Peaks & Valleys is an occasional series from the Observer-Reporter business department about the natural gas industry’s ebbs and flows, and how they affect the economy of Washington and Greene counties and surrounding areas.
From the cab of his truck, Ed Brownlee has been seeing signs of a turnaround in the natural gas industry.
Brownlee, who drives for Avella-based Brownlee Trucking, owned by his cousin Frank Brownlee, noted earlier this month that during the downturn of the past couple of years, the trucking company moved into the water storage tank business and has been supplying them to Range Resources.
He’s seeing drilling picking up in the Burgettstown area, adding the company also is hauling compressors, currently doing work on a compressor station project in West Virginia.
“We definitely have seen a pick-up,” Brownlee said. “It’s not where it was, that’s for sure, but work seems to be picking up.”
Just down Route 18 from Burgettstown, at Sunnyside Supply in Slovan, owner Paul Battista noted as he closed out the books on February, he recorded the first pick-up in business in 24 months. Of his top 25 customers last month, a dozen were new accounts, but 90 percent of the overall business was related to oil and gas industry orders.
“We’ve hung in there,” Battista said. “We knew (the gas industry) was going to come back, we just didn’t know when.”
From those in the supply chain to those doing the drilling and attorneys and analysts who follow it, there is optimism the gas industry is emerging from the downturn.
The consensus word to describe what is happening is “modest,” but many believe the uptick can be sustained over a period of years.
Dennis Degner, vice president for the Southern Marcellus Shale Division of Range Resources in Southpointe, said two weeks ago he’s “cautiously optimistic” for a rebound he believes is already in the making.
“I’d say the turnaround is already here,” Degner said. “The uptick is happening now.”
The biggest driver behind the nascent rebound is improving pipeline infrastructure in the region, which is creating new markets and moving the local gas price differential closer to parity with national prices.
The brighter outlook can be traced to several recent events:
• A link to external markets: On Feb. 13, after a 2½-year process, the state Department of Environmental Protection issued environmental permits to Sunoco Logistics’ Mariner 2 pipeline.
The permits enable Sunoco to commence construction on the cross-state, 300-mile project that will parallel its Mariner East 1 pipeline.
The project originates at the MarkWest natural gas processing plant in Chartiers Township and moves eastward across southern Pennsylvania.
The $2.5 billion project will carry propane and butane from the Marcellus and Utica shale plays of Ohio, West Virginia and Western Pennsylvania eastward to the Marcus Hook industrial complex for movement to both Northeast and overseas markets.
• A home market for ethane: The go-ahead for Mariner East 2 was preceded by the June announcement that Shell Chemical will proceed with construction of its ethane cracker plant in Beaver County, which, if it goes according to schedule, will be using Marcellus and Utica-produced ethane to make ethylene feedstock for the plastics and petrochemical industries in the next few years.
• A power market: In mid-March, Sugar Land, Texas-based Industrial Info Resources, a leading provider of global market intelligence in the industrial process, heavy manufacturing and energy markets, said it is tracking $11.52 billion in power industry projects that are set to kick off this year in the Northeast, including Pennsylvania, New York, New Jersey and Delaware.
“Many of the capital projects in the region are set to take advantage of the abundant natural gas coming from the Marcellus Shale in Pennsylvania,” the company said.
One of those potential power projects could have a local impact.
Earlier this month, APV Renaissance Partners Opco LLC of Bernardsville, N.J., said it is considering developing a natural gas power plant at First Energy’s closed Hatfield’s Ferry Power Station in Greene County.
APV, which is applying to DEP for an air-quality permit, will hold an informational meeting April 5 in Carmichaels.
The early phases of a rebound were noted last month by John Shackelford, a senior examiner for the Federal Reserve Bank’s Fourth District, which is headquartered in Cleveland and includes Pittsburgh and Western Pennsylvania.
In a Feb. 17 column, Shackelford, who follows the natural gas industry for the Fed’s Shared National Credit Program, wrote that during the downturn that began in 2014, energy companies learned to operate in a lean way and with energy prices again rising, those companies are likely to invest in drilling and undertake other projects that can bring renewed investment and jobs to the region.
“In 2016, when prices reached their recent low, there were more than 5,000 wells drilled that energy companies left uncompleted,” Shackelford wrote. “These wells are basically ready for production and can be brought on line in a matter of weeks.
“A number of such wells are in the Fourth Federal Reserve District, which comprises Ohio, Western Pennsylvania, the northern panhandle of West Virginia and eastern Kentucky. The Fourth District and the United States stand to benefit as production resumes.”
The companies that survived the downturn are well-known names in the Appalachian Basin, specifically in Washington and Greene counties: Range Resources, Rice Energy, Consol Energy and EQT. All have increased their capital spending budgets for the 2017.
