THE GREAT SHALE GAS RUSH
Exploring the promise and challenge of a new energy supply.
Along the narrow two-lane roads that
wind through Washington County in southwestern Pennsylvania, there is little
sign that the surrounding pastures and hay bales, barns, homes, and childrenâ€™s
swing sets all are sitting on one of the largest reservoirs of natural gas in
But at second glance, an observer
can see red and white lattice towers rising here and there over the hillside.
New gravel roads separate the thick woods and brush. Fields feature long
stretches of grass that donâ€™t quite match the surrounding meadowâ€”recently
reseeded places where new pipeline has been buried. Giant barrel-like
structures, pipes and valves, painted green to blend in with the landscape, are
condensate tanks and compressor stations. And chemical tank trucks, sand
haulers, flatbeds stacked with lengths of pipe, and cement mixers seem to be
rumbling in every direction.
Itâ€™s all part of a new energy
industry thatâ€™s being built here. This is the epicenter of the Marcellus shale.
From Barrier to Boon
For decades, the Marcellus was known
to geology buffs as a 389-million-year-old soft rock formation, a mile or more
under the Appalachian Mountains, encompassing 95,000 square miles (246,000
square kilometers) in an arc from West Virginia to New York. Named for a
surface outcrop of the rock near Marcellus, New York, the formation was thought
of as an underground barrier, simply an annoyance to drillers who focused on
little pockets of oil and gas in sandstone beneath.
But within the past three years, all
of that has changed.
Applying a method developed in a
similar geological formation, the Barnett shale in Texas, scores of energy
companies proved that by combining and supercharging some old oil industry
technologies, they could drive fissures through that rock to yield sizable
amounts of natural gas.
There are shale deposits all over
the United States, well-mapped thanks in part to intensive
geological research done by the U.S.
Department of Energy and the U.S. Geological
Survey in response to the 1970s energy crises. These studies sat on shelves
for decades. Now theyâ€™re a key reference for producers in shale â€œplays,â€ as
theyâ€™re called, around the nationâ€”including the biggest by far, the Marcellus.
How big? Estimates are that the
Marcellus shale holds between 50 trillion cubic feet (TCF) and 500 TCF of
natural gas. At the low end, thatâ€™s double the gas stores seen in Alaskaâ€™s big
Prudhoe Bay at the dawn of its development. At the high end, the reserves would
be second to those of the worldâ€™s largest natural gas field, the Pars field of
Iran and Qatar.
But unlike Pars, this gas isnâ€™t in
the middle of the Persian Gulf. Itâ€™s right in the heart of the energy-hungry
East Coast of the United States. The eastern tip of the formation is less than
100 miles from New York City. With development centered in Pennsylvania, itâ€™s a
location that has lured billions of dollars of investment by companies around
the world. Defying critics who wonder how such an energy boom can be sustained
in a slow economy, companies from India, Japan, Norway, and elsewhere have
descended on the scene, wowed by the Marcellus shaleâ€™s great potential and
proximity to markets.* They also hope to take this made-in-the-USA technology
overseas. The United States is the number one consumer of this fuel, but shale
can be found all around the planetâ€”and the world has plenty of interest in a
new source of natural gas.
Shaking Up the Energy Equation?
Most people know natural gas as the
fuel that lights the blue flame on the stove. It also heats half the homes in
the United States and 35 percent of the homes in Europe. But the largest use
around the world is at power plants, where it is burned to generate
electricity. Depending too much on natural gas for power has long been seen as
risky, because its price was traditionally volatileâ€”largely linked to the
roller-coaster global oil market. So natural gas provides just 20 percent of
U.S. electricity, compared to nearly 50 percent for King Coal.
The prospect of abundant, cheap natural
gas in the United Statesâ€”especially gas thatâ€™s easily delivered by pipeline to
the populous East Coastâ€”profoundly shakes up that energy equation. Natural gas
generates electricity more efficiently than coal, with half the greenhouse gas
emissions, fewer acid rain precursors and virtually free of many other
troubling pollutants like mercury and particulates. Natural gas also burns
cleaner than oil. And although only a tiny percentage of vehicles are now
outfitted to run on natural gas, itâ€™s capable of powering cars, trucks, and
Billionaire oilman T. Boone Pickens
says the United States ought to be producing vehicles to take advantage of
domestic shale gas and break its foreign oil dependence. "This is our
chance," Pickens told The Philadelphia Inquirer in an interview on the
Marcellus shale. "I think it's almost divine intervention that we had all
this gas show up at this time in the deal."
Gas companies in Pennsylvania also
frame their role as a pivotal one in the big U.S. energy picture. â€œWeâ€™ve talked
a lot about taking control of our energy future in this country,â€ says Matt
Pitzarella, spokesman for Range
Resources, the first company to drill in the Marcellus and one of the most
prolific drillers. â€œNow we have that opportunity, and it really was literally
beneath our feet all this time.â€
Reversal of Fuel Fortunes
Not long ago, it looked like the
United States was running out of natural gas.
