The key word right now for the world’s oil and gas business might be “change”—big change. Current trends promise to dramatically alter the industry from what it has been for the past 40 years. Why?

Mostly because of what’s happening with the shale plays across the U.S. and Canada. Rank the Marcellus resource play in the northeastern U.S. among the biggest of the big.

It’s very possible the world will see a complete supplier/ consumer role reversal within the next decade, the London-based International Energy Agency (IEA) said in its World Energy Outlook, published in late 2012. The agency’s executive director, Maria van der Hoven, added as the IEA published the report that “North America is at the forefront of a sweeping transformation in oil and gas production that will affect all regions of the world.”

The IEA projects the U.S. “becomes a net exporter of natural gas by 2020 and is almost self-sufficient in energy, in net terms, by 2035.” It adds North America will emerge as a net oil exporter, accelerating a directional switch in the international oil trade, with almost 90% of Middle Eastern oil exports heading for Asia—not the U.S. or Europe. Links between regional gas markets will strengthen as the liquefied natural gas (LNG) trade becomes more flexible and contract terms evolve.

Big stuff, and the big Marcellus is helping to create that change. A recent Standard & Poor’s report found the Marcellus “could contain recoverable resources equal to almost half of the current proven natural gas reserves in the United States.”

Marcellus production already has had a major impact on U.S. output, as the federal Energy Information Agency (EIA) noted in late 2012. The EIA estimates the Marcellus accounts for 26% of U.S. shale gas production now—and the share continues to grow.

It adds production rose 72% from October 2011 to October 2012, hitting 6.8 billion cubic feet (Bcf) per day

A pair of Pennsylvania state officials called the Marcellus “the global superstar of natural gas formations” in a recent article. Michael Krancer, secretary of the Pennsylvania Department of Environmental Protection, and Patrick Henderson, energy executive for Pennsylvania Gov. Tom Corbett, pointed to “a dramatic and historic change in the direction of natural gas flows in America. Flows always have been from the West or Southwest United States to the Northeast.

“Not anymore. Pennsylvania became a natural gas exporter in 2010 and is perfectly located to be the supplier to the tremendous growth markets of the northeastern United States,” they add.

Looking downstream to the refining, marketing and petrochemical businesses centered in the east end of the commonwealth, they add “this new energy revolution is also being seen in Philadelphia. Refineries that were just recently pronounced dead have new life—in no small part because of hydraulically fractured, domestic oil and natural gas.”

Randall Albert, chief operating officer for gas operations for Pittsburgh-based Consol Energy Inc., is another proponent of the Marcellus and what its reserves mean to the area. “Natural gas is what steel was in the last century for this region,” he tells Midstream Business.

What is it?

All of that excitement focuses on a wide geologic formation of Paleozoic/Devonian age—rather old in geologic terms compared to other hydrocarbon-producing formations. It curves northward from Virginia and West Virginia, across western Maryland and Pennsylvania, into northern Pennsylvania and southern New York.

The busy part of the play lies in southwestern Pennsylvania and northern West Virginia, with some prospects and production overlapping into eastern Ohio. Most Marcellus drilling targets lie 2,000 to 8,000 feet below the hilly, forested surface of the Appalachian countryside.

Although a broad resource play, the production mix from Marcellus wells varies by location. The shale tends to produce dry natural gas in northern and northeastern Pennsylvania and New York while wells in western Pennsylvania and northern West Virginia produce gas with a large percentage of natural gas liquids (NGL)—with a particularly heavy ethane cut.

Hart Energy’s North American Shale Quarterly ranks the Marcellus as the country’s largest gas shale play by far—both in the geography it covers and its low-risk resource potential.

Likewise, the EIA rates U.S. proved wet natural gas reserves, which include NGLs, at around 318 trillion cubic feet (Tcf) in 2010, and that number assuredly will go up sharply when the EIA announces updated gas reserve numbers shortly. Total, recoverable gas resource estimates for the Marcellus vary between 260 Tcf and 490 Tcf.

To give some perspective to those numbers, EIA estimates total U.S. gas consumption in 2011was a little less than 23 Tcf. Furthermore, large portions of the Marcellus are sandwiched between the Utica shale below and the Upper Devonian shale above, both highly prospective for gas and NGLs.

The play spreads across roughly 60 million acres within the Appalachian basin, although some gas producers quote prospective area estimates in the range of 15 million acres since not all of the Marcellus merits commercial drilling and development.

