How right those boys from Pink Floyd were so many years ago. Money these days in Pennsylvania and New York is indeed a gas -- straight from the Marcellus Shale formation.
So it isn't surprising, if your familiar with the geographical positioning of the Marcellus, to hear that Philadelphia has gone the way of New York City. Meaning of course that it also has decided to blame an innocuous process called hydrofracing for all that is bad in the world. Yes, Philly is petitioning its superhero in the commonwealth, Governor Ed Rendell, to ban fracing, the process that has made extraction of natural gas from the Marcellus a possibility.
You see, the Marcellus Shale -- its development and the ultimate sale and use of its 500 trillion cubic feet of natural gas -- is the biggest economic development story to hit the Appalachian region, PA and NY specifically, since Andrew Carnegie and Henry Clay Frick got together to create US Steel. The Marcellus is the biggest shale play in the country -- its reserves to some extent have been proven by the early drillers, and the big boys (Exxon, Talisman, EnCana and friends) are now coming to play. For Philadelphians and New Yorkers, proof of the Marcellus's promised wealth is everywhere in their states. Check out a job board in western PA -- great paying opportunities abound in geoscience, engineering, water management, construction, rig operation, accounting -- you name it. Office space is filling up all along the Marcellus fairway in towns like Cecil, Cranberry, Warrendale, Williamsport, Mansfield. Some companies are building new headquarters. Along the highways, you'll see new tractors in new barns, new rooves on older houses, new pick ups on farms. Seems like the spread of the benefits never ends -- there's new work for engineering firms, and heavy equipment operators, and lawyers, and conference centers, and hotels and restaurants and car dealerships and real estate agents.
Until of course, you get to Philly. And in some cases, New York. Their states are going through a major energy revolution and benefiting greatly. Some even say Pennsylvania will become an exporter of natural gas - not bad for a state that's been importing the lion's share of what its residents use to heat homes, cook food and run industries.
But there's little if any boom in these two cities -- Philly especially. It doesn't even lie in the shale geographically, while the majority of PA does. While Pittsburgh and other smaller towns are rebounding from the jobs and royalties the gas industry is delivering, the recession is tasting pretty bad in Philly.
That apparently is a good reason to forward myths and unscientific information about the fracing process. After all, if its in Pennsylvania, and it isn't centered in Philly, it must be bad. Just like if its in New York and its not happening in Manhattan, it must be bad.
There -- its finally been said. Could the political brew-ha-ha over fracing really be more about not getting a share of the biggest payday to hit the area in recent decades than the ridiculously small potential anyone's water will be contaminated? You tell me.
Tuesday, March 30, 2010
Wednesday, March 10, 2010
Was Gordon Gekko Right?
Back in the 1980s when we were all about "me," we loved movies teeming with style and money. One that generated some interesting one-liners was "Wall Street," starring Michael Douglas, before Catherine Zeta-Jones settled him down, and a young Charlie Sheen, before he knew he needed to be settled down.
The most famous scene in the movie is one in which Douglas is giving a speech to a group of shareholders and makes the infamous statement "Greed, for lack of a better worrd, is good. Greed works." A sensational claim that makes anyone watching cringe.
I often think of that line when I'm speaking with people who are heavily against natural gas drilling. Those folks usually have two basic arguments. One, of course is environmental -- drilling is bad for the planet. The other is that drilling is the work of greedy oil and gas companies out to rule the world. I think of "Wall Street," beacuse sometimes, putting those two ideas together actually proves Douglas character, Gordon Gekko, may have a point.
To get to that point, think of each Marcellus well -- or any well drilled for that matter -- as its own business or cost center. When all is said and done, each developed well needs to produce enough in profit to make the cost of creating it worthwhile. So basic economics -- if the amount of money the production company gets back from the well over its lifetime is not higher than the amount of money that was needed to develop and maintain it over its lifecycle, the well was a bad business decision, so to speak. Thats the "economic viability" issue you hear Marcellus drillers talk about a lot. We've known about the gas in shales for years. But sinking a traditional well to that depth in most cases just didn't produce enough gas to make it profitable until the combination of hydraulic fracturing and horizontal drilling.