Federal Reserve Chairman Alan
Congress in 2003 that the nation would need to begin to import substantial
amounts of the key fuel from overseas. This raised the specter of foreign gas
dependence that mirrored long-standing U.S. oil dependence, and risky reliance
on big reserve holders like the Persian Gulf and Russia. In Europe, which
imports a quarter of its gas by pipeline from Russia, gas disruptions pose a
But precisely at the moment Greenspan
was delivering his grim forecast for the United States, energy industry
iconoclasts in Texas were proving definitively that combining horizontal
drilling and large-volume hydraulic fracturing could unlock a huge rush of gas
from shale. And in that same year, a Range Resources geologist decided to urge
his bosses to try the method on a stubborn well heâ€™d been working at in
Although the Keystone State was
thought to have tapped out its big-time energy supplies long ago, Pennsylvania
was key to the rise of oil and coal that fueled U.S. industry in the 19th and
20th centuries. The worldâ€™s first oil well was drilled here, on leased farmland
in Titusville in 1859.
About 100 miles south of the storied
Drake Well, in 2004, Range drilled the first gas well into the shale on leased
farmland in Mount Pleasant Township.
After several years of
experimentation, there were nearly 20 Marcellus wells in Pennsylvania in 2007,
nearly 200 were drilled in 2008, and nearly 790 last year. The Marcellus
industry, now made up of 67 companiesâ€”ranging from the worldâ€™s largest to some
of the smallest energy playersâ€”has already drilled about 1,100 wells this year.
That puts producers on track to drill somewhat less than the 1,700 wells they
had aimed to drill in Pennsylvania this year, a slowdown certainly due to tough
economic factors roiling the industry. But more than 2,480 permits for new
wells have been issued this year in Pennsylvania, and the industryâ€™s plans call
for a pace of more than 3,500 wells annually within the decade.
Marcellus drillers say they can
bring 200,000 jobs to a state that has struggled to revive its industrial
sector, and they have paid $3.5 billion in lease payments and royalties to
landowners in the past two years for the right to drill on private property.
But all this means building a big
extractive industry in a state that hasnâ€™t seen this kind of development in
decades, right near homes and schools, in the midst of rural farmland, and
close to treasured parks and forests.
For Pennsylvanians, even generations
past the heyday of the stateâ€™s big coal- and coal-fired steel industries, itâ€™s
hard to forget the havoc that an energy business can wreak on the environment.
To remind them, there are 260 million tons of abandoned
waste coal in piles that mar about 8,500 acres across the state. And more
than 5,510 miles of the stateâ€™s streams are impaired by discharges from 220,000
acres of abandoned
coal mine lands, Pennsylvaniaâ€™s worst water pollution problem.
â€œBeen there, done that,â€ says
Democratic Senator Bob Casey of Pennsylvania, who is pushing for greater
federal oversight of the industry. â€œFor many, many years people said, â€˜Donâ€™t
worry about this, donâ€™t worry about that, just get out of our way, we need to
extract this natural resource from the ground.â€™ â€
The industry is battling to improve
its image, recently hiring Tom Ridge, a former Republican governor of
Pennsylvania and director of U.S. homeland security, as a strategic consultant.
Early this month, Ridge and an industry group, the Marcellus Shale Coalition, unveiled a
set of â€œcommitment to the communityâ€ principles, promising to implement
state-of-the-art environmental protection and to improve transparency and
Pennsylvania native Pitzarella of
Range points out how his company has pioneered reuse of wastewater from the
drilling process, and how it was the first shale operator to disclose chemicals
used at each of its wells. â€œThe challenge is demonstrating to people that this
is not the second coming of the coal industry from 100 years ago,â€ he says.
But across Pennsylvania, there also
have been wastewater spills and conflicts with neighborsâ€”for Range and for
other drillers. And at least two serious documented incidentsâ€”an EOG Resources well
blowout in a central Pennsylvania forest this summer and alleged faulty well
construction by Cabot Oil & Gas that
the state says allowed natural gas to migrate into home drinking waterâ€”have
helped feed a backlash. Thereâ€™s an effective moratorium on drilling above the
border in New York and in eastern Pennsylvaniaâ€™s Delaware River basin, enforced
by a compact agency of four states and the federal government that oversees the
â€œThe industry is poised on a
knife-edge of public acceptance that could affect its license to operate for
years to come,â€ says Timothy Wirth, a former Democratic senator from Colorado
who heads up the nonprofit United
Nations Foundation, which is trying to ensure a safer and cleaner global
climate. Wirth has touted the natural gas from shale as a â€œgame-changerâ€ that
could help address global warming, but he says the industryâ€™s inadequate
response to land and water concerns have imperiled the fuelâ€™s future as a
bridge to a low-carbon future.
