Natural Gas Locked in the Marcellus Shale Has Companies Rushing to
Cash in on Possibilities
Pittsburgh Post-Gazette
6 December 2009
By Elwin Green
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.
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 egreen@post-gazette.com or 412-263-1969.