But its still expensive. Rule of thumb -- and this is a little dated -- about $1million for a traditional well vs. $3 million for a shale well. That ratio has likely increased a little on the shale side. But the point is, it costs at the very least about three times more capital to develop a shale well than a traditional well.
The most expensive part of shale well drilling is called the completions process. This step is post drilling, and includes methods to stimulate the well for good production. It includes the fracturing process.
There has been much made of the "thousands of chemicals" that go into frac fluid, which is forced into a well to encourage gas flow. Gas companies have routinely said that while the formulas are not always the same (they change somewhat based on the conditions of the shale where the specific well is and based on the service company doing the frac), frac fluid usually contains about 99 percent water and sand, and about 1 to .5 percent additives. Each frac usually uses about 4 to 5 chemical additives. Not hundreds or thousands. Let me clarify that: there may be numerous chemicals that CAN be used to stimulate the shale, but usually very few are used on each job. Yet the idea of the frac crew as mad scientists dumping chemical after chemical into some evil brew persists.
Back to Gekko. And some simple logic. Completions processes are expensive. Every cost here works against the wells overall profitability. Chemicals cost money. So does transporting them and disposing of the leftovers. The more chemicals used, the higher the development cost of the well. So, it actually behooves production companies to use as few additives, and the smallest volume of those chosen, as absolutely necessary to stimulate the well. So, if production companies are indeed greedy, how can the myth of frac fluid containing "hundreds of toxic chemicals" actually be true? I'm not exactly sure.
You can apply "the greed is good theory" to a number of other criticisms of the industry as well when you think about each well as a cost center.
For instance, there's the idea that well sites in themselves are an environmental mess and that while developing the well workers are careless and irresponsible. Again, keep in mind that every issue associated with a well that costs the company money goes against profitability. Hence, no one -- most specifically the producer -- wants a spill or accident of any kind. Spills require emergency remediation. Expensive. The actual solution applied can be costly. Providing drinking water to any impacted water well owner, really expensive. Then there are litigation costs, public outreach/meeting attendance costs, loss of production and work stoppage costs, fines, and various other financial losses that come with onsite accidents. Once again, the idea of the greedy company doesn't quite match up with that of the environmentally irresponsible drilling company. Thats not to say accidents and problems don't occur. But the insinuation that companies developing wells don't do their best to keep them from occurring is just conjecture. Running any business that irresponsibly is a recipe for ruin. And considering the need for capital to continue drilling, being sloppy in business doesn't work well for drilling companies.
So, maybe in some ways, taken just a little out of context, maybe Doulas's Gordon Gekko had a point. Greed, and the desire to make money, might actually be good, if it keeps companies from making dumb mistakes that actually cost them money.
The most famous scene in the movie is one in which Douglas is giving a speech to a group of shareholders and makes the infamous statement "Greed, for lack of a better worrd, is good. Greed works." A sensational claim that makes anyone watching cringe.
I often think of that line when I'm speaking with people who are heavily against natural gas drilling. Those folks usually have two basic arguments. One, of course is environmental -- drilling is bad for the planet. The other is that drilling is the work of greedy oil and gas companies out to rule the world. I think of "Wall Street," beacuse sometimes, putting those two ideas together actually proves Douglas character, Gordon Gekko, may have a point.
To get to that point, think of each Marcellus well -- or any well drilled for that matter -- as its own business or cost center. When all is said and done, each developed well needs to produce enough in profit to make the cost of creating it worthwhile. So basic economics -- if the amount of money the production company gets back from the well over its lifetime is not higher than the amount of money that was needed to develop and maintain it over its lifecycle, the well was a bad business decision, so to speak. Thats the "economic viability" issue you hear Marcellus drillers talk about a lot. We've known about the gas in shales for years. But sinking a traditional well to that depth in most cases just didn't produce enough gas to make it profitable until the combination of hydraulic fracturing and horizontal drilling.
But its still expensive. Rule of thumb -- and this is a little dated -- about $1million for a traditional well vs. $3 million for a shale well. That ratio has likely increased a little on the shale side. But the point is, it costs at the very least about three times more capital to develop a shale well than a traditional well.
The most expensive part of shale well drilling is called the completions process. This step is post drilling, and includes methods to stimulate the well for good production. It includes the fracturing process.