A quieter rebound
Several attorneys whose firms represent natural gas exploration and production companies in the Appalachian Basin said during an industry panel discussion this month in Pittsburgh they aren’t expecting a boom like the one that accompanied the opening of the Marcellus during the last decade, when as many as 70 drilling companies were working the shale strata.
Instead, they foresee a modest recovery, led by those companies that successfully navigated the downturn and facilitated a consolidation of the industry in the basin.
The consolidations, which one attorney placed at $6.25 billion worth of acquisitions in the Marcellus last year, and another $250 million in the Utica, came from three buyers.
The $3 question
Matt Jarrell, director for Pittsburgh-based Sherrard, German & Kelley, said one of the biggest challenges will be the ability of producers to make money on natural gas in what he sees as years of lower-priced natural gas.
Jarrell said he doesn’t believe natural gas will return “in my lifetime” to its $12- to $13-per-mcf range that was the going rate when the Marcellus boom began.
“At some point, somebody needs to make money producing molecules. We’ll hover at $3 for a long, long time ... and we’ll have to figure out” how to make money at that price, he said.
Range’s Degner pointed to relief in commodity prices for natural gas as enabling Range to “thrive” on $3 gas, based on improved infrastructure and additional markets.
Rice CEO Daniel Rice IV said in an email the local (Appalachian Basin) price differential – which as the downturn approached was often $1 per mcf less than national prices – has now narrowed to 60 cents per mcf.
“We can take advantage of better prices and better markets,” Degner said, adding the company, which last year became the first U.S. producer to ship ethane to Europe through the Mariner East 1 pipeline, will this year ship ethane through the soon-to-be-completed Mariner West pipeline to Sarnia, Canada, where it has a supply contract with Nova Chemicals.
Oil and gas analyst Jeff Quigley, director of energy markets for Houston-based Stratas Advisors, agreed with the assessment of others that the gas upswing in the Appalachian Basin will be modest. But Quigley, who spoke Wednesday at an energy forum in Southpointe sponsored by Guttman Energy, believes shale gas could move higher, to $4 per mcf after 2018, particularly if export demand for ethane to Europe and LNG to Asia grows.
Like Degner, Rice expressed optimism that as other basin pipeline projects are completed, more markets will open up for locally produced gas.
Both men said they are looking beyond this year and 2018 to a time when they expect expanded markets and the buildout of manufacturing in the region as a result of Shell’s ethylene feedstock.
“Over the next few years, there is substantial new outlet capacity projected to come online,” Rice said. “We expect this capacity will significantly outpace Appalachian production growth, leading to improved local prices.”
Both companies’ outlooks are buttressed by their spending plans. Range will deploy five rigs in 2017 and will spend $1.15 billion, $500 million more than 2016, with two-thirds of the budget earmarked for work in the Appalachian Basin.
Rice, which will use four horizontal rigs, has a 2017 drilling and completion budget that earmarks $1.035 billion, nearly double that of 2016, with $585 million allocated to Marcellus Shale activity in Washington and Greene counties, and $450 million allocated to Utica Shale activity in Belmont County, Ohio. Rice, which employs more than 475, currently has openings for 30 people.
Degner said Range, which has 400 people in Pennsylvania and was able to keep many in its supply chain busy during the downturn, is also setting its sights “on the next frontier after pipelines,” a period of the next four or five years when the Shell ethane cracker goes into operation, which he sees driving job creation and manufacturing in the region.
Like Degner, Rice sees the improving pipeline infrastructure capacity as a key to improved performance beyond 2017.
“For the past several years, local production has exceeded local demand and out-of-basin pipeline capacity, resulting in a major bottleneck in the basin and causing a deterioration in Appalachian prices,” he said. “We have strategically positioned ourselves to be protected in the near term with approximately 93 percent of our 2017 volumes either transported out of basin or protected with basis hedges.
“Looking ahead to 2018 and beyond, we are positioning ourselves to benefit from the anticipated recovery in local pricing due to the influx of firm transportation projects slated to come online.”
A commodity caveat
Shackelford cautioned in his column that, as commodities, oil and gas can have a tendency to be overproduced and repeat the boom and bust cycle.
“While oil and natural gas prices’ recent climb is reason for optimism, it is important to consider that an increase in gas production may lead to a decrease in overall gas prices, and companies may again restrain production. Because prices are dictated by supply and demand, companies must remain diligent in balancing the supply they are producing with global demand.”
While Battista acknowledged he worries about overproduction and agrees the recovery will probably be modest, he’s taking a better view of the future where his natural gas customers are concerned.
“We like what we see coming down the tracks,” he said.