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ENERGY REPORT (Section 2)9/29/10
Marcellus Shale (Economic Opportunity)
Purpose
The purpose of this report is to highlightwhy the supply of natural gas may be an important factor in the transition of energy usage, in going from fossil fuels to alternative energy.
This report looks at the economic opportunity of the Marcellus Shale gas reserves.
Economic Opportunity
According to a Feb 2009 report from Centre County, PAMarcellus ShaleIndustry Update.
The potential of the Marcellus Shale has not been realized – Pennsylvania is only in the infancy of the explorationand development process.
A smaller-scale comparison can be offered in a review of the recent experience in north Texas, where the BarnettShale formation has been undergoing development for a little over a decade. The Barnett formation, at5,000 square miles, pales in comparison to the size and potential of the Marcellus Shale formation, which extends95,000 square miles and includes approximately 60 percent of Pennsylvania’s land mass.
A recent evaluation of economic activity in the Barnett Shale region found the following:
· A total of 55,000 people are directly employed in the exploration and production of natural gas
· An additional 108,000 jobs support those direct workers in a full spectrum of employment sectors
· The gas industry contributes more than $10 billion to the region’s economy each year
With a land area spanning three states and almost 20 times the size of the five-county Barnett region, the MarcellusShale provides an unparalleled economic opportunity for Pennsylvania.
According to a May 2010 release….
New Study: Marcellus Shale Expected to Create 212,000 New Jobs by 2020 – on Top of Thousands Already Being Created Now
Updated report from Penn State quantifies enormous economic, energy potential of exploration of clean-burning natural gas in Commonwealth
HARRISBURG, Pa. – The safe and steady development of clean-burning natural gas in Pennsylvania’s portion of the Marcellus Shale has the potential to create an additional 212,000 new jobs over the next 10 years on top of the thousands already being generated all across the Commonwealth. And over just the next 18 months, these activities are slated to create more than $1.8 billion in state and local tax revenues. These are among the key findings released today by professors from Penn State Universityin anupdate to their initial jobs and economic impact study issued last July.
“At a time when more than half-a-million people in Pennsylvania are currently out of work, the release of this updated report from Penn State today confirms the critical role that responsible energy development in the Commonwealth can play in substantially, perhaps even permanently, reversing that trend,” said Kathryn Klaber, president and executive director of theMarcellus Shale Coalition (MSC). “Last year alone, Marcellus producers paid more than $1.7 billion to landowners across the state, and spent more than $4.5 billion total to make these resources available. By the end of this year, that number is expected to double, and millions of Pennsylvanians will find themselves the direct beneficiaries of that growth.”
Market Dynamics (Oversupply Causes Lower Prices)
Per 9/13/10 WSJ…
Still, there's an even bigger issue facing the industry than the Gulf spill: oversupply.
Oil and gas producers have adopted and refined advanced drilling techniques enabling them to tap unconventional resources such as shale gas, trapped in dense rock thousands of feet underground. U.S. natural-gas reserves and production, after years of decline, are now back to levels last seen in the early 1970s. Meanwhile, U.S. gas consumption peaked in 2000 and fell 2% in 2009, as the recession damped demand.
Extra supply has caused gas prices to tumble almost 30% in the past three years, hurting producers' profits and stock prices, with companies like Chesapeake Energy seeing big drops. Even though oil prices have more than doubled since February 2009, that has only partially offset the producers' losses. "The overriding question for exploration and production stocks is the future of the U.S. gas market and when oversupply ends," says Mr. Richardson.
Low prices would usually spur producers to stop drilling and help rebalance the market, but that isn't happening for a variety of reasons, including lease conditions and the sector's natural bias toward growth. Jonathan Wolff at Credit Suisse calculates that for every dollar of cash flow producers make in 2010, they will reinvest $1.52 on average.
One way investors can gauge the industry is to track the number of U.S. drilling rigs in operation, particularly "horizontal" rigs, which target shale gas. (The easiest way to find this tally is on the website of oil-field-services company Baker Hughes Inc.; look for the "Rig Count" box on the site's main page.) If this number levels off or drops, it would indicate efforts to bring on new supplies were easing, helping to address the oversupply issue.
Mr. Waghorn argues that producers with the highest costs need a gas price of about $4 per million British thermal units to keep running. Today, the average gas price in the futures market for 2011 is about $4.70 per million BTUs.
But developing new shale resources, which will be needed in the future, requires a much higher price—$6 or more per million BTUs—to deliver a suitable return on producers' investment. If developers don't think they can get that price, they won't go ahead with new gas projects—which will limit new supply, tighten the market and cause the gas price to rise.
For Mr. Waghorn, this suggests the risk of further big declines in gas prices is limited, with big potential for them to rise significantly over time, as higher prices will be needed to justify investment in new fields.
