaster to put the Marcellus back on the industry's map. Beginning in late August 2005, three mammoth storms -- Katrina, Rita and Wilma -- struck within two months, causing massive disruptions in the nation's natural gas supply, much of which comes from Louisiana, Texas and offshore rigs in the Gulf of Mexico.

As a result, the wholesale price of natural gas, which had already doubled from $2 per million British Thermal Units to $4 in 2002 and doubled again to reach $8 in 2004, rocketed to nearly $16 by the end of the 2005 (a million BTUs is roughly equivalent to a thousand cubic feet of gas).

Natural gas producers could see the potential payoff in producing more. But the Marcellus Shale was not high on the lists of places to look.

"Three to five years ago, it wasn't even discussed anywhere within the industry. It wasn't even contemplated," said Mr. DeIuliis, at Consol Energy.

Scientists and industry experts had long known the Marcellus Shale contained natural gas. Yet its deposits were buried so deep that extracting them did not make economic sense.

That began to change in 2004, when Range drilled the first modern well in the Marcellus Shale.

The well made use of a technology that had long been employed in other regions -- hydrofracking. As the name suggests, hydrofracking induces fractures in the shale by injecting it with water. This creates new spaces for the gas to move into, thus making more gas accessible.

The bigger breakthrough came the following year. Historically, drilling a natural gas well meant plunging a well bore straight down into the earth, with the hope of finding a pocket of gas lodged in a layer of rock. In 2005, Range drilled a well that went straight down for a distance, then turned sideways, extending its reach horizontally.

In shale formations, natural gas tends to reside in vertical fractures in the rock, so striking gas with a vertical well was literally a hit-or-miss proposition. With horizontal drilling joined to hydrofracking, Range saw a dramatic increase in production.

Neither horizontal drilling nor hydrofracking were new, either. In fact, Mr. Walker designed the first hydrofracking well in 1982. Producers used both horizontal drilling and fracking to extract gas from the Barnett Shale, a formation in the Fort Worth, Texas, area.

But no one before Range had bothered to bring those technologies to the Marcellus Shale.

Mr. Walker ascribed the failure to do so to a simple lack of interest. For decades, oil and gas producers focused their attention on the Gulf Coast. "Appalachia just became this kind of sleepy mom-and-pop" region, he said.

Maybe more of a sleeping giant.

A large part of the projected economic impact arises from the location of the Marcellus. While a portion of the Barnett lies underneath Fort Worth, the Marcellus underlies Pittsburgh, Cleveland, Erie and Buffalo, and stretches east nearly to New York and Philadelphia, making it a potentially huge source of convenient fuel for the entire northeast.

While natural gas producers are excited about the potential of the Marcellus, environmentalists are worried, especially about wastewater produced by hydrofracking.

Producers are responding to those concerns in different ways. Range has developed a system for recycling all of its wastewater. CNX recycles a small portion of the Marcellus flowback, disposing of the remainder through state- or federally approved facilities.

At the October conference, Mr. Gerber suggested another use for the wastewater. Noting that municipalities need large amounts of salt for snow removal, he suggested government and industry work together. "There's salt in that water. Why don't we extract that and use it?"

To advance discussions with environmentalists, as well as with government and representatives of other industries, producers have formed the Marcellus Shale Coalition, which recently elected Mr. Walker as its chairman. Its 62 members include both producers and support companies, as well as two trade associations, the Independent Oil and Gas Association of Pennsylvania and the Pennsylvania Oil and Gas Association.

Mr. Walker said the coalition has had ongoing meetings with the Nature Conservancy, Penn Future and the Sierra Club.

"We want to work with all of these conservation groups," he said. "We are not the enemy. We do not want to have a combative relationship."

On the government side, the group has received support from U.S. Rep. Tim Murphy, R-Upper St. Clair, who joined with Dan Boren, D-Okla., in October to form the Congressional Natural Gas Caucus. Three weeks later, in the Senate, Mary L. Landrieu, D-La., and Saxby Chambliss, R-Ga., announced the creation of the Senate Natural Gas Caucus.

But the future of development in the Marcellus Shale could be rocky.

"When it became, quote unquote, 'discovered,' gas prices were high, results for the Marcellus looked very strong," Mr. DeIuliis said. Now gas prices have fallen again. "That will change the environment in regard to what drives development in the Marcellus," he said. "The bubble will deflate."

"Some fallout's not a bad thing in the long term," he said. "The secret is to position yourself so that you're in it for the long haul."

While falling prices generally lead to pullbacks in production, Ms. Haines noted that some producers were tweaking their response.

"Activity has slowed down in many basins in the country, but it has not slowed down in the Marcellus," she said. "Sometimes companies will reduce their drilling elsewhere and redeploy their capital to the Marcellus."

At the conference, Mr. Gerber said EQT's production arm could break even on its Marcellus drilling when natural gas wholesales for $2.50 per million BTUs; when it sells for $3.50 to $4, the company sees a 10 percent after-tax profit.

So recent prices in the $5 range, while far below the prices that sparked the land rush, are still high enough to pay off.

Barring disruptions from government regulation or other unforeseen factors, the industry could see the Marcellus Shale continuing to fuel business in the region for years to come.
Elwin Green may be contacted at or 412-263-1969.

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