Drilling Education is a Must

A Dec. 6 report from the Pennsylvania Department of Labor's Center for Workforce Information and Analysis gives this update on Marcellus Shale- related industries employment: In all of Pennsylvania for the three years ending with the first quarter of 2011, there were 10,868 new jobs created in "core industries" and 1,028 jobs lost in "ancillary industries," for a net employment change of 9,840.

In the Dec. 8 Ithaca Journal Guest Viewpoint, "Business, labor urge safe gas development," it was argued that New York should develop its natural gas resource to "provide thousands of New Yorkers with the opportunity to get back to work." As evidence of that potential, the authors incorrectly stated that "in just the past two years, Pennsylvania added 72,000 new jobs associated with the development of Marcellus Shale gas."

The claim of 72,000 new jobs is based on an erroneous analysis that has been corrected in some documents, but unfortunately that correction is often ignored by those wishing to promote gas development. Jobs are created by gas development, but they are far fewer than drilling advocates claim, and many of the jobs created go to out-of-state temporary workers.

The actual net new Marcellus-related jobs created in Pennsylvania of 9,840 is about 14 percent of 72,000. The origin of this error lies in a single substitution of one word for another: new "hires" were erroneously claimed as new "jobs." Here is a simple example of the difference.

» Worker A leaves his maintenance job with town to take a new job with gas driller.

» Town hires a replacement maintenance person, Worker B. Worker B quits current job at the gravel pit.

» The gravel pit hires Worker C, who leaves a part-time job at the highway department.

» The highway department hires Worker D, who had been unemployed.

Result: Four new hires, but only one new job.

The ratio of new hires to new jobs is actually much greater than the four-to-one example above and is critical to correctly measuring the economic impact of gas development.

A single news story — in the May 29, 2011, issue of The (Harrisburg, Pa.) Patriot News — appears to be the original source of this confusion that gas drilling advocates continue to nurture. That story was headlined "Marcellus Shale drilling creates 48,000 jobs" and cited a publication by the Pennsylvania Center for Workforce Information and Analysis as its source. But the source document refers to new hires, not new jobs.

Everyone trying to assess the potential positive and negative impacts of gas drilling on the region needs to be alert to the continued overstatement of the possible employment benefits that can be linked to gas drilling activity.

Education on this complex issue will have to be one neighbor at a time over time. It will not be a blitz but rather will include building trust and being even handed. There are powerful forces wanting to mislead and confuse and you rightly point out....my goodness look how long folks believed that smoking was not harmful! Fortunately we have a lot of time and we have a lot of people aware of the issues. It has been a learning curve for me as well. Three years ago, I had not heard of Marcellus Shale. As for "voting" and "ordinances" and "zoning" these are creatures of public opinion and sentiment which is at this point unsettled. The ultimate "vote" will be the number of leases and acres drilled. If it does not meet "critical mass" the industry will fail here. So there is still time for choice and still time for education.

Also, at that meeting there was sentiment expressed to the affect that if we use gas etc. we ought to bare the burdens and consequences of drilling. This view misses the burden shared by those making the profits which, of course, is NONE! Rockefeller and Exxon are never going to worry about their water becoming contaminated, nor will those investors in China and other foreign countries, nor the middlemen manipulating the investments, nor the workers from other states and countries taking our jobs etc. Nope its those people on the ground who bare the consequence and who receive a pittance share of the profit and all the burden.

Shale Bubble Inflates on Near-Record Prices
By Joe Carroll and Jim Polson - Jan 9, 2012 12:01 AM ET

Jan. 3 (Bloomberg) -- Total SA, France's largest oil company, acquired a $2.32 billion holding in Ohio's Utica shale region from Chesapeake Energy Corp. and EnerVest Ltd. Elliott Gotkine reports on Bloomberg Television's "Countdown." (Source: Bloomberg)

Surging prices for oil and gas shales, in at least one case rising 10-fold in five weeks, are raising concern of a bubble as valuations of drilling acreage approach the peak set before the collapse of Lehman Brothers Holdings Inc.

