A publication of Site Selection
NOVEMBER 16, 2009
Vol. 1, Issue 7

Shale Gas: A Site Selection
Game Changer

Abundant shale gas is an increasingly important site location factor.

editor bounce@conway.com
Paul Bonavia
Charlotte Batson is an energy analyst for Taimerica Management Company (www.taimerica.com), Mandeville, La., and editor of the Taimerica-SBS Alternative Energy News.
n 2008, the Potential Gas Committee (PGC), a group of industry experts affiliated with the Colorado School of Mines, focused on shale gas resources as part of its biennial estimate of U.S. reserves. The PGC increased their previous reserve estimate from 2006 by a staggering 39 percent, the highest upward revision ever. Approximately two-thirds of the increase results from higher estimates of recoverable natural gas in shale formations. Although not every play will be commercial and contribute to those reserve estimates, here’s what we know so far:        Shale gas has a unique set of characteristics — an energy “perfect storm” — that will redefine the competitive landscape of states and communities:       Recognizing the current political reality vis-à-vis environmental issues is just as important as the technology and the economics. The Waxman-Markey energy bill, currently making its way through Congress, would impose CO2 emissions caps and initiate a cap-and-trade system, adding costs to industries that emit carbon. Even if Waxman-Markey doesn’t become law this year, the pressure to reduce emissions will still be significant. In 2009, EU airports began a carbon-measuring system and are “encouraging” all airlines and all countries that use EU airspace to follow it by purchasing carbon credits. Each airline and country has an assigned number of carbon credits allowed. Whatever happens, the cost of carbon compliance is less for natural gas than any other fuel used in transportation and industry.
       This newly abundant energy source will drive many companies to expand or relocate, drawing investment and jobs to some locations and creating competitive challenges for others. Industry experts weigh in:
“Without question, the Haynesville Shale bodes well for Louisiana’s economy and environment, and it means this state stands to play a pivotal part in leading America to a new, more promising energy and environmental future, built around American-produced, carbon-light natural gas.”
Kevin McCotter, Director of Corporate Development
Chesapeake Energy Corp.
       Not every shale gas play will be a commercial success. States with commercial shale gas plays will be potential locations for oil company regional headquarters, field offices, suppliers and oil field service companies. Shale gas deposits are found in at least 17 states from the Rocky Mountains to the Gulf Coast, to Appalachia, to the Great Lakes and beyond (see Map 1). And recent announcements bear this out: Equitable Resources, Inc. will invest $61 million to expand its operations in Pittsburgh, creating 354 jobs. EQT Corp., the largest natural-gas producer in the Appalachian Basin, announced the expansion of its regional headquarters in Pikeville, Kentucky. This expansion includes the construction of a 45,000-sq.-ft. building in an industrial park directed toward energy companies, and the creation of at least 100 jobs at salaries of $55,000 or more. And AOP Clearwater, which recycles the water used in drilling operations, recently announced an investment of $12 million to locate in West Virginia.
       For the states in which drilling takes place, the supply chains of the drilling and production industries will be seeking locations near the resource itself. These companies will supply the field locations with a wide variety of equipment and services, including drilling mud and cement, drill pipe and well casing, wireless networks, electronic measuring devices and services, sophisticated software and computer networks for horizontal drilling and so on. Big winners include Schlumberger and the others that do the “frac jobs,” the critical technology for bringing the natural gas to the surface.
Table 1. States With Natural Gas Severance Taxes
Source: Pennsylvania Budget and Policy Center

       States in which natural gas is tax-exempt will also benefit. Pennsylvania, one of several states home to the Marcellus Shale, has been referred to as the “OPEC” of shale gas. The “gold rush” there will be accelerated since the recent defeat of a proposed severance tax on natural gas at the wellhead. Neighboring West Virginia has a 5-percent natural-gas severance tax (see Table 1). Because the wells are highly directional, there can be considerable latitude in choosing each well’s surface location, and that site selection itself becomes a critical economic issue. Other states with drilling activity for natural gas that do not have a severance tax are Virginia, New York and Maryland.
         Currently, 17 percent of electricity is generated from natural gas. States with the infrastructure in place, and especially those that lead in natural gas consumption for electricity generation, will likely be big winners (see Table 2). In 2009, Texas led the way, with consumption of more than 180 million cubic feet of natural gas to generate electricity. Nos. 2 and 3, Florida and California, consume nearly half of Texas’s consumption. Currently, North and South Dakota, West Virginia, Montana and Hawaii are not generating any electricity from natural gas.
       Coal-burning utilities can benefit as well. Faced with stringent pollution laws in North Carolina, Progress Energy decided against a $330-million scrubber project on a coal-burning plant in favor of a $900-million retrofit to natural gas, thereby reducing the environmental impact and satisfying the legal requirement while simultaneously upgrading the (cheap) technology. And natural gas can play a bigger role in plants even without conversion, or at times of less-than-peak demand — more excess gas-powered capacity exists than excess coal-fired capacity. Utilities already investing in alternative energy are finding natural gas to be an inexpensive complement to mitigate the unreliability of solar or wind generators.
Table 2. Top 5 States for Natural Gas Consumption For Electricity Generation, all sectors, 2009
Source: DOE/EIA

       Natural gas has implications beyond electricity generation. Currently, the transportation industry is the second-largest source of emissions. T. Boone Pickens and others are investing capital into making natural-gas-powered vehicles commonplace. Some areas, such as southern California, are ready for natural-gas vehicles with infrastructure in place. In other regions, natural-gas vehicles are better suited for fleets, such as taxis, school buses and municipal vehicles, because they are maintained and fueled at a central location. And because those organizations tend to drive more miles than individuals, they are in a better position to benefit from the lower price of fuel. Companies such as UPS are already beginning to put these new technologies to work by converting their vehicles. Natural gas could even be used to generate the electricity needed for electric cars, or to make hydrogen for fuel-cell-powered cars.
       Yet amid all the optimism, there is skepticism too. Proven reserves take time to develop, and it will be years before these resources come to market. Lower natural-gas prices that stimulate plant conversion may be too low to justify new drilling programs. Data on some of the later shale discoveries may not support the same economics that the Barnett Shale demonstrates. Other concerns have surfaced about the environmental impact of development drilling, particularly in states that are newcomers to the oil industry. But some energy analysts see shale gas as an important backup to solar and wind energy for periods in which sunlight or wind are not available. It can serve as a bridge until the technology for reliable electricity from solar and wind catches up, reducing carbon emissions in the meantime.


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