Money in the Marcellus

The Marcellus Shale formation in Pennsylvania has opened up a wide variety of nearly limitless opportunities within regions of the commonwealth that have seen no sign of economic activity in decades. Most of Central and Western Pennsylvania are consumed with the exploration, development and transportation of immense new reserves of natural gas that are now recoverable through very refined techniques of hydraulic fracturing. The amount and quality of the gas extracted is feeding new revenue streams for pipeline development for inter- and intra-state shipments of gas, especially to the Philadelphia region.

The Philadelphia metropolitan area, while not blessed with natural gas reserves that are known at this moment, may be the greatest beneficiary of this newly available and low-priced fuel. In modernizing its energy infrastructure, Philadelphia is on the verge of becoming a relatively low-cost energy region, which should be attractive to manufacturing and other energy development activities. We may yet see the resurgence of the chemical refining industry in the Philadelphia area as the need for crackers and other sophisticated refining and treatment operations increases with the flow of oil and gas into this region. The availability of low-cost natural gas is leading to the expansion of distributed energy systems as large companies see the advantages of controlling their own energy destinies, and creating their own electricity from natural gas at their own facilities. This allows large facilities to turn off the grid when it’s too expensive, or when there are security or weather-related risks to the grid’s ability to deliver power.

The briefest history of the Marcellus and similar formations are that algae died 400 million years ago, sank to the bottom of the ocean, mixed with minerals and turned into shale with little air pockets in it containing methane and other gases. While gas deposits were known to exist within the shale, before January 2008 no one had reliably calculated the magnitude of the potential reserve. At that time, professor Terry Englander and colleagues responded to an inquiry about the size of the reserve, and were stunned at their own calculations, which indicated tens of trillions of cubic feet of gas, far greater than anticipated.

On Jan. 17, 2008 Penn State published a game-changing press release revealing Englander’s results, and shortly thereafter fracking became the most important economic infusion Pennsylvania has seen in decades. The costs of horizontal drilling techniques required for hydraulic fracturing are three to four times the cost of conventional drilling techniques, but in light of the reserves at hand, drillers have pockmarked much of Pennsylvania with thousands of new wells, many of which sit idle until new pipeline infrastructure can be developed to transport the gas to cost-effective markets.

Philadelphia, in particular, as well as its densely populated suburbs, stands poised to benefit from more plentiful and cheaper natural gas, but constraints on pipeline capacity may throttle back the speed of progress. Most recently the planned Commonwealth Pipeline designed to transport gas from northeastern Pennsylvania to the Philadelphia region was abandoned by its developers for reasons that have not yet been disclosed.

This influx of gas will be crucial to implement some of the more inspired business expansion activities outlined in the Commonwealth’s Marcellus Shale Advisory Commission’s report from July 2011. The entity was appointed by Pennsylvania Gov. Tom Corbett to evaluate Marcellus opportunities. The report foresees the establishment of widely available compressed and liquid natural gas stations throughout Pennsylvania to support fleets of natural gas powered vehicles. Several mass transit organizations and corporations have begun to integrate the use of compressed natural gas (CNG) in buses and trucks.

Whether we are peering at a nascent industry or an ephemeral trend remains to be seen, but it should be noted that the vehicular CNG systems are off-the-shelf technology, and not experimental in nature. Rather, it is the ever-present challenge of obtaining financing to construct a CNG fueling station until there is a reliable inventory of such vehicles, coupled with the reluctance of before and after market car manufacturers to so equip vehicles until there is a reliable network of fueling stations. Nevertheless, companies such as Waste Management have moved forward with such initiatives for a portion of its trucking fleet.

Philadelphia Gas Works (PGW) recently issued a request for proposal for a gas-to-liquids (GTL) facility within the city, another potentially critical advancement in the region’s energy future. By using an historic chemical process that precipitates liquids from the gas stream rather than creating actual liquid natural gas (LNG), a facility can create a clean-burning diesel fuel product for trucks and cars. Whether such a venture can be launched will also be directly related to the availability of large quantities of gas, which in turn is dependent upon the expansion of the pipeline infrastructure serving the city and its environs. It is interesting to note that PGW also has an LNG facility within the city, one of the very few in this region. LNG can be transported by truck, rail or barge, and thus can be somewhat less dependent upon the expansion of the pipeline network. But taken together, CNG, GTL and LNG bode new methods for powering vehicles, allowing for less reliance upon foreign sources of oil.

The commission also identified co-generation as a key goal for expanding the natural gas markets within the commonwealth and nationally. By employing combined heat and power (CHP) technology, facilities can generate their own power from natural gas, and recognize efficiencies far greater than traditional turbine and boiler equipment because CHP captures the electrical power and heat energy generated by combustion.

With the falling price of natural gas, and its anticipated long-term relative price depression, CHP facilities become viable means by which facilities can reduce or eliminate their reliance on the aging grid infrastructure, and more cost-effectively generate their own power. Moreover, facilities can hedge the use of CHP equipment against peak electrical rates, and then transition easily back to grid power when the rates are low. This also allows for more flexible locations for manufacturing, industrial and health care facilities than can now be less sensitive to building near major power lines and substations, a hallmark of a distributed energy system such as CHP.

Although many more uses are conceivable and foreseeable, the abundance of natural gas raises the potential for constructing new refineries or crackers to isolate certain chemical components of the gas stream, creating a valuable inventory of chemical products. Shell may develop an ethane cracker in western Pennsylvania to convert ethane to ethylene, and other chemicals that become feed stocks for the plastics and related industries.

Ultimately the successful development of these industrial and transportation initiatives will be directly related to the continued extraction of gas through fracking, a robust pipeline construction process and favorable regulatory climate for permitting. It is as if we stand at a moment of time just before steel began to overtake iron in construction, and the future of natural gas development seems both limitless and daunting at the same moment. What is most critical is that industry and energy developers lead the dialog on these opportunities, and not cede the public relations initiative to those who see only the threat in this increasingly available resource.

While it is true that the extraction and distribution of natural gas has well-known environmental risks, those risks can be mitigated responsibly. It is essential that the private sector ensure that its message is responsibly and consistently communicated to the public at large to reduce delays in citing energy generating plants, drilling and compressor sites, and pipelines. EMI


Andrew S. Levine is co-chair of the environmental practice group at Stradley Ronon Stevens & Young LLP. He can be reached at [email protected].

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