Chinese, French and Japanese energy explorers committed more than $8 billion in the past two weeks to shale-rock formations from Pennsylvania to Texas after 2011 set records for international average crude prices and U.S. gas demand. As competition among buyers intensifies, overseas investors are paying top dollar for fields where too few wells have been drilled to assess potential production, said Sven Del Pozzo, a senior equity analyst at IHS Inc. (IHS)

Marubeni Corp. (8002), the Japanese commodity trader, last week agreed to pay as much as $25,000 an acre for a stake in Hunt Oil Co.’s Eagle Ford shale property in Texas. The price, which includes future drilling costs, exceeds the $21,000 an acre Marathon Oil Corp. (MRO) paid last year for nearby prospects owned by KKR (KKR) & Co.’s Hilcorp Resources Holdings LP. In the Utica shale of Ohio and Pennsylvania, deal prices jumped 10-fold in five weeks to almost $15,000 an acre, according to IHS figures.

“I don’t feel confident that the prices being paid now are justified,” Del Pozzo said in a telephone interview from Norwalk, Connecticut. “I’m wary.”

The world’s largest energy producers, including Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA), are revisiting onshore U.S. prospects passed by in recent decades in favor of deep-water finds in West Africa and the Gulf of Mexico. New drilling techniques developed in the Barnett shale of north Texas have enabled companies to crack previously-impervious formations.

Overseas explorers such as China Petrochemical Corp. and Total SA (FP) want to learn from U.S. partners so they can exploit vast shale resources in Europe and Asia, said Mark Hanson, an analyst at Morningstar LLC in Chicago.

The U.S. holds an estimated 2,543 trillion cubic feet of gas, enough to meet domestic demand for more than a century at current rates of consumption, according to the Energy Department in Washington. Shale accounts for 862 trillion of that total, or 34 percent. In China, shale formations hold an estimated 1,275 trillion cubic feet of gas, 12 times as much as the nation’s so- called conventional fields.
Buying to Continue

The buying spree is likely to continue because international oil producers are eager to amass reserves in the U.S., which surpassed Russia in 2010 as the world’s largest source of gas, said Christian O’Neill, an analyst at Bloomberg Industries in Princeton, New Jersey.

Oil production also has blossomed in the world’s largest economy, rising to a 9-year high of 5.78 million barrels a day in October, the most recent month for which the Energy Department in Washington has figures.

Hunt, the closely held Dallas company founded by Texas tycoon H.L. Hunt in 1934, has only drilled “a handful” of wells in its Eagle Ford shale acreage, which means it doesn’t yet know how extensive or rich those holdings are, Del Pozzo said. Similarly, because drilling in the Utica shale in the U.S. northeast still is in its infancy, the geological characteristics and potential bounty of the region are hard to assess, said Manuj Nikhanj, head of energy research at ITG Investment Research Inc.

“The big risk is that people are jumping in with both feet too early,” Nikhanj said in a telephone interview from Calgary. “Of course, the other side of that is that if they wait, they risk missing out on what could turn out to be a big deal.”
More Science

Buyers are studying fields more closely before committing, he said. Total, Europe’s third-largest oil producer by market value, was selective about what sections of the Utica shale will be included in the 25 percent stake it acquired on Dec. 30 in 619,000 acres controlled by Chesapeake Energy Corp. (CHK) and EnerVest Ltd.

Total’s outlay, including drilling costs, will be $2.32 billion, or the equivalent to about $15,000 an acre, based on Bloomberg calculations. That’s more than four times the average per-acre price from seven Utica shale transactions tracked by IHS from March 2011 to September 2011.

“We are seeing prices move up quite dramatically in these exploratory shale plays,” Nikhanj said. “But the Total joint venture also shows us that these companies with deep pockets are doing more science” before signing deals.
High-Risk Prospects

The quirky nature of shale geology means the risks are high that an investment made in a sparsely drilled prospect will go bust, Nikhanj said. Rock density, porosity and pressure levels vary widely within each field, which means one parcel may hold enough fuel to justify prices of $30,000 or $50,000 an acre, while the adjacent land is almost worthless to drillers.

Brent oil futures, the London-traded benchmark for two- thirds of the world’s crude, jumped 26 percent to an average of $110.91 a barrel in 2011, the highest on record, spurred by supply disruptions in North Africa and escalating worldwide demand for fuels to run trains, airplanes and trucks.

