Gas Riches Creating New Energy Giant

on July 30, 2011 at 10:30 AM

Pennsylvania is angling to best the Lone Star state at its own game.

Pennsylvania Governor Tom Corbett says he wants his state to become the “Texas of natural gas” as energy companies scramble to tap into the Marcellus Shale, a vast reserve of gas underlying about two-thirds of the Keystone State as well as parts of surrounding states.

At the current breakneck pace of development, the new Republican Governor may see his wish come true. More than 3,100 wells were drilled into Pennsylvania’s 35% share of the Marcellus between 2008 when the current boom began, and June 2011, according to the state’s Department of Environmental Protection.

Mounting Pace Of Development

The 1,386 wells sunk in 2010 almost doubled the number in 2009, but is set to be eclipsed this year, with 808 wells were drilled in the first six months.

Wells are producing even more gas than had been forecast thanks to advanced stimulation techniques, and plans are to ship it to the nearby Northeastern US market via a new pipeline network currently under construction.

The gas bonanza has created more than 100,000 direct and indirect jobs, contributed millions of dollars in state and local tax revenues, and made some landowners rich with lease and royalty payments, especially in rural areas where economies struggled before gas companies like Chesapeake Energy and Range Resources moved in.

“Pennsylvania is now self-sufficient in supplying itself with natural gas and in future years will likely become a major supplier of natural gas and liquids to consumers in other states,” a study from Pennsylvania State University said in July.

Proliferating Protest

But the state’s new “gold rush” has also drawn protests from environmentalists and some lawmakers who claim the industry is contaminating drinking water with toxic chemicals used in well completion, and polluting air around wells and compressor stations.

The industry has so far resisted calls for tighter regulation, arguing that the chemicals used in hydraulic fracturing are separated from aquifers by layers of steel and concrete and thousands of feet of rock, and so cannot contaminate private water wells.

For more on Pennsylvania’s natural gas boom and its discontents, read: Pennsylvania Regulators Face Their Future.

Still, a July report from the Marcellus Shale Advisory Commission, a panel of business and government officials formed by Governor Corbett, proposed stronger environmental safeguards, tougher penalties for violators, and a new system to monitor reports of illness among people living near gas wells.

Meanwhile, a Penn State study released on July 20 estimated the gas industry generated $11.2 billion in economic activity during 2010, a number that is projected to almost double by 2020 as tens of thousands of new wells are sunk.

By 2020, the state’s Marcellus wells are expected to produce 17 billion cubic feet a day of natural gas – more than eight times the 2010 output – which would make the field the most productive in the US, the study said.

Another report by the US Energy Information Administration said in July that the Marcellus as a whole contains 410 trillion cubic feet (tcf) of recoverable gas, or 55% of total reserves held in the U.S. lower 48 states.

That’s less than the 489 tcf estimated by Penn State geoscientist Terry Engelder, whose 2008 assessment of Marcellus potential helped spark the current gas boom. That amount of gas would satisfy total US needs for 20 years at the current consumption rate of some 24 tcf a year, allowing the US to potentially cut its dependence on foreign oil and reduce greenhouse gas emissions.

Same Gas, Less Cost

The rich opportunities of the Marcellus are not lost on energy companies like Range Resources which reminded investors in July that Marcellus gas was both abundant and cheap to produce.

The company said it could make a 12% rate of return from extracting wet gas in southwest Pennsylvania with a natural gas price of only $2 per mm BTU. If the price is $3.75–around the mid-point of its range on the NYMEX exchange operated by CME Group over the last year– Range can get the same rate of return for gas from more costly northeastern Pennsylvania.

By comparison, gas from the Haynesville Shale, another major field in Louisiana and Texas, needs a $5.50 NYMEX price in order to yield a 12% return, Range said.

Philip Budzik, a spokesman for the Energy Information Administration, said the Marcellus in general and Pennsylvania in particular will be major sources of gas for decades.

“Without a doubt, it is a game-changer,” Budzik said. “Pennsylvania will be an important source of natural gas for this country.”

The only uncertainties about the outlook for Pennsylvania gas are what happens to prices and whether gas-extraction technology continues to improve, Budzik said.

The EIA’s estimates for the quantity of Marcellus gas, based on actual production data, are deliberately conservative, and may significantly understate the true size of reserves, Budzik said.

“The total amount of natural gas that could be produced could be many times greater than what we currently estimate,” he said.

Photo Caption: Electrical transmission towers on a farm in this aerial view March 25, 2011 in Lancaster County, Pennsylvania. AFP PHOTO/Stan HONDA