There has been much made of the "thousands of chemicals" that go into frac fluid, which is forced into a well to encourage gas flow. Gas companies have routinely said that while the formulas are not always the same (they change somewhat based on the conditions of the shale where the specific well is and based on the service company doing the frac), frac fluid usually contains about 99 percent water and sand, and about 1 to .5 percent additives. Each frac usually uses about 4 to 5 chemical additives. Not hundreds or thousands. Let me clarify that: there may be numerous chemicals that CAN be used to stimulate the shale, but usually very few are used on each job. Yet the idea of the frac crew as mad scientists dumping chemical after chemical into some evil brew persists.
Back to Gekko. And some simple logic. Completions processes are expensive. Every cost here works against the wells overall profitability. Chemicals cost money. So does transporting them and disposing of the leftovers. The more chemicals used, the higher the development cost of the well. So, it actually behooves production companies to use as few additives, and the smallest volume of those chosen, as absolutely necessary to stimulate the well. So, if production companies are indeed greedy, how can the myth of frac fluid containing "hundreds of toxic chemicals" actually be true? I'm not exactly sure.
You can apply "the greed is good theory" to a number of other criticisms of the industry as well when you think about each well as a cost center.
For instance, there's the idea that well sites in themselves are an environmental mess and that while developing the well workers are careless and irresponsible. Again, keep in mind that every issue associated with a well that costs the company money goes against profitability. Hence, no one -- most specifically the producer -- wants a spill or accident of any kind. Spills require emergency remediation. Expensive. The actual solution applied can be costly. Providing drinking water to any impacted water well owner, really expensive. Then there are litigation costs, public outreach/meeting attendance costs, loss of production and work stoppage costs, fines, and various other financial losses that come with onsite accidents. Once again, the idea of the greedy company doesn't quite match up with that of the environmentally irresponsible drilling company. Thats not to say accidents and problems don't occur. But the insinuation that companies developing wells don't do their best to keep them from occurring is just conjecture. Running any business that irresponsibly is a recipe for ruin. And considering the need for capital to continue drilling, being sloppy in business doesn't work well for drilling companies.
So, maybe in some ways, taken just a little out of context, maybe Doulas's Gordon Gekko had a point. Greed, and the desire to make money, might actually be good, if it keeps companies from making dumb mistakes that actually cost them money.
Tuesday, March 2, 2010
It's the Economy, Stupid!
This past summer, if any of us can still remember days that had sun and no snow, Penn State University offered a study of the Marcellus Shale indicating that by 2020, the oil and gas industry could be generating somewhere in the neighborhood of 175,000 jobs.
That's a lot of work for the Appalachian region, stretching from Kentucky through West Virginia, Pennsylvania, Eastern Ohio and Southern New York. Good, steady well paying jobs of all sorts. Science and engineering jobs that parents can believe their children may return home for after college. Work on rigs and developing and remediating well sites that could put many industrial folks back to work. And so many others. Jobs are the shining star of Marcellus development.
So I was pretty surprised when people at information sessions started telling me that Marcellus jobs were a myth. They were all imported from Texas. or Oklahoma. or Colorado. Crews came up worked on rigs, made a ruckus, and then went home. They weren't "sustainable" jobs, to use a word that keeps popping up in all the wrong places.
I'm not an economist. I can only counter those allegations with what I see. So I'll start with an observation.
Range Resources, the company that considers itself (rightly so) the father of the Marcellus, began its Appalachian presence a few short years ago with one man -- Ray Walker, its President. Today, it employs over 200 in the Marcellus region, and leases quite a bit of office space in Southwestern Pennsylvania. It also uses lots of fleet vehicles, office equipment, housing, and so on. That's one company.
In the last few years, companies that have established a presence in the basin, or grew a smaller operation include Chief Oil & Gas, XTO/Exxon, Fortuna/Talisman, MarkWest, Williams, Atlas, Chesapeake, EnCana, Haliburton, Schlumberger, Hess, EXCO Resources, Cabot, and Anadarko to name a few. Its an impressive list of names. There are others, and even more are on their way.
