“According to a recent ICF study, the Northeast will host more than one-fourth of all U.S. capacity expansions for natural gas pipeline investment through 2020 and about a third of NGL pipeline capacity. According to the study, the Marcellus, all told, is projected to stimulate nearly $70 billion in investments in natural-gas and NGL-related infrastructure through 2035.”
Pennsylvania was the birthplace of the oil and natural gas industry in the 1800s. A century and a half later, the Marcellus shale play has once again put Pennsylvania and West Virginia in the energy headlines.
This time the focus is on natural gas more than oil–and with wells that are at least one hundred times deeper than the first oil well drilled in 1859. The rapid growth in supplies in an area exceptionally close to major demand markets has been a benefit to regional economic growth and has helped reduce U.S. dependence on imported energy. It has also increased the need for enhanced downstream infrastructure.
A New Boom
Natural gas from the Marcellus shale propelled Pennsylvania to the number three state in natural gas production in 2012– all the way from fifteenth place as recently as 2007. For 2013, the Energy Information Administration (EIA) projects that Pennsylvania may surpass Louisiana to rank second after only Texas. Meanwhile, West Virginia’s rank rose from fourteenth in 2007 to ninth in 2012. Based on projections in EIA’s new Drilling Productivity Report, the Marcellus was able to provide 17 percent of U.S. domestic natural gas marketed production in 2013.
The rapid growth of Marcellus natural gas is staggering. Natural gas production in Pennsylvania more than doubled in 2010, then again in 2011, then rose more than 70 percent in 2012. West Virginia’s natural gas production doubled between 2010 and 2012. For 2012, these two states were already producing 2,256 billion cubic feet (more than the United Arab Emirates) and 540 billion cubic feet (more than Colombia), respectively, and more significant increases for 2013 are yet to be fully tallied by the EIA.
While the most active areas of the Marcellus play are in Pennsylvania and West Virginia, the Marcellus shale formation itself extends into New York and Ohio and edges over the borders of Maryland, Virginia, and Kentucky. Most activity has been in a swath from Pennsylvania’s northeast border with New York, down to the southwest of the state and through north central West Virginia.
The Marcellus shale was formed from sediments deposited in a coastal sea during the Devonian period 400 million years ago, and is inter-bedded with limestone in some areas. It may be found on the surface in some places, but plunges to depths of up to 10,000 feet elsewhere.
The Utica shale is among the formations beneath the Marcellus, and early activity for the Utica has tended to lie further to the west, in western Pennsylvania and eastern Ohio. One reasn for this is the depth of the Utica. In central Pennsylvania, the Utica can be as much as 7,000 feet below the Marcellus, but moving to the west into Ohio, it may be 3,000 feet below the Marcellus, closer to the surface and therefore more easily accessible.
Technology Revolutionizes Reserve Assessments
Oil and natural gas production in Pennsylvania and West Virginia is hardly a new development – the world’s first oil well was drilled in western Pennsylvania in 1859, and the state produced its first natural gas in 1881. For what is now West Virginia, the first oil production took place in 1860, followed by the first natural gas production in 1885. The U.S. Geological Survey (USGS) observed in its 2011 assessment of the Marcellus, “Since the 1930s, almost every well drilled through the Marcellus found noticeable quantities of natural gas.”
But in those days, the target was more likely the more naturally flowing Oriskany Sandstone below the Marcellus. Although operators noticed shows of natural gas when drilling through the Marcellus, flows were short-lived, since the tightly packed particles in shale did not allow the gas to flow easily. Nevertheless, over the years, some conventional wells in the Marcellus were relatively more productive when natural fractures allowed the natural gas to flow more easily. The “energy crises” of the 1970s spurred interest in less conventional resources, including the Devonian shales of the eastern U.S.
Despite an exemption from the federal price controls and other incentives that existed at the time, Devonian natural gas remained a marginal source for decades. However, in the early 2000s, the success of horizontal drilling and hydraulic fracturing in the Barnett shale in Texas led to similar experimentation elsewhere, including in the Marcellus. Successful application there led to rapid growth in Marcellus activity by the latter half of the decade.
The radical changes in perspective brought about by these revolutionary technologies can be seen in the upheaval in estimates of technically recoverable reserves In 2002, the USGS had estimated about two trillion cubic feet of undiscovered, technically recoverable natural gas in the Marcellus shale. In its 2011 reassessment, the USGS upped this to 84 trillion cubic feet of natural gas and 3.4 billion barrels of natural gas liquids.
Other recent estimates vary but are also quite large. The EIA in 2012 put technically recoverable reserves for the Marcellus at 141 trillion cubic feet, less than half of its 2011 estimate of 410 trillion cubic feet but still nearly double the latest USGS figure. In early 2013, the Potential Gas Committee increased its estimate of “Atlantic” technically recoverable natural gas resources (including the Marcellus, Utica, and lesser plays) to 741 trillion cubic feet, up from 354 trillion cubic feet two years earlier.
As development of the Marcellus continues, estimates will no doubt continue to change, but production’s rapid rise and current volume – 4.3 trillion cubic feet for 2013, according to EIA estimates — have already made the remarkable potential of this play a reality.
