Don’t Lose Sight of the Gas Play

For months now the newspapers have caught onto the fact that the gas price slump had created a shift in exploration strategy for the Marcellus Shale play. While it is true that a big chunk of the industries assets have been shifted from northeastern PA to southwestern PA to take advantage of the higher priced ‘wet’ gas located there, the shift represents a temporary change in strategy. It is not, as has been suggested, a signal that the industry is not coming to the region or that it has bypassed PA in favor of OH and its Utica Shale.

There are a few concepts to remember when making strategic decisions about the opportunities gas is and will bring. First is that prices have rebounded to $3.20/MBtU for gas as of August 1. That’s not a favorable price for the long term for gas companies but it’s as high as the price was when the drilling was booming in the northeast.

Utica Shale represents another big gas play opportunity, especially since the reserves also include oil locked in that formation. The exploration is moving to OH because the shale formation is closer to the surface there than in PA but the depths are about the same north of Pittsburgh, so there is a sharp increase in activity in Beaver and Lawrence Counties.

The most important fact to bear in mind about the gas industry is that whatever is going on now is but a short play in the scheme of things. Whether there’s a boom or bust in exploration right now, the industry is in the early innings of its relocation here and plans to extract gas for many generations. If you need further evidence, keep an eye on the planning and construction of the mid-stream and downstream projects. Since late 2011, Caiman has been more than doubling the capacity of its Ft. Beeler plant in Moundsville WV, investing at least $250 million. Last month it announced it was investing another $800 million in infrastructure and processing projects in the area and that’s after it sold its original Marcellus Shale assets to Williams for $2.5 billion.

Williams has been accumulating midstream projects and assets, and is beginning to put large projects in process as well. The company has hired Exterra to build another processing facility in the Moundsville area, a multi-billion dollar investment.

While Shell was sniffing around the region to make a choice of a preferred site for their ethane cracker, the regional economic development people also let it be known that Shell’s wasn’t the only plant being considered. Almost no one picked up on that information but there are whispers that suggest that more plants are coming. Aither Chemical has announced a smaller cracker with a different technology in Charleston WV. More interesting is the rumor that another large player (meaning Chevron, BP, Exxon-Mobil) is planning a cracker in the region, likely in PA and possibly on a faster track than the Shell project.

And speaking of the Shell project, there are also inquiries being made more frequenlty about the availability of housing once the cracker in Monaca is under construction. Shell has estimated that it will need about 10,000 workers to build the plant before it is all said and done. That’s a full two-year supply of housing of all sorts for the entire region. With vacancy rates at apartments and hotels near 100%, Shell seems to be thinking about creative solutions to the problem by proactively securing hjousing for the workers. The terms that have been discussed are for 10-year leases, suggesting that the cracker plant is but one of several projects planned for the site.

None of this adds up to much work for the meat-and-potatoes contracting business right now but the trend reminds us that this industry isn’t going away and is talking about investing numbers that will approach or pass $100 billion – with a ‘b’ – before the industries infrastructure is in place. If that investment took ten years it would mean a construction volume that is triple what is built in a good year by the rest of the industry.

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