Ray Walker, senior vice president and chief operating officer at Range Resources Corp., compares the Marcellus to Qatar’s sprawling North gas field, ranked by the IEA as the largest gas field on earth.

“It’s an unbelievable gas field,” Walker tells Midstream Business. “This is the emerging center of the world oil business. If you say the word ‘Marcellus,’ people in the industry know what you mean.”

Credit Walker and Range with a solid knowledge of the Marcellus. Range announced the discovery well in 2004 that opened the play. And unlike Qatar’s remote, mostly offshore, gas reserves located thousands of miles from major markets in the politically unstable Middle East, the Marcellus adjoins major North America population and manufacturing centers, “and that’s a huge advantage,” he says. But Walker quickly adds a question: How to get all that gas and NGL production to market? That challenge twill keep the midstream sector busy for years.

Low gas prices, coupled with comparatively better NGL prices, have caused Marcellus drilling to tilt toward the NGL-rich area in recent months and midstream activity will follow.

Neal Dingmann, managing director of equity research at SunTrust Robinson Humphrey, says it is the liquids-rich area of the Marcellus shale that has driven the play’s high rates of return. Both the Marcellus and underlying Utica are two of the most promising regions financially in the country. Returns in the liquids-rich area in the Marcellus, assuming full ethane recovery, can be as high as 60%. “I would put that up against nearly any play that is out there today,” he adds. Greene County in Pennsylvania’s southwest corner has emerged as a sweet spot where Marcellus wells have the highest NGL yield, Consol’s Albert tells Midstream Business. “The wet areas give producers a $3 to $4 (per thousand cubic feet) uplift,” he adds.

Price impact

Midstream firms have scrambled to build new infrastructure in an area that has had little in the way of gathering and processing capacity—and what infrastructure there is may be out of date. Rising production and limited infrastructure have combined to force down product prices.

For example, the EIA found the price spread between Columbia Gas Transmission’s Appalachian index for gas produced in southwestern Pennsylvania historically traded about 25¢ per million Btu above the gas industry’s standard Henry Hub index for Gulf Coast gas. Five years ago, the difference was more than 50¢.

But by the middle of last year, the Appalachian index and Henry Hub fell into rough parity. By year-end 2012, and looking at the forward markets into 2016, the Appalachian index now trades below Henry Hub, “mostly reflecting the growth of Marcellus natural gas production,” the federal agency notes.

That reflects the sharp rise in local gas production looking for pipe. In 2005, Pennsylvania produced less than 500 million cubic feet (MMcf) per day. For 2012, forecasts projected gas production to average 4 Bcf per day—a compound annual growth rate of more than 34%.

A lot of work remains to be done in the midstream and a substantial share of it will be done this year, Brad Olsen, vice president of midstream research at Tudor, Pickering, Holt & Co. tells Midstream Business.

“What we’re expecting to see in 2013 is a focus more on the wet gas side of things, southwestern Pennsylvania and northern West Virginia. Really, what we're going to see over the next year is a pretty unprecedented amount of capacity expansion in the wet gas portion of the play,” Olsen says.

“Now we're looking at a situation where the amount of capacity coming online will be roughly 2 Bcf a day by the end of 2013. Needless to say, that is probably the largest single area, or the largest single accumulation of gas processing capacity anywhere, in the country coming online in the next several years.

“We’re seeing that infrastructure bottleneck somewhat alleviated, if not resolved, in the next 12 to 15 months. And, we're also starting to see an expansion of that midstream capacity a little bit farther north into northwestern Pennsylvania, where some folks like Range and Exxon’s XTO subsidiary are starting to drill,” he adds. “From a big picture standpoint, we're seeing just a massive capacity build out.”

The infrastructure additions include projects to provide the necessary gathering, processing and transmission services that any gas field needs. The Federal Energy Regulatory Commission (FERC) in late 2012 approved an expansion of Transco’s Leidy line and mainline, owned by Williams Partners LP. The $341 million project will add 250,000 dekatherms of capacity and includes 12 miles of new pipeline and the addition of 25,000 horsepower of compression at Transco’s Essex County, New Jersey, compressor station. Completion is scheduled for late 2013.

A formal FERC filing could come early this year on an even bigger pipeline project—the Commonwealth Pipeline. A joint project of Inergy Midstream LP, UGI Energy Services Inc. and WGL Holdings Inc., the system would inter-connect with existing gas transmission systems to move gas to East Coast markets. The 30-inch, 120- mile system would have an 800,000 dekatherm-per-day capacity and enter service in 2015.

