Beneath the rolling pastures and woodland of western Pennsylvania, a corner of Appalachia dotted with Victorian main streets and white church steeples, a radical shift is under way.
In Punxsutawney, home to a groundhog named Phil who prognosticates the weather each February, a $2.8 million hotel is under construction. A few miles away in DuBois, metal fabricator Staar Distributing LLC is expanding to neighboring Brookville. All this development is coming to an economically depressed region that lies atop the Marcellus shale, a rock formation that produces more natural gas than Saudi Arabia.
Output from shale deposits including the Marcellus has surged 10-fold since 2005 to account for a third of the country’s gas production, government data show. The boom has eliminated a regional price premium, redirected pipeline flows and left the nation poised to export the fuel overseas after cutting imports by 44 percent since 2007. It’s also helped make the U.S. 86 percent energy independent, the most since 1986.
“The Marcellus is a Goliath,” David Schlosser, senior vice president for engineering and strategic planning at EQT Corp., one of the four largest gas producers in the Marcellus, said in an Oct. 31 interview at the company’s headquarters in Pittsburgh. “In some ways, we’re just at the tip of the iceberg.”
Rising production has pushed down prices. Gas at the Tetco-M3 hub, which supplies New York City, traded at an average discount of 7.21 cents to the benchmark Henry Hub in Louisiana in October, compared with average premiums of 83.77 cents in October 2005 and 17.62 cents in October 2012.
Gas futures for December delivery rose 2.9 cents, or 0.8 percent, to settle at $3.818 per million British thermal units on the New York Mercantile Exchange. The futures have dropped 66 percent from November 2005.
The discount of Northeast prices to Gulf Coast gas comes even as colder weather boosts demand for the heating fuel, Adam Longson, an analyst at Morgan Stanley in New York, said in a Nov. 14 note to clients. Northeast output has been so robust that the bank increased its 2014 production growth estimate for the region to 2.4 billion cubic feet a day from a forecast of 2.2 billion just a month earlier, enough to supply about 24,000 homes in the U.S. for a year.
In Pennsylvania’s Greene County, workers at an EQT drilling site gather behind a bank of computers in a steel-sided shelter known as a doghouse, monitoring data as roughnecks on the muddy rig floor remove pipe from a well. Producers use a technique known as hydraulic fracturing, or fracking, to blast water, sand and chemicals underground, breaking apart shale rock and extracting gas buried thousands of feet below the surface.
Gas supply from the Marcellus has surged as companies including EQT, Chesapeake Energy Corp. and Cabot Oil & Gas Corp. use improved technology to increase well efficiency. Production from the formation may jump 37 percent to 12.5 billion cubic feet a day in November from a year ago, compared with 9.9 billion from Saudi Arabia in 2012, data from BP Plc and the U.S. Energy Department’s Energy Information Administration show.
“There’s probably no reason, based on its proximity to the Marcellus, that Tetco-M3 gas ever trades at a significant premium to Henry Hub for the foreseeable future,” Blue Jenkins, senior vice president for trading and origination at EQT, said in an Oct. 31 interview in Pittsburgh.
Using a process known as reduced cluster spacing, which decreases the distance between perforation clusters used to fracture rock in the horizontal section of a shale well, EQT estimates it has boosted the volume of gas that can be recovered from each Marcellus well by about 20 to 25 percent, Schlosser said. The company and other producers also place several wells in close proximity, reducing the amount of equipment and permits needed to drill.
The gas produced from the Marcellus shale comes from about 5,000 wells, according to Manuj Nikhanj, managing director and head of energy research at brokerage ITG Investment Technology Group Inc. in Calgary. About 80,000 potential drilling locations remain untapped in the region, Nikhanj said at a Nov. 19 press briefing in New York. The time needed to drill a well has dropped from about 35 days in 2008 to 15 days, ITG data show.
“There’s an enormous amount of commercial resource available,” he said. “The technology continues to improve and push the envelope.”
The Northeast shale boom has prompted pipeline projects designed to transport the fuel out of Appalachia. The projects total about 5 billion cubic feet a day of gas capacity and would move the fuel to markets in the Midwest, Southeast and Gulf Coast, according to Chicago-based Navigant Consulting Inc.
Enterprise Products Partners’ Appalachia-to-Texas Express pipeline would carry ethane, a byproduct of gas drilling, from Pennsylvania, West Virginia and Ohio to petrochemical plants in Texas. The project, which would include the reversal of a line in Missouri, is scheduled to begin operation in the first quarter of 2014.
“The amount of production coming out of the Marcellus is a world-scale development,” said Robert Ineson, senior director at research company IHS Inc. in Houston. “It’s grown with astonishing speed in just a few years and it’s transforming the market in the context of a pipeline grid that was designed to bring gas from the Gulf Coast and Rocky Mountains to the Northeast and Midwest.”
Net inflows of gas to the Northeast from other regions dropped 60 percent during the first nine months of 2013 from the same period in 2008, EIA data show. Starting in April of this year, there have been days when the Northeast was a net exporter of gas to eastern Canada, according to the EIA.
The Marcellus gas bonanza has also spurred plans to ship cargoes of the fuel to Europe and Asia. In September, Dominion Resources Inc. won Energy Department approval to export liquefied natural gas from an existing terminal in Maryland, the fourth such project authorized by the agency. Sunoco Logistics Partners LP’s Mariner East pipeline would deliver propane and ethane from the Marcellus to Marcus Hook, Pennsylvania, where the fuels can be sent overseas.
Shale production “puts the U.S. at a tremendous cost advantage to the rest of the world when you look at energy prices,” EQT’s Jenkins said. Spot gas at the Henry Hub traded at $3.8477 per million Btu on Nov. 25. Japan bought LNG from Brunei at $16.21 per million Btu in August, the most recent month for data, according to LNG Japan Corp. in Tokyo.
The increase in Northeast gas drilling has incited opposition from environmentalists, who say fracking taints water supplies and makes farmland unusable. New York banned the process in July 2008 so it could draw up new regulations for drilling.
Those concerns haven’t slowed the growth of shale gas production in western Pennsylvania. In Jefferson County, construction of a $4.3 million business park is scheduled to begin in the spring, Brad Lashinsky, the county’s director of economic development, said in Nov. 14 phone interview.
“The gas wells in Jefferson County are in the exploratory phase of production,” Lashinsky said. “We’re anticipating that most of the growth is still to come.”