Recent E&P Trends
With the tremendous improvements in rig efficiency in the Marcellus and elsewhere, looking at rig counts alone leaves much of the story untold. Not only has there been an increase in the number of wells drilled per rig, but production per well has risen dramatically. For example, Baker Hughes data show the rig count in the Marcellus averaged 134 rigs in the first quarter of 2012 but declined to 86 in fourth quarter 2013.
However, the number of wells drilled per rig, as calculated by Baker Hughes, rose from 4 wells per rig to 6.7 wells per rig over the same period – a 67 percent increase. Despite the decline in the rig count, the resulting number of wells drilled nevertheless rose from 541 to 576 wells from 2012:Q1 to 2013:Q4. Rig efficiency is greatly affected by depth and other factors.
For example, the Baker Hughes data show that Marcellus rigs are drilling more wells than those in North Dakota’s Bakken (4.1 wells per rig for 2013:Q4) and Texas’ Eagle Ford (4.1 wells per rig). However, the Marcellus’ average is exceeded by the Barnett in Texas, at 11.0 wells per rig and the Fayetteville, in Arkansas, at 14.3 wells per rig. About two-thirds of Marcellus rig activity is in Pennsylvania, with the remainder largely in West Virginia.
New York State has had a moratorium on hydraulic fracturing since 2008, thereby barring any shale gas development. Meanwhile, according to EIA estimates, initial production per Marcellus well has almost doubled over that period, from 3.2 million cubic feet/day in 2012:Q1 to 6.1 million cubic feet/day in 2013:Q4. According to EIA, production per well in 2007 had been less than 0.5 million cubic feet/day. The net result, according to EIA data, is that even though the number of active rigs declined over this period, total Marcellus natural gas production doubled, from 6.5 billion cubic feet in 2012:Q1 to 13.5 billion cubic feet in 2013:Q4. A host of factors has led to these efficiency and productivity improvements.
Increased use of pad drilling has reduced time spent moving, setting up and taking down rigs, as well as reducing land used for roads and rig locations. Improved understanding of the geology as well as ongoing advances in targeting and executing the drilling, fracturing, and completion of wells has led to large increases in well productivity. For example, “zipper fracs,” use the pressure from the stimulation in one well bore to enhance the results of coordinated fracturing operations in parallel wells.
Marcellus natural gas has a significant liquids component, particularly towards the west. With the present market value of natural gas liquids much stronger on a price per BTU basis than the value of natural gas, the targeting of more liquids-prone prospects has been an important consideration. However, the ability to produce and market more natural gas liquids (NGLs) is dependent on the ability to expand infrastructure for natural gas processing, fractionation, and transportation.
Infrastructure, Employment, Local Markets
The proximity of the Marcellus is a benefit to major consuming areas. Roughly one-third of U.S. natural gas consumption occurs in the Northeast and Midwest, and five of the top ten natural gas consuming states (New York, Pennsylvania, Illinois, Ohio, and Michigan) are in this region. New York’s recently-released draft energy plan foresees a growing share for natural gas consumption in that state, with a 21 percent consumption increase by 2030 enhancing natural gas’s contribution as the state’s largest single energy source.
Numerous infrastructure projects are in the works to adapt to the challenges posed by these developments, from new pipelines and pipeline reversals to gas processing units, gathering systems, ethane cracker plants, and other facilities at a pace not seen for decades. A natural gas pipeline expansion to New York City is reportedly the first pipeline to cross the Hudson River in over 60 years. Options for routing NGLs to petrochemical feedstock centers are being explored, from new regional processing facilities to shipping them to existing centers on the Gulf Coast – and even exports to other continents.
According to a recent ICF study, the Northeast will host more than one-fourth of all U.S. capacity expansions for natural gas pipeline investment through 2020 and about a third of NGL pipeline capacity. According to the study, the Marcellus, all told, is projected to stimulate nearly $70 billion in investments in natural-gas and NGL-related infrastructure through 2035.
Meanwhile, the Marcellus has provided many direct and indirect jobs within the region. Employment in oil and natural gas production, drilling, and oil and gas support activities in Pennsylvania and West Virginia tripled between 2005 and 2012, from 6,258 jobs to 20,591 jobs, according to Bureau of Labor Statistics data. This does not include the indirect jobs created as suppliers increased their operations and workers’ earnings were spent within the local communities. According to an IHS study, direct, indirect, and induced economic effects of unconventional oil and gas will add more than 200,000 jobs in the Northeast and West Virginia through 2020 and a cumulative 411,000 jobs through 2035.
Furthermore, increasing U.S. supplies of natural gas in this region and for the country as a whole has helped reduce net imports of natural gas. U.S. reliance on net imports of natural gas has dropped from over 15 percent as recently as 2007 to five percent in 2013.
The energy and economic impact of the Marcellus shale’s development over just a few years has been stunning. The innovative advances in horizontal drilling and hydraulic fracturing have increased technically recoverable reserves by a factor of more than 40. Improved rig efficiency and well productivity have made the Marcellus the largest single natural gas producing shale play in the country and in the world.
Additionally, new drilling and environmental performance laws and regulations, specific to shale gas development in the Marcellus region, will assure that this play is developed while protecting air, land and water resources. Besides the economic benefits and increased jobs, the Marcellus has enhanced energy supplies to regional markets and helped reduce U.S. energy imports. The region truly has come a long way since 1859.
Fred Lawrence is vice president of economics and international affairs at the Independent Petroleum Association of America. Gary Slagel of IPAA contributed to this essay.