As long as crude commands such lofty prices, explorers will continue to seek out geologic formations soaked in oil and gas components such as propane, Dan McSpirit, a Denver-based analyst for BMO Capital Markets, said in a telephone interview.
Learning the Drill

China Petrochemical, the Beijing-based crude producer known as Sinopec (600028) Group, and Total expect to glean expertise from their U.S. partners in the horizontal drilling and high-pressure water injection necessary to extract oil and gas from shale, said Hanson, the Morningstar analyst. Ultimately, the know-how will be transferred to virgin shale prospects in Europe, Asia and Latin America, he said.

U.S. gas explorers including Chesapeake and Devon Energy Corp. (DVN) are selling interests in shale fields to international energy companies such as Total and Sinopec to finance drilling on leases acquired during a “massive land grab” in 2007 and 2008 as oil and gas prices soared to record highs, O’Neill of Bloomberg Industries said.

The plunge in energy prices that followed Lehman’s bankruptcy and subsequent global financial crisis left operators like Chesapeake too poor to fulfill clauses that set deadlines for finishing wells on pain of forfeiting the leases, O’Neill said.

“These deals give the domestic exploration companies capital to drill so they won’t lose those assets, and gives the foreign companies the learning process they’re going to need to exploit shale resources on their own,” O’Neill said.

Reuters) - The public health effects of shale gas development need to be rigorously studied as production rapidly spreads in the United States, public health professionals and advocates said on Monday.

Advances in the hydraulic fracturing, or fracking, drilling technique have revolutionized the natural gas industry, but researchers said more must be done to evaluate what the shale boom means for the those living near wells.

Health groups have concerns including possible air and water pollution from fracking, especially since some operations take place very close to homes and schools.

"We are leaping before we are looking," said Jerome Paulson, of the Mid-Atlantic Center for Children's Health and the Environment, at a conference focused on shale gas and public health.

"Those who are drilling and extracting ... have not done the human health research and ecological studies to assure that the process and chemicals they use are the least hazardous possible," Paulson said.

The Mid-Atlantic center and Physicians, Scientists and Engineers for Healthy Energy sponsored the conference with hopes of setting up a consortium to collect and assess scientific data on the effects of shale development on the public.

Past studies of shale gas development have provided varying results sometimes even when they were based on the same information, said Vikas Kapil, a chief medical officer at the Centers for Disease Control.

"This sort of begs for some systematic and organized way to begin to think about how we collect data, the kind of data we collect, and to have some common understanding and transparency in how this work is laid out and organized," Kapil said during a speech at the conference.

Fracking involves injecting water mixed with sand and chemicals into shale formations at high pressures to extract fuel.

The recent spread of fracking has raised concerns among environmentalists, public health advocates and some neighbors of shale wells who worry about issues such as water contamination and increased truck traffic. Some have also linked earthquakes to disposal of waste water from shale wells.

Industry groups say fracking has been done safely for decades and that drillers have worked diligently to minimize effects of drilling.

PUSHING THE PAUSE BUTTON

The Environmental Protection Agency is expected to release the first results of its analysis of the effects of shale development on drinking water later on this year.

Already, a recent EPA draft report showed that harmful chemicals from fracking fluids were likely present in a Wyoming aquifer near the town of Pavillion.

Still, many researchers at the conference complained that federal and state government seemed to be woefully behind the curve when it comes to assessing the health effects of shale gas development.

Adam Law, a physician with Weill Cornell Medical College, which helped organize the conference, said the industry has not upheld its responsibility to ensure that its practices are safe and to examine the consequences for public health.

The conference was not conceived to be activist, Law told Reuters on the sidelines of the forum. "This is an attempt to bring the evidence-based community into dialogue."

While Law said the conference was not "anti-fracking," he said he believes authorities should "push the pause button" on shale drilling in new areas until thorough studies can be completed.

An industry-backed group that promotes shale gas production said drillers have been using fracking for more than 65 years and the only difference in the current shale boom is the use of horizontal drilling.

"What these guys are essentially arguing is that the mere act of turning a drill bit horizontally, thousands of feet underground, represents a greater risk to health than drilling a well straight down into the formation," said Chris Tucker, a spokesman for Energy In Depth.

"It's a position completely unmoored from the facts, from the science and from the demonstrable history of safe operations to which this industry lays claim," he added.