When I think about companies moving in, I think about the basics of setting up office. In addition to the managers and rig hands and geologists and engineers needed to run the operation, you also need secretaries, assistants, geotechs, safety people, accountants (I've been amazed at the number of accountants this industry employs to get everyone paid and royalties out the door), land personnel, lawyers, regulatory and permitting people, public relations folks, IT and tech people, interns, clerks, you name it. Drilling is a complicated endeavor - to borrow from the Clinton's again, it takes a village to produce a well, so to speak.
So I have a hard time when people tell me the only jobs in the Marcellus are rig hands imported from Texas. or Oklahoma. or Colorado. I will tell you there are managers that have been imported from those areas -- that's because the oil and gas industry has been a little more lively where they're from in recent years, and because these are some of the best people available at doing those jobs. Funny thing is this -- lots of them are from Appalachia originally. I once heard an Appalachian executive say a great thing about the Marcellus is getting people back home who were forced to leave for other areas in the 1980s when the local oil economy fell on hard times.
But regardless -- when an executive comes here to take a position in a play forecast to last as long as the Marcellus play is projected to go, he or she buys a house, enrolls kids in school, and starts patronizing local businesses. That can only be good in a place like PA that's been bleeding people to other states for years.
The jobs are there -- check local boards. EQT, more of a regional company, is hiring so many people right now they may have to import. There just can't be enough qualified people in the region to do what they need done at the current moment. Schools in eastern PA see this trend needs to remedied. Both Penn College and Lackawanna College have set up technical programs to train people in jobs like well tending, oil and gas equipment maintenance and rig work. Expect to see more programs like that emerge as the play grows.
I've also run across some things that are just fun about the flurry of activity surrounding well drilling that benefit an economy. For the southerners that have moved north, or are here to train new crews, the weather this winter was more than a surprise. I believe it could have jump started a business boost for those who install remote starters in cars and trucks. I've been in parking lots for oil and gas companies that at lunch and the end of the day are filled with idling white pick-ups with out of state plates.
Bakeries near producer offices also have to be thriving. The oil and gas industry is one in which vendors of equipment, services and innovation like to stop in and meet face to face with potential contacts and share their latest success and products. This almost always includes pastries. I spent over a year working as a consultant in a producer's office -- someone was always visiting, and there were always Krispy Kreme, Dunkin Donuts and Einsteins Bagel boxes. As offices grew and took on more employees, the number of goodies brought in by vendors grew as well. The oil and gas industry loves breakfast.
The bump in hotel and lodging use is one non-believers like to attempt to debunk. But at a time when people are spending less on vacations and travel, hotels in and around the Marcellus region often have something to cheer about. Last summer, I visited a small inn complex in Clark's Summit in northeastern Pennsylvania. The comfortable inn was booked solid by landmen, and oil and gas folks for the next year. Year -- not month, not season, year. I have a funny feeling the inn owners aren't among those who say there aren't economic boosts to drilling.
Then of course there are local heavy equipment operators hired to help prepare and remediate sites, local material companies who provide items like stone, gravel, liners, rental equipment and other items for well site work, and local truckers who handle various hauling needs. Regional and local engineering and project management outfits have seen much business come their way in terms of permitting, site design, surveying, and environmental assessments. My favorite job so far is rattlesnake handler: PA requires that in some areas, where specific types of snakes are known to live, a snake handler be available during all well construction activity. Who knew?
It seems it takes all kinds and many types of occupations to effectively produce a Marcellus well. 175,000 jobs doesn't seem like such a big number when put into perspective.
That's a lot of work for the Appalachian region, stretching from Kentucky through West Virginia, Pennsylvania, Eastern Ohio and Southern New York. Good, steady well paying jobs of all sorts. Science and engineering jobs that parents can believe their children may return home for after college. Work on rigs and developing and remediating well sites that could put many industrial folks back to work. And so many others. Jobs are the shining star of Marcellus development.
So I was pretty surprised when people at information sessions started telling me that Marcellus jobs were a myth. They were all imported from Texas. or Oklahoma. or Colorado. Crews came up worked on rigs, made a ruckus, and then went home. They weren't "sustainable" jobs, to use a word that keeps popping up in all the wrong places.
I'm not an economist. I can only counter those allegations with what I see. So I'll start with an observation.