MarkWest Energy Partners LP has emerged as the region’s biggest midstream operator and its Houston, Pennsylvania, processing and fractionation complex, located southwest of Pittsburgh, has emerged as a Marcellus midstream hub with pipeline and rail connections. Its large operations will get bigger in the next year or so as the firm has announced it expects to have 3 Bcf of processing capacity in the region by year-end 2014 to serve Marcellus producers.

Marketing ethane

Ethane presents a particular challenge for midstream firms. Marcellus wells produce a lot of it and there’s a limited regional market for the NGL. Some ethane can remain in the methane streams that processing plants separate out for natural gas pipelines—but only so much. Tudor, Pickering’s Olsen says Marcellus midstream operators have had to scramble to find ethane markets.

“The demand side of things is pretty problematic right now, and I think what we’ve seen is there’s no ethane demand native to the Northeast,” he says. “And so, you’ve got to move it somewhere.”

Midstream operators have multiple projects working to help solve the ethane problem. MarkWest has the 50,000 bbl. per day Mariner West ethane pipeline under construction, built in cooperation with Sunoco Logistics Partners LP, to move Marcellus ethane to Canada’s big petrochemical complex at Sarnia, Ontario, backing out more costly naphtha feedstock. Service should begin at midyear.

Enterprise Products Partners LP has its own project under way to handle that ethane production—the 1,230- mile ATEX Express Pipeline, now under construction and expected to enter service in early 2014. Capacity will be 190,000 bbl. per day. The north end of the line includes 369 miles of new, 20-inch pipeline from Washington County, Pennsylvania, to Seymour, Indiana, south of Indianapolis.

That pipe will connect with an existing Enterprise products pipeline that currently moves petroleum products to the Midwest from the Gulf Coast. Flow in the existing line will be reversed and the line dedicated to ethane. An additional 55 miles of new line will be built at the south end of the ATEX system to connect Enterprise’s NGL storage complex at Beaumont, Texas, to the Mont Belvieu NGL hub east of Houston.

And since there’s a Mariner West, there will be a Mariner East. Range, working with Sunoco, has taken another approach to the ethane challenge: Export it overseas. The firms’ Mariner East pipeline will move an ethane-propane mix from MarkWest’s Houston plant to Sunoco’s Marcus Hook refinery near Philadelphia for loading aboard tankers. The project is expected to enter service in the middle of 2014 with completion—including propane shipments—due in 2015.

A new industry

All that ethane could form the foundation for a whole new industry in the region—petrochemicals.

Shell Chemical LP has plans under way for what it calls “a world-scale ethylene cracker” at Monaca, Pennsylvania, northwest of Pittsburgh. Announced in 2011, the plant might go on stream in 2016. Shell already serves as a major player in the U.S. petrochemical business with four ethane cracking plants in Texas and Louisiana.

In addition to the cracker, Shell says it is considering polyethylene and mono-ethylene glycol units to help meet increasing petrochemical demands in the North American market. Much of that petrochemical production would flow to industries in the Northeast.

There are other proposals for ethane cracking capacity in the region. Len Dolhert, chief executive at Aither Chemicals LLC, says the firm has plans under way for a smallerscale plant in West Virginia employing a more cost-effective technology than conventional steam cracking.

“Aither has the lowest cost process to crack ethane. We are delighted with the interest we've been receiving from companies in the U.S. and abroad,” he tells Midstream Business, adding firm plans have yet to be announced.

That proposed cracking capacity would boost rail traffic in the region, which already has seen a sharp increase because of the Marcellus, says Jonathan Chastek, assistant vice president of business development for Wheeling & Lake Erie Railway Co.

“Whether Shell builds the cracker could have a great impact on related, polyethylene plants,” Chastek tells Midstream Business, pointing to carloads of polyethylene resin that will need to be moved to market. There’s a sizeable manufacturing base in the region that uses resin now, most of which now moves in by rail from Gulf Coast plants. Marcellus-based polyethylene would back out much of that traffic.

The Marcellus already creates significant business for the Wheeling & Lake Erie, Norfolk Southern and other railroads serving the region, Chastek adds. NGL shipments still move on a manifest basis rather than the unit trains typical in the Bakken and some other shale plays. That’s because markets are diverse, not point-to-point, he says.