Friends,
It's not that the folks in Charleston lack "wisdom, vision and courage." They do not.
They have the wisdom to make themselves rich from 'public service'.
They have the vision work for outside interests while claiming to serve us.
And they have the courage to risk humiliation and jail for selling their votes to the highest bidder.
If this were not true, why would our "representatives" force a truck driver or logger who barely earns $20,000 a year to pay state taxes at a higher rate than is paid by the billionaires who own the natural gas industry?
And why do Mountaineers, who are rightfully proud of their independence, allow themselves to be treated like servants by the very politicians they, themselves, elected?
-- Rich Laska

Rich the bottom line is that public service has become too advantageous to the individual. A state senator told me, in a disgusting tone, that he was told upon first taking office that if you do not leave the West Virginia State Senate a millionaire you have no business in politics. It was not long after that revelation that he obtained a nice federal government job right here in WV in addition to the job of serving his constituents. That is why our politicians follow the money, they want that job security for a job that pays off very well.

Just watch this fight over redistricting take place. Rather than do what is constitutionally required and draw the lines correctly our state legislators in Charleston are tripping all over themselves succumbing to the pressure from our current U. S. Congressional delegation, and their favored interests, to maintain status quo. It's all about self preservation.

It is an easy equation to solve. Only when the costs of going against the public interest outweigh the benefits of serving special interests can we expect change.

Joe Ferretti a/k/a
Slatyforkfool

One has to only look at the PSD fight to see what threats and coercion can be levied. Read the recent PSC report where there are threats of individual liability for the PSD members who bravely fight for what is right with the Snowshoe sewer. One PSD member was accused of having a conflict of interest and of course there is always the threat of fines or worse for the PSD. All because the PSD wants to spend 20 million instead of 30 or more.

It's the time honored golden rule, he who has the gold makes the rules. Developers and major land holders sue the PSD over the fight to extend service to their land at public expense and then those folks go to Charleston to be heard. Do you think local ratepayers who may be burdended with huge sewage bills have the ability to spend days in Charleston fighting to be heard? Do they have the ability to make campaign contributions?

I don't understand Marty seemingly having a change of heart on drilling. He has offered an explanation that we are free to accept or reject. Bottom line, the public has to hold these folks, from Marty on up, accountable. I see little to know discussion on this site about where your delegates and Senator are on the issue of drilling. Did they support the last legislation on drilling? Have they sought input from your communities? Who is supporting them financially? You can research that in the Secretary of State data on campaign contributions. At least Marty is engaged. How about the others? Hold them accountable and determine where they stand. That is the only suggestion I have.

Joe Ferretti
Slatyforkfool

U.S. energy companies are pumping so much natural gas out of the ground that prices are plummeting, and the cheap gas isn't likely to evaporate anytime soon.
Experience WSJ professional
Editors' Deep Dive: Advances in Oil, Gas Drilling

PETROLEUM REVIEW

Ntural-gas prices fell 5.7% Wednesday to their lowest level in over two years—good news for people who use gas to heat homes and for companies that use it to power factories.

For U.S. energy companies, however, the domestic natural-gas market is looking increasingly out of whack. Despite a 32% drop in prices last year, onshore production rose 10%, and it is expected to rise another 4% this year, according to Barclays Capital. As a result, prices are expected to remain low for at least the next couple years.

Many energy companies have shifted their focus away from natural gas to more profitable oil. Still, natural gas is often a byproduct of oil drilling, and some companies are opting to burn off the gas they find because they don't have a way to transport it.

For example, Goodrich Petroleum Corp.—reluctantly, it says—is flaring gas from an oil well on a ranch in South Texas because a nearby pipeline is already full.

U.S. energy companies are pumping so much natural gas out of the ground that prices are plummeting, and the cheap gas isn't likely to evaporate anytime soon, Ryan Dezember reports on Markets Hub.

Oil production isn't the only factor boosting natural-gas supplies. Some gas fields produce so much ethane, a valuable liquid used to make plastics, that companies will drill regardless of gas prices. In addition, some companies need to continue drilling so they don't violate terms of leases on millions of acres of land—deals struck when gas prices were high.

Wednesday's price drop on the New York Mercantile Exchange, to $2.77 per million British thermal units for gas delivered next month, stemmed in part from new forecasts for warmer weather in several large heating markets, including New York and Chicago.

