How natural gas is changing Western Pennsylvania’s business climate

Bob Taylor, Senior Corporate Banker, Senior Vice President, First Commonwealth Bank

Bob Taylor, Senior Corporate Banker, Senior Vice President, First Commonwealth Bank

With drilling in both the Marcellus and Utica Shale formations, Western Pennsylvania is sitting on one of the largest U.S. natural gas fields.

Even if you’re not directly affected, Bob Taylor, Senior Corporate Banker and Senior Vice President at First Commonwealth Bank, says the multiplier effect ripples out into the economy.

Each well site has about 250 different jobs associated with it, and Marcellus alone has about 6,378 active wells.

“It’s an engine that is going to drive the region here for the next 20 years,” he says.

Smart Business spoke with Taylor, an energy lender, about where Western Pennsylvania’s natural gas industry is going.

What is the current situation with Marcellus and Utica?

Small companies first explored Marcellus, finding the sweet spots to de-risk the field. Then larger companies like Exxon Mobil Corp., CONSOL Energy and Chevron Corp. bought up these companies and their acreage to move into steady production drilling. Three years ago, more then 45 operators were drilling in Marcellus. By 2013 that was down to 33, according to the Pennsylvania Department of Environmental Protection.

With Utica, the large companies stepped in first to acquire acreage. This consolidation has impacted area service providers that supply the well operators in Utica.

Overall, there has been a strong impact in counties like Washington and Greene. Pittsburgh will be affected now that an agreement has been reached to drill under the airport, bringing in $50 million upfront and $450 million in royalties over the next 20 years.

How are natural gas prices impacting the rig count and service providers?

Marcellus has been ranked as one of the lowest cost fields; operators can get a 10 percent ROI with prices as low as $2.75 per 1,000 cubic feet (mcf) for dry gas and $2.25 per mcf for wet gas. With today’s price around $3.50 to $4.25 per mcf, Marcellus is profitable.

Wet gas is more valuable because it has additional liquids that can be separated out and sold, such as ethane used to make plastics. Utica is principally dry gas in Pennsylvania, but Marcellus has both wet and dry gas.

Several years ago prices were high, but supply began to exceed demand, depressing prices. Therefore, some rigs moved to the wet gas in Ohio’s Utica play. Marcellus went from 100 rigs last year to around 53. Many service companies also have crossed the border.

However, each region has a field manager — service companies that supply products in Pennsylvania have to re-qualify for Ohio. The overriding factor is safety. For example, a service provider’s truck can’t be within 100 feet of the wellhead and must have fire extinguishers.

In the future, the volatility of price should moderate to around $3 to $7 per mcf, with increased demand from export, vehicles, manufacturing and electric generation.

What gas-gathering infrastructure is developing?

Many wells have been drilled and completed, so the next push will be to lay pipe to gather the gas and bring it to production facilities. It costs about $1 million per mile to lay pipeline, and about $3 billion to $5 billion is being spent in Pennsylvania alone.

Just like drilling, laying pipe has a number of associated jobs from engineers, steel pipe manufacturers, excavators and welders to safety inspectors who monitor pipelines.

Why is wastewater treatment the wild card?

Water is injected into the ground at high pressure to frack the shale rocks and release natural gas. Flow-back water that comes up has salt brine, minerals, dirt, sand, etc. Originally, the solids were removed and the water was reused for fracking.

With the drilling slowdown, there is excess wastewater. The cheapest elimination method is deep injection wells, but there are environmental concerns. The Environmental Protection Agency (EPA) may stop or limit deep injection wells sometime in the future. The EPA could require an evaporation and crystallization technique that distills the wastewater, but cost estimates for these reclamation facilities vary from $2.5 million to $100 million.

Bob Taylor is a Senior Corporate Banker and Senior Vice President at First Commonwealth Bank. Reach him at (412) 690-2214 or [email protected]

To learn more, call (800) 711-BANK (2265), or visit fcbanking.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

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