Low gas prices drive drillers to Ohio

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If you're looking for a shale success story, look no farther than Lisbon, a small town that's hit it big.

Local roads have been transformed from gravel to asphalt. There's talk of widening Lincoln Way, the main thoroughfare, to four lanes. And three new restaurants have opened -- including The Shale Bar and Grille, a nod to the industry that's making all this possible.

It's everything the proponents of natural gas development have promised Pennsylvania. There's only one problem: Lisbon is in Ohio.

After several years of nonstop drilling, too much gas and too few buyers have put the brakes on Pennsylvania's Marcellus Shale boom. Amid the lowest natural gas prices in a decade, energy companies say much of Pennsylvania's gas, while plentiful and clean-burning, is too cheap to make a profit.

Instead, they're looking west.

PG graphic: Natural gas prices, rigs decline
(Click image for larger version)

A Post-Gazette analysis of state Department of Environmental Protection data shows drillers are picking up stakes in northeast Pennsylvania, long the center of shale development, and moving in greater numbers to Western Pennsylvania and Ohio. Over the last year, the number of drill rigs boring wells in Pennsylvania dropped from 115 to 78, while drills in Ohio increased from 12 to 20.

Their target? "Wet" natural gas, which is expensive to process but comes laced with lucrative by-products and is abundant in the Utica Shale running through Western Pennsylvania and Ohio. This resource is shifting the balance of power to the west, bringing new life to old coal towns -- and new fears among shale veterans that this boom will inevitably lead to another bust.

For years, energy companies favored "dry" methane gas, which dominates Pennsylvania's shale formations, for its pipeline-ready purity. But as a glut of natural gas drives prices down, drillers are increasingly willing to shoulder the cost of processing wet gas in exchange for the valuable liquid hydrocarbons that come with it, including ethane, propane and butane.

"With the relatively warm winter, there wasn't as much natural gas used," said Tim Kelsey, a Penn State professor who studies shale economics. "Demand has gone up some, with former coal-fired power plants shifting over to natural gas ... but given the current low price of natural gas, wet gas is more profitable."

Take Bradford County, Pa., which has more Marcellus Shale wells than anywhere else in the state. Years of explosive growth have earned it a reputation as the natural gas capital of Pennsylvania.

But even as total production continues to rise in the county, state data shows energy companies have drilled fewer and fewer wells over the past six months. In June 2011, 45 new wells, or "spuds," were drilled in Bradford. This June, the county saw only 14.

That drop-off is closely linked to the steep decline in natural gas prices, which fell nearly 50 percent over the same months to $2.46 per million BTUs. Same story in Tioga and Lycoming counties, two Marcellus Shale powerhouses where new spuds have fallen off in recent months.

And then there's Ohio.

The landmen first started sniffing around Columbiana County about a year and a half ago, crowding courthouse parking lots with cars bearing out-of-state plates. In Lisbon, the county seat 35 miles south of Youngstown, officials had to open an office next to the courthouse to accommodate the dozens of deeds researchers cramming into the recorder's office. The drilling rigs soon followed, bringing all the housing and traffic troubles locals love to hate.

County commissioner Mike Halleck's courthouse office overlooks Route 30, the town's main thoroughfare. From his seat, he sometimes watches the line of trucks crawling through town, bound for a drilling site in Hanover, in Elk Run, in Madison.

"We don't have an empty building that I can point to in Lisbon," Mr. Halleck said. "There's been a tremendous amount of money spent on the improvement of everything, from the courthouse parking lot to township roads. Our sales tax revenue is up about 10 to 12 percent."

"And it's nothing," he added conspiratorially, "compared to where we're going to be in two to three years."

Indeed, the town is already bracing for change. At least one defunct hotel reopened this summer, anticipating business from drillers. In downtown Lisbon, a local outfitter has opened a second shop catering to drilling crews, selling flame-resistant pants and work boots to men with accents they've never heard around here before.

And you only have to watch the snarl of traffic around Lisbon's town square to get an idea of where things are headed.

"Traffic in Lisbon is already horrible," said Nancy Germanovich, minding the rows of heavy-duty boots in her son's downtown store. "But having a store in town, you want that."

In March, natural gas prices were poised to sink below $2, their lowest point in more than a decade. That month, energy companies drilled 17 wells in Ohio. Since 2012, when interest in Ohio began in earnest, more than 50 spuds have been drilled in the Buckeye State.

It's peanuts compared to the 841 sites drilled in Pennsylvania over the same period. But interest in Ohio is growing.

Companies aren't shy about the shift. In its 2011 annual report, Chesapeake Energy laid out plans to scale back Marcellus Shale drilling, simultaneously ramping up production in the Utica region to 20 rigs. Utica Shale, which lies thousands of feet beneath the Marcellus formation, is considerably more expensive to drill. It's also a relative newcomer to the shale scene, only fully surveyed within the past two years, well after the Marcellus boom was under way. Despite this, Chesapeake officials said they've "accelerated" plans to explore their Ohio holdings, which stretch across 1.2 million acres.

Consol, which has more than a dozen wells in Westmoreland County, may follow suit. "Longer-term rebalancing will be aided by declining conventional production and the shift in drilling towards oil and 'liquids rich' gas plays," the company wrote in its annual report.

"We're still at a point where these are by no means heady times for the drilling part of this industry," said Kathryn Klaber, president of the Marcellus Shale Coalition, an industry group. "There is no doubt there's been a drop in rig count in Pennsylvania."

But some regions near Pittsburgh are beating the statewide trend. Lawrence, Beaver and Butler counties, all of which lie on the eastern edge of the boundary between wet and dry gas deposits, have seen modest growth since January. And plans to build an ethane "cracker" plant in Beaver County, which would extract profitable petroleum products from wet gas, have raised hopes of attracting new interest in Western Pennsylvania.

That said, officials and residents in Bradford County are quick to point out they're still in the game. While low prices may have sent drill crews packing for now, thick shale deposits and miles of newly laid pipeline will make the northeast even more attractive when markets rebound, they say. In that neck of the woods, folks speak of natural gas prices as they once did about milk -- down few cents a gallon, up a buck per million BTUs -- and they're used to the notions of boom and bust.

Indeed, Ohio may do well to follow their example. Warning bells are ringing, however faintly: Carroll County, one of the most heavily drilled areas in Ohio, says it's already seeing a slackening of interest.

region - businessnews - marcellusshale

Andrew McGill: amcgill@post-gazette.com or 412-263-1497. First Published July 30, 2012 4:00 AM


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