Harsh Economics for Gas Producers
An even greater risk, perhaps, is
that the United States shows no sign of adopting the kind of national policy to
cut greenhouse gases that would increase demand for natural gas in the energy
marketplace, thereby enhancing its value. In fact, one key coal industry
lobbying point against congressional climate action has been to warn that
utilitiesâ€™ inevitable switch from carbon-intensive coal to natural gas would
expose consumers to the risk of higher-priced electricity.
Ironically, natural gas prices are
now extremely lowâ€”in the past two years theyâ€™ve been closer to coal prices than
they have been at any other point in the past decade. Thatâ€™s partly because the
slow economy has kept all energy prices down. And itâ€™s partly due to the
drilling for shale gas, which has pushed new supply onto the market at a time
when demand is weak. Shale gas companies, in fact, try to illustrate how
theyâ€™ve benefited consumers by pointing to how the price of natural gas on the
New York commodities market began to take a sharply divergent path from the
price of oil in 2005 if the prices are compared by heating value. The 2009
price of natural gas on NYMEX, the New York Mercantile Exchange, was $6.55 less
than oil per million BTU, and has averaged $8.80 less this year. The futures
market price doesnâ€™t translate exactly into what consumers are paying today,
but itâ€™s a gauge of where prices are heading. If this trend holds, Pennsylvania
consumers would save $6.8 billion and U.S. consumers would save $205 billion
annually compared to what they would have paid if natural gas prices were in
line with those of oil.
But low natural gas prices, welcome
as they may be for consumers, put the gas companies in a squeeze. The more they
produce, the more they depress the price of natural gas. And, given the high
cost of drilling wells, the harder it is to make money.
The history of the energy business
is replete with boom and bust cycles: frenzy of competition to exploit a new
opportunity, leading to ruin when the resulting excess of supply causes prices
to plummet. A number of analysts wonder if that scenario is playing out in
shale. "Most U.S. natural gas basins do not generate sufficient returns to
justify drilling in today's weak price environment, suggesting that the current
growth pace is not sustainable in a market that is likely to see little near-term
demand growth," investment bank Credit Suisse said in a report earlier
Todayâ€™s harsh economic conditions
force gas producers to cut costs. And for the time being, at least, that makes
increased drilling in the Pennsylvania Marcellus even more likely. The
â€œgeologic riskâ€ is low; companies donâ€™t have to spend money finding the
well-known rock formation, and the drilling process is standardized, repeatable
from well to well. In Pennsylvania, theyâ€™ve been able to acquire land at a
relatively low price and pay lower royalty rates than in other producing
states. In fact, one of the reasons the bulk of development has been in
Pennsylvania rather than in neighboring West Virginia, located on the same
Marcellus shale formation, is because of the Mountain Stateâ€™s higher taxes.
â€œI believe that this is one of the
highest, if not the highest rate-of-return gas play in the United
States,â€ said Range Resources Chief Operating Officer Jeff Ventura at the
companyâ€™s last quarterly conference call with Wall Street analysts. Range also
benefits because its acreage is in southwestern Pennsylvania, where the gas is
â€œwet,â€ mixed with other valuable products that can be separated out and sold,
like propane and butane.
Thereâ€™s a catch for the drillers,
though, if they want to hang on to their prime acreage. Many of the leases they
signed with landowners compel them to begin drilling within a certain time
frameâ€”five years is typicalâ€”or the leases expire. So drilling continues apace.
Range has told shareholders that its production will increase 14 percent this
year and no less than 25 percent next year. â€œWe believe that this accelerated
drilling and completion is the right thing to do even at today's gas price,â€
Ventura said, given the rate of return and the production the company expects
over the life of its Marcellus wells.
Of course, drilling in the Marcellus
is so new that nobody knows how much gas the wells ultimately will produce. And
there are other uncertainties for the gas companies even as they try hard to
keep their costs down. New environmental requirementsâ€”state or federalâ€”could
hike costs. Pennsylvania, its state government budget in woeful deficit, also
is considering a severance tax on the industry; it is the only large oil- and
gas-producing state that doesnâ€™t take a percentage of the revenue from the
natural resources â€œseveredâ€ from its soil. Analyst Kevin Book of ClearView
Energy Partners, who typically follows developments in Washington, D.C., for
his energy industry clients, has been regularly reporting to them on shale
policy news from Pennsylvania, because of their potential implications for any
place shale stores are found. â€œWe cannot discount the viral nature of energy
policy,â€ he wrote in one report.
So the future of the boom hangs in
the balance. How successfully producers will apply their new technology,
whether they can add wealth to a place while preserving its cherished land and
water, and how much fuel they can provide a world in dire need of cleaner energyâ€”all
will be decided on Pennsylvaniaâ€™s changing farmland, in its forests, and in its
National Geographic News