But he sees potential for oil prices to fall substantially if the global economy sputters over the next 12 months and demand falters. So, investors should look for signs that demand for gas is recovering and that inventories of the fuel, currently very high, are declining. These data, and more, are published weekly at the Department of Energy's website,
There's one more long-term factor to consider. If Washington passes comprehensive climate-change legislation, including effective limits on carbon emissions, this could help redress the imbalance of natural-gas supply and demand. Gas emits about half as much carbon as coal when burned, so putting a cost on carbon would make gas more competitive versus coal. Gas demand would likely rise.
Utilities (Electric Demand)
Gas and government loom large in the outlook for electricity producers, too. Gas-fired plants provide 23% of America's power, and in much of the country set the market price for electricity. So, higher gas prices often mean higher profit margins for suppliers that own coal, nuclear or hydropower plants. Their fuel costs are often lower than those of suppliers relying on gas-fired plants, but market prices for electricity are still tied to the price of gas.
Like the gas producers, utilities have been hoping an economic rebound would fire up demand for energy. Further help was supposed to come from Washington in the form of comprehensive climate-change legislation. The hope was that by making carbon-intensive fuels like coal more expensive, the new rules would force many such power plants to shut down and tighten electrical capacity—raising prices and profits.
But a lack of legislation and slack demand has complicated that picture. Indeed, analysts at Barclays Capital believe demand for electricity will not return to prerecession levels for some years yet, weighing on prices.
Utilities (From Coal to Gas)
Power companies are increasingly switching to natural gas to fuel their electricity plants, driven by low prices and forecasts of vast supplies for years to come.
While the trend started in the late 1990s, the momentum is accelerating and comes at the expense of coal. Some utilities are closing coal-fired plants; others are converting them to run on gas.
The switch is occurring globally and is getting a push from regulators who want to limit emissions that contribute to climate change, haze and health problems such as respiratory illness. Though efforts in Congress to pass legislation attaching a price to carbon emissions appear stalled for now, utilities still anticipate eventual carbon restrictions. The Tennessee Valley Authority, for example, recently announced a 20-year development plan that emphasizes nuclear and gas, and includes fewer coal units.
Black Days for Coal
An analysis of the impact over the next several years if all coal-fired power plants must install sulfur-dioxide scrubbers to meet EPA emissions standards for mercury and acid gases
1,885 million megawatt-hours
Coal-fired generation in the U.S. in 2009
47 million MWh
Loss of generation expected over next five years due to natural plant retirements
244 million MWh
Loss expected because of EPA regulation of sulfur-dioxide and mercury emissions
110 million MWh
Gain expected from new coal plants
1,704 million MWh
Expected coal-fired generation in 2015
—9.6%
Percentage change in coal-fired generation, 2015 versus 2009
Sources: Ventyx, Electric Power Research Institute, Energy Information Administration, Bernstein Research analysis
Natural gas also has the edge in Europe. In 2009, far more gas- than coal-burning plants were built in the European Union—24% of new capacity versus 8.7%.
Journal Reports: Read the completeEnergy reports.
Migration Occurring
"It's pretty clear that, whether it's caused by future carbon legislation or action by the EPA, the migration away from coal has begun," says Constellation Energy Group Chief Executive Mayo Shattuck.
Coal-burning facilities are expected to slip to 10% of total new capacity in the U.S. in 2013, down from 18% in 2009, the U.S. Energy Information Administration reports. Gas, meanwhile, is expected to soar to 82% of new capacity in 2013 from 42% last year.
The falling price of natural gas in the U.S., to about $4 per one million British thermal units, has helped gas capture an ever-increasing share of power generation. Hardly a week goes by without a company announcing changes that push coal to the sidelines, usually in favor of natural gas, renewables or nuclear plants.
Small Won't Survive
Most big coal-burning utilities have invested billions of dollars to install pollution-control equipment on their largest coal-fired plants. But they are replacing or idling smaller coal plants for which such expenditures can't be justified.
Job Growth
According to a June 2010 release from the Marcellus Shale Coalition (MSC)
Marcellus Shale Coalition (MSC)
Founded in 2008, the Marcellus Shale Coalition (MSC) is an organization committed to the responsible development of natural gas from the Marcellus Shale geological formation and the enhancement of the region’s economy that can be realized by this clean-burning energy source.
The members of the coalition work with our partners across the region to address issues with regulators, local, county, state and federal government officials and communities about all aspects of producing clean-burning, job-creating natural gas from the Marcellus Shale.
Bucking Trends: Marcellus Shale Producing Counties Continue to Add Jobs as Unemployment Climbs Elsewhere
Marcellus job growth the largest “for any sector in [PA], save for…temporary census jobs”
Want to know how tough the economy is in Pennsylvania right now? Of the Commonwealth’s 67 counties, only five did not lose jobs over the past 12 months. But only two of those counties actually improved their unemployment rate (that is, lowered it) by more than two percentage points compared to last year. And wouldn’t you know it — they just happen to be neighbors: Bradford and Tioga Counties. One other thing they share in common: They both happen to be places were Marcellus Shale producers are investing millions of dollars a day to develop clean-burning natural gas for the Commonwealth.