“We’re focusing our development on NGLs in the longer term,” Chastek says. The railroad does a sizeable—and growing—business in NGL and gas condensate to multiple markets. Much of the Y-grade (mixed NGL) goes to markets around Chicago or the Gulf Coast, while propane moves to East Coast and southeastern U.S. markets.

Condensate shipments have a long haul to western Canada for use as diluent in the bitumen/heavy crude oil produced in the Athabasca region in northern Alberta.

The rig count

Despite the upbeat news about the play, one recent Marcellus trend that has some industry observers concerned is a falling rig count. Part of that trend may be a shift by drillers to the emerging Utica shale. Or, the number may be down in the past year through the combined result of improved drilling technology and better formation knowledge—rather than a drop in actual producer activity.

Robin Robinson, vice president of U.S. drilling-land for Baker Hughes, told Hart Energy’s DUG East conference attendees the rig count decline is the product of “gamechanging” technology. In particular, he pointed to steerable rotary drill bits. Rigs are on location for fewer days, thus drilling contractors can do more with fewer rigs and crews.

“What we’ve seen, even though there was fairly good drilling performance, is two factors: The time drilling these wells is just about cut in half and the range for the times to drill these wells has closed significantly,” Robinson told the conference. “Technology is a key driver.

“The wells-per-rig-per-month number is way up. Operators move very efficiently from well to well,” Robinson added, adding approximately two-thirds of the wells drilled in the plays are now pad drilled, where drilling contractors sink multiple wells from one location “and the number is growing.”

Tudor, Pickering’s Olsen agreed, but said there are other factors to consider.

“Some of that rate-count reduction is because NGL prices have fallen. Some of that reduction is drilling efficiencies that have reduced the need for quite as many rigs in the area. And then, there's also just a certain amount of uncompleted wells that are waiting for midstream connections, which have now built up a backlog, to a point where guys are not drilling quite as aggressively in the wet-gas area,” he tells Midstream Business.

Political challenges

The Marcellus has the potential “to create an American energy superpower, based here in Pennsylvania,” says Pennsylvania’s Krancer. “We have the energy resources and the markets in the same location. That’s not the way it usually works. That is what is producing this unbelievable, off-the-charts opportunity. The technologically recoverable resources are huge enough to power this country for hundreds of years. It is enough to make us the Saudi Arabia of natural gas.”

But since the region has seen negligible oil and gas activity during the past century, not all residents welcome the drillers, the wells and the midstream infrastructure that follows. And much of the hilly, heavily forested region remains lightly developed. The sight of a drilling rig mast, or construction of a pipeline or gas processing plant, can prove a shock to area residents who might ignore a new coal tipple.

Krancer admits it has been a challenge to bring factions together, although Pennsylvania and West Virginia have had some success in doing just that with a predictable uptick in activity.

New York, in comparison, outlawed hydraulic fracturing— crucial to making tight-rock shale plays like the Marcellus give up their hydrocarbons—and industry activity there has been nil, although there are moves afoot to loosen that restriction.

Range Resources is one of several companies that have active, highly visible community relations and marketing programs to support their Marcellus investments. A large Range advertisement sporting the tag line “drilling is just the beginning” hangs above the baggage claim area at Pittsburgh International Airport and Range-sponsored television commercials pointing out the economic advantages of Marcellus development air on TV stations in the region.

The Marcellus creates a lot of friends, too, thanks to new jobs and increased economy activity, says Steven Adelkoff, president of the Pittsburgh-based Renewable Manufacturing Gateway, a non-profit working to bring clean technology and renewable manufacturing businesses to Appalachia.

“Our economy in western Pennsylvania, northern West Virginia and eastern Ohio will experience a sustainable competitive advantage in manufacturing over the next several decades as a result of low energy prices created by the abundant natural resources in our region,” he tells Midstream Business.

A report released in late 2012 by Workforce West Virginia, the state’s employment office, reviews the impact the Marcellus has had already on job creation and economic growth. “The overall effect on specific industries in West Virginia due to activity within the Marcellus shale gas field is becoming more evident,” the report says. The study behind the report found midstream-related employment in the Mountain State increased 50% during the 2008-2011 study period while wages within the sector increased 18.9%

Those are big numbers for a state—and region—suffering from years of high unemployment and stagnant economic growth. And the industry trends under way in 2013 indicate the Marcellus will only get bigger.

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