Earlier this week, Bank of America Merrill Lynch said gas prices could drop below $2 in the fall, a level unseen since 2002. Four years ago, it sold for around $9.

Eventually, the natural-gas market is expected to correct itself, either by forcing companies to further slash gas-development budgets or by luring in new gas customers. But industry observers say that could take many months, or even years.

The current glut partly stems from the U.S. energy industry's success with new exploration techniques—notably hydraulic fracturing of shale formations, or fracking. Shale formations full of gas keep turning up across the country, storage reservoirs are close to full and companies are now starting to try to export the excess gas.

The gas produced by oil drilling has only added to the surplus—and made it unlikely that it will end any time soon. Oil prices now top $100 a barrel, giving energy companies ample incentive to expand drilling and keeping pressure on prices consumers pay at the pump. High oil prices effectively subsidize the production of otherwise unprofitable natural gas.

"That's what's being underestimated by a lot of people who expect the gas supply to fall precipitously," says Mark Papa, chief executive of EOG Resources Inc., one of the biggest independent oil-and-gas companies in the country.

Many experts predict rock-bottom natural-gas prices through at least 2013. "We're anticipating sustained low gas prices," says Andy Steinhubl, co-head of consultancy Bain & Co.'s North American oil and gas practice.

That is good news for consumers. More than half of American households use gas to heat their homes, and they can expect an 18% drop in the cost of staying warm this winter, according to federal forecasts. A home in the Northeast that uses natural gas can expect to spend $1,023 this year, less than half the cost of heating with oil.

Inexpensive natural gas also is a boon for manufacturers and petrochemical producers. For the first time in nearly a decade, steel companies and plastics makers are building facilities in the U.S., taking advantage of the inexpensive fuel to compete globally.

Domestic explorers have little choice but to keep pumping. They have spent enormous sums leasing up prospective acreage in gas fields. Saddled with those leasing costs, the companies are watching operating costs rise.

Although the energy industry typically talks about gas wells and oil wells, most wells usually contain a mixture of oil, gas and other petroleum products. In fact, nearly one-quarter of all U.S. gas production comes from oil wells, according to the government.

Moreover, many gas wells contain significant amounts of ethanes and other valuable liquids, which are sold separately and priced in relation to crude oil.

"Companies are making so much money on the oil and natural-gas liquids that gas is basically free," says Amy Myers Jaffe, director of Baker Institute Energy Forum, a policy think tank at Rice University in Houston. "They are saying to themselves: I am going to produce the gas regardless of what the price is, because I'm making money on the oil and liquids."

To be sure, not everyone thinks inexpensive gas will last long. Jon Wolff, an analyst with International Strategy and Investment Group, says "nearly all U.S. gas drilling is uneconomic." He expects significant declines in gas production in Louisiana this year as financial hedges expire and joint-venture capital gets used up. He forecasts a rebound in gas prices to $4.50 per million BTUs in the second half of this year.

Chesapeake Energy Corp., which has drilled more U.S. gas wells in recent years than any other company, has said it will cut spending on such wells if prices remained at current levels.

"The market needs a rest," says Chief Executive Officer Aubrey McClendon. As soon as prices rebound, he says, "the industry will be back to drilling more aggressively than it is today."

Billions of dollars worth of existing exploration leases, however, limit how much such companies can ratchet back. Such leases generally require companies to drill at least some wells to keep the leases from expiring.

When Louisiana's Haynesville Shale was discovered in 2008, gas prices were over $9 per million BTUs and companies rushed to lease as much acreage as possible. Landowners were paid up to $30,000 an acre. The leases required companies to drill at least one well on each 640-acre block, usually within four years.

"If you don't drill, you will lose the lease—money put up and thrown away," says Don G. Briggs, president of the Louisiana Oil & Gas Association.

Another issue: some companies raised money from foreign energy companies on the condition that they use it to drill, a commitment that doesn't go away just because gas prices are now low.

Blair Thomas, chief executive officer of EIG Global Energy Partners, a private-equity firm that has invested heavily in domestic energy companies, says the industry will be dealing with lease expirations and drilling commitments for another year or two.

"Until that passes, the industry will continue to drill gas wells, whether they are economic or not," he says.