You’ve heard of the Marcellus Multiplier, ….
According to thePenn State study, the continued ramp-up of responsible exploration activities throughout the Commonwealth over the next decade is expected to bring online an additional 13.5 billion cubic feet of natural gas a day, nearly seven times the amount that Pennsylvanians currently use on a daily basis. This extraordinary increase in daily natural gas output results in the creation of more than 211,000 new jobs in the Commonwealth, along with $18.85 billion in value added resources for the state’s economy. As significant,the study also finds that for every $1 invested in the state by Marcellus Shale producers, $1.90 of total economic output is generated as a result – a phenomenon that’s come to be known as the “Marcellus Multiplier” among the hundreds of individual industries up and down the Marcellus supply chain that continue to benefit from this work including:
Prepare site for the drilling process
Restoration of the site and maintenance of the producing well
Casing and drilling of the well
Construction of flow lines at the site before natural gas enters gathering lines
Moving materials to and from the well site
Water and materials management
…now meet the Rural Revitalizer. Take a look at the numbers for yourself: In counties where the responsible development of the Marcellus Shale is taking place, jobs are being created, unemployment rates are being held at bay, and millions of dollars are being returned to local governments to provide for essential services.
Bradford County’s story is among the best. In 2009, the local unemployment rate was approaching 11 percent. Today? As recently reported by the Towanda Daily Review, it “leads the state of Pennsylvania in new job creation with 2,000 more people employed than one year ago.”
Today’s Scranton Times Tribune sheds additional light on the positive and lasting impact that Marcellus Shale development is having on job creation and growth across the Commonwealth:
In May, a Penn State University study funded by the natural gas industry said development in the Marcellus Shale region would create 88,000 jobs in 2010. With unemployment up in the state, Bradford County has bucked trends with an unemployment rate that has gone down in the last year.
The Current Employment Statistics for the state in May show statewide mining and logging employment of 23,900, up 2,300 for the year. That growth, 10.6 percent, is the largest rate of growth for any sector in the state, save for federal government employment gains from temporary census jobs.
In Bradford County, an area of high drilling activity, seasonally adjusted unemployment is down a full percentage point, from 8.8 percent last year to 7.8 percent in May. Establishment data, a count of jobs in the county, showed a 1,100-job gain during the year, or 5 percent, to a total of 22,900 jobs, according to state data.
Regional Newspapers Highlight the Economic, Workforce Opportunities for Pennsylvanians
- “With the boom in Marcellus Shale natural gas development throughout the region, area educational institutions are growing to keep up with work force demands. New training, certification and degree programs are being created at local schools to ensure local job skills are tailored to white- and blue-collared job needs related to the natural gas drilling industry. … An industry-financed study conducted by Penn State’s department of energy and mineral engineering, which offers an undergraduate degree in natural gas engineering, expected Marcellus Shale natural gas extraction efforts to create more than 200,000 jobs in the state and have an overall $18 billion economic impact by this year. (Scranton Times Tribune, 6/28/10)
- “It’s just a great opportunity for people to really see what opportunities this industry can provide,” Thompson said. “And it’s not limited to natural gas drilling and extracting. It’s everything. It touches so many different verticals, from food, insurance, gas rig and well site construction, it really runs the gamut of what a lot of people in this area have been doing well for years.” (Morning Times, 6/28/10)
Editorial Pages Underscore the Opportunities Created Through Responsible Marcellus Development
- “Ground was broken Tuesday afternoon for a Natural Gas Park that will serve the needs of an energy source for the next century. In the evening, Williamsport City Council approved a land development plan for a new gas industry tenant at 240 Arch St. with the potential for 200 to 250 jobs. … These opportunities for our region, its families and its economic profile come along once in a lifetime. (Williamsport Sun-Gazette Editorial, 6/29/10)
- Good news for Valley was millions of years in the making: “Marcellus Shale covers an area equal to Pennsylvania and Ohio combined, but the good news locally was concentrated on a plot the size of a couple of city blocks straddling the border of Youngstown and Girard. It was there that ground was broken for V&M Star’s expansion, a $650 million project that will provide construction jobs now and, eventually, 350 jobs making oil-country grade pipe. … Now, with new technology and increasing demand for clean-burning natural gas, investors are looking at drilling thousands of Marcellus Shale wells. And hundreds of miles of pipe for those wells will be coming from the Mahoning Valley. (Youngstown Vindicator Editorial, 6/30/10)
AuthorMike Chmela (Project Director, Market Research)