Range Resources, the company that considers itself (rightly so) the father of the Marcellus, began its Appalachian presence a few short years ago with one man -- Ray Walker, its President. Today, it employs over 200 in the Marcellus region, and leases quite a bit of office space in Southwestern Pennsylvania. It also uses lots of fleet vehicles, office equipment, housing, and so on. That's one company.
In the last few years, companies that have established a presence in the basin, or grew a smaller operation include Chief Oil & Gas, XTO/Exxon, Fortuna/Talisman, MarkWest, Williams, Atlas, Chesapeake, EnCana, Haliburton, Schlumberger, Hess, EXCO Resources, Cabot, and Anadarko to name a few. Its an impressive list of names. There are others, and even more are on their way.
When I think about companies moving in, I think about the basics of setting up office. In addition to the managers and rig hands and geologists and engineers needed to run the operation, you also need secretaries, assistants, geotechs, safety people, accountants (I've been amazed at the number of accountants this industry employs to get everyone paid and royalties out the door), land personnel, lawyers, regulatory and permitting people, public relations folks, IT and tech people, interns, clerks, you name it. Drilling is a complicated endeavor - to borrow from the Clinton's again, it takes a village to produce a well, so to speak.
So I have a hard time when people tell me the only jobs in the Marcellus are rig hands imported from Texas. or Oklahoma. or Colorado. I will tell you there are managers that have been imported from those areas -- that's because the oil and gas industry has been a little more lively where they're from in recent years, and because these are some of the best people available at doing those jobs. Funny thing is this -- lots of them are from Appalachia originally. I once heard an Appalachian executive say a great thing about the Marcellus is getting people back home who were forced to leave for other areas in the 1980s when the local oil economy fell on hard times.
But regardless -- when an executive comes here to take a position in a play forecast to last as long as the Marcellus play is projected to go, he or she buys a house, enrolls kids in school, and starts patronizing local businesses. That can only be good in a place like PA that's been bleeding people to other states for years.
The jobs are there -- check local boards. EQT, more of a regional company, is hiring so many people right now they may have to import. There just can't be enough qualified people in the region to do what they need done at the current moment. Schools in eastern PA see this trend needs to remedied. Both Penn College and Lackawanna College have set up technical programs to train people in jobs like well tending, oil and gas equipment maintenance and rig work. Expect to see more programs like that emerge as the play grows.
I've also run across some things that are just fun about the flurry of activity surrounding well drilling that benefit an economy. For the southerners that have moved north, or are here to train new crews, the weather this winter was more than a surprise. I believe it could have jump started a business boost for those who install remote starters in cars and trucks. I've been in parking lots for oil and gas companies that at lunch and the end of the day are filled with idling white pick-ups with out of state plates.
Bakeries near producer offices also have to be thriving. The oil and gas industry is one in which vendors of equipment, services and innovation like to stop in and meet face to face with potential contacts and share their latest success and products. This almost always includes pastries. I spent over a year working as a consultant in a producer's office -- someone was always visiting, and there were always Krispy Kreme, Dunkin Donuts and Einsteins Bagel boxes. As offices grew and took on more employees, the number of goodies brought in by vendors grew as well. The oil and gas industry loves breakfast.
The bump in hotel and lodging use is one non-believers like to attempt to debunk. But at a time when people are spending less on vacations and travel, hotels in and around the Marcellus region often have something to cheer about. Last summer, I visited a small inn complex in Clark's Summit in northeastern Pennsylvania. The comfortable inn was booked solid by landmen, and oil and gas folks for the next year. Year -- not month, not season, year. I have a funny feeling the inn owners aren't among those who say there aren't economic boosts to drilling.
Then of course there are local heavy equipment operators hired to help prepare and remediate sites, local material companies who provide items like stone, gravel, liners, rental equipment and other items for well site work, and local truckers who handle various hauling needs. Regional and local engineering and project management outfits have seen much business come their way in terms of permitting, site design, surveying, and environmental assessments. My favorite job so far is rattlesnake handler: PA requires that in some areas, where specific types of snakes are known to live, a snake handler be available during all well construction activity. Who knew?
It seems it takes all kinds and many types of occupations to effectively produce a Marcellus well. 175,000 jobs doesn't seem like such a big number when put into perspective.
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