Over the longer term, an increase in the number of natural-gas-fired power plants could reduce the surplus of natural gas. New federal environmental rules require extensive upgrades to coal-fired power plants in order to reduce air emissions. Many coal plants are likely to be replaced with gas-fired generation.

In the meantime, gas production continues to rise. Daily gas production in South Texas' Eagle Ford oil field doubled last year and is expected to nearly double this year.

Goodrich isn't the only company opting to burn off natural gas. In the 12 months ended in August, the most recent data available, Texas approved 651 permits to burn off gas, up from 107 three years earlier.

The state says it requires drillers to hook up to pipelines eventually. In a few weeks, after a pipeline is upgraded, Goodrich plans to hook up the Dilley, Texas, well that is now flaring gas, and the gas glut might get a little bigger.

Write to Russell Gold at russell.gold@wsj.com and Ryan Dezember at ryan.dezember@dowjones.com

Significant news out this morning from the U.S. Department of Energy’s Energy Information Administration:

… The estimated unproved technically recoverable resource (TRR) of shale gas for the United States is 482 trillion cubic feet, substantially below the estimate of 827 trillion cubic feet in AEO2011. The decline largely reflects a decrease in the estimate for the Marcellus shale, from 410 trillion cubic feet to 141 trillion cubic feet.

Now, this comes after last summer’s fairly confusing release of a new U.S. Geological Survey analysis of the Marcellus Shale reserve, and in the wake of other reports that have warned the Marcellus is not nearly as huge as some hopeful reports from the media, industry and political leaders have said.

In today’s early release of a summary of its 2012 Energy Outlook, the EIA explained its new figures this way:

Both EIA and USGS have recently made significant revisions to their TRR estimates for the Marcellus shale. Drilling in the Marcellus accelerated rapidly in 2010 and 2011, so that there is far more information available today than a year ago. Indeed, the daily rate of Marcellus production doubled during 2011 alone. Using data though 2010, USGS updated its TRR estimate for the Marcellus to 84 trillion cubic feet, with a 90-percent confidence range from 43 to 144 trillion cubic feet—a substantial increase over the previous USGS estimate of 2 trillion cubic feet dating from 2002. For AEO2012, EIA uses more recent drilling and production data available through 2011 and excludes production experience from the pre-shale era (before 2008). EIA’s TRR estimate for the entire Northeast also includes TRR of 16 trillion cubic feet for the Utica shale, which underlies the Marcellus and is still relatively little explored.

Interestingly at about the same time the EIA was briefing the media on its new report, Chesapeake Energy announced this news, what it called an update on additional steps it is taking to continue creating shareholder value in response to the lowest natural gas prices in the past 10 years:

Chesapeake plans to further reduce its operated dry gas drilling activity by 50% to approximately 24 rigs by the 2012 second quarter from 47 dry gas rigs currently in use and by 67% from an average of approximately 75 dry gas rigs used during 2011 … Specifically, during the 2012 second quarter, Chesapeake plans to have reduced its drilling activity in both the Haynesville and Barnett shales to six operated rigs each and to 12 operated rigs in the dry gas area of the Marcellus Shale in northeastern Pennsylvania.

And even in the so-called “wet gas” areas of the Marcellus like West Virginia (those areas where the natural gas reserves also contain significant amounts of potentially profitable other materials like ethane, butane, propane, and pentane), Chesapeake said:

Chesapeake plans to further reduce its undeveloped leasehold expenditures, the majority of which have been focused on liquids-rich plays during the past three years. The company is now targeting to invest approximately $1.4 billion in undeveloped leasehold expenditures in 2012 (net of joint venture partner reimbursements), of which approximately 90% will target liquids-rich plays and 100% will be in plays where the company is already active. This compares to undeveloped leasehold expenditures, net of joint venture partner reimbursements, of approximately $3.4 billion and $5.8 billion in 2011 and 2010, respectively.

Chesapeake CEO Aubrey McClendon said:

We have committed to cut our dry gas drilling to bare minimum levels that are likely to be maintained until expected drilling economics on dry gas plays return to levels competitive with expected returns in Chesapeake’s lineup of liquids-rich plays, which we believe is the best in the industry. As in previous natural gas pricing downturns, Chesapeake is promptly responding to rapidly changing market conditions, and we hope today’s announcement helps disprove the view held by some industry observers that producers fail to act rationally in times of unusually low natural gas prices.