Tuesday, July 6, 2010

Pennsylvania Looking at Natural Gas Drilling Implications

The Pennsylvania State University's College of Earth and Mineral Sciences; Department of Energy and Mineral Engineering conducted a study on the Marcellus Shale Gas industry.
The study, titled An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play, was written by Timothy Considine, Robert Watson, Rebecca Entler and Jeffery Sparks and released July 24, 2009.
It is designed to educate the public on the current size, economic impacts, and future prospects of the Marcellus Shale Gas industry in the state. 
According to the study, the Marcellus Shale formation is the largest unconventional natural gas reserve in the world. An estimated 489 trillion cubic feet of recoverable resources and the industry is expected to expand.
The industry has generated $2.3 billion in total value added, more than 29,000 jobs and $240 million in state and local taxes in 2008. With a higher pace of development, the study believes the economic output in 2009 will top $3.8 billion, state and local tax revenues will be more than $400 million and total job creation will exceed 48,000.
Marcellus Shale refers to a geological formation consisting of layers of shale and rock which contains large amounts of natural gas. For decades, the gas as believed to be unattainable until innovations in the gas drilling industry made it possible to access the gas.
The Marcellus Shale is the largest known shale deposit in the world, running under the Appalachian basin from upstate New York, through Virginia and west into Ohio. The study believes that natural gas is widely viewed as "the bridge between the age of oil and the next energy paradigm." It said by developing domestic natural gas resources in the United States, greater energy import dependency and higher trade deficits could be avoided. The study also believes natural gas will play a pivotal role in the transformation of U.S. economy to achieve lower levels of greenhouse gas emissions.
According to the study, leasing, exploring, drilling and developing the natural gas reserves will directly generate thousands of high-paying jobs and directly create many others as employment is stimulated in support industries and as workers spend their wages and land owners spend royalty income.
However, natural gas development is very competitive and prone to sharp contractions in drilling activity from swings in the costs, prices, and taxes in the gas industry.
In Pennsylvania, the average depth of the shale is about a mile from the surface. The depths can make drilling costs relatively high and significant amounts of gas are required to make the process financial feasible for gas companies. Growth of the gas industry is also dependent on the available of water for "fracing," or cracking the shale to allow the gas to escape, and the availability of disposal facilities for the used frac water.
The gas produced by the wells is known as "wet" gas, because it contains dissolved hydrocarbons, such as propane, ethane, butane and other heavier gases which must be removed before the gas can be sold to gas transmission or distribution companies. The by-products can be valuable, however, building a processing facility for the by-products takes a lot of time and money. The liquids would also require separate pipelines, rail facilities, or truck terminal facilities.
Spin-off jobs resulting from the gas industry can include suppliers of steel, machines and equipment. The industry will also require thousands of workers in manufacturing and construction.
Probably the most major factor in gas industry development is the market for the gas. According to the study, natural gas prices are very volatile and most producers must lock in a price using future contracts. With the exception of the price spike in the summer of 2008, natural gas prices have been drifting lower since 2005. The gas industry is also facing competition from development of other industries, such as wind power. In 2008, wind captured 42 percent of new power generation in the United States.
As the gas well industry grows, so does the concern for the environment. The report said several measures are taken to ensure the environment is protected during the drilling process. As a well is drilled, steel pipe casing is cemented in place to isolate the well from the surrounding area. Ground water supplies are protected and contamination of sub-surfaces drinking water supplies is avoided. The report also said that well drilling companies take care to isolate any fluids used in the fracing process from sub-surface drinking water by collecting it in a plastic-lined pit or large water tank. The water is then recycled or taken to a designated facility for treatment. The report said no untreated water used in fracing is disposed in a stream or river.
The report said after a period of low drilling activity during 2006 and 2007, well completions jumped to 308 wells drilled. For the first quarter of 2009, gas drilling for the entire U.S. is down 21 percent from 2008.
The study estimates total spending by Marcellus producers as $3.09 billion during 2008. Not all of the spending was with in the state, as some supplies are imported from other regions and some land income is spent outside the state. However, an estimated $2.95 billion occurred in Pennsylvania in 2008. The money went toward payments to suppliers, payments to landowners, payroll and taxes. More than a third of that money, about $334.1 million was spent in the mining sector, $259 million went to the construction industry, $141.1 million went to wholesale trade, $48.5 million went toward scientific and technical professional services and administrative services. About $47.6 million was spent in the transportation and retail trade sectors and $25.6 million was spent in the agriculture, utilities and manufacturing sectors.
Using a mathematical formula, the study projects over 1,000 Marcellus wells will be drilled throughout the state in 2010 with a steady increase during the following 10 years. Any sharp spikes in prices could increase activity while a prolonged slump in prices could decrease activity.
The study concludes by saying imposing severance or property taxes on the Marcellus gas industry as it is beginning to become established, could lead to tax losses for the state and could undermine the future growth of the industry.
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Reported by Kimberly Finnigan, Tri-County Sunday. E-mail: kfinnigan@thecourierexpress.com

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