By ARTHUR STERNGOLD
After four years of rapid growth, Marcellus gas drilling declined in Pennsylvania. According to Baker Hughes, the number of drilling rigs in the state fell 29 percent from its peak a year ago. The most recent data from the Pennsylvania Department of Environmental Protection show the number of Marcellus wells drilled in July was 57 percent lower than it was for the same period last year, and the decreases were even greater for Lycoming, Bradford and Tioga Counties.
Gas production from the Marcellus region and other shale basins got ahead of demand, forcing down prices to unprofitable levels. As a result, "we are losing our shirts today," according to Rex Tillerson, CEO of Exxon Mobil. Most drillers have cut back, resulting in layoffs and cancelled orders for many workers and suppliers. People wonder if Marcellus drilling is a long-term development or a speculative bubble that's here today and gone tomorrow.
Despite the current slump, natural gas production from the Marcellus region and other shale formations is likely to keep growing for decades, according to a special report in The Economist magazine and other recent studies. These increasing supplies of shale gas will reduce energy costs, create jobs and improve the global competitiveness of U.S. manufacturers. However, for our nation and state to realize these benefits, gas producers must earn greater public acceptance by proving their practices are environmentally safe and socially responsible.
Just a decade ago, shale gas accounted for an insignificant share of U.S. natural gas supplies. By 2010, shale gas supplied 27% of natural gas, and it's projected to supply 43% by 2015 and 60% by 2035, according to IHS Global Insight. UBS Securities found that during the last decade, shale gas production grew at a 32% annualized rate, with most of the growth in the second half of the decade coming from the Marcellus, now the country's largest shale play. Vaclav Smil, an energy expert and author, believes the growing supplies of shale gas eventually will make natural gas the world's most important fossil fuel, edging out both oil and coal.
The recent cutbacks will slow the pace of gas development, but less so in the Marcellus than in other shale basins. This is because the Marcellus has close proximity to the premium east coast market that stretches from Virginia to Boston. It's cheaper to transport natural gas supplies from the Marcellus to these urban areas than from other gas-producing regions. An analysis by Fitch Ratings predicts that Marcellus production will grow from 4 billion cubic feet per day to more than 10 billion over the next five years even if prices stay low.
The growing supply of cheap natural gas has already cut energy costs for many consumers and businesses, and it's expected to reduce electricity rates in the near future. Low gas prices, along with tightening air pollution standards, have led to a rapid increase in the use of natural gas by power plants that have long relied on coal to generate electricity. Between 2006 and 2012, natural gas went from providing 20 percent of America's electricity to nearly 25 percent. IHS Global says this will lower electricity rates by ten percent in the years ahead.
Cheap, domestically-supplied natural gas is enhancing the global competitiveness of U.S. industries that use gas as a fuel or feedstock, such as steel companies, chemical manufacturers and refineries. Dow Chemical Company, which was building plants overseas a decade ago, is expanding its manufacturing facilities in the U.S. to take advantage of low-priced gas, and other companies have announced similar moves. According to The Economist, lower energy and feedstock prices could create one million new factory jobs in the U.S. by 2025. The effects will be multiplied if natural gas catches on as an alternative to gasoline and diesel fuel for large fleets of buses, trucks and automobiles.
This coal-to-gas changeover may slow global warming by cutting carbon dioxide emissions from power plants. Compared to coal, natural gas is a cleaner-burning fossil fuel that produces half the amount of carbon dioxide emissions, the chief culprit of climate change. Since coal-fired power generation is responsible for a third of carbon dioxide emissions in the U.S., substituting gas for coal reduces greenhouse gases. This shift contributed to an eight percent drop in U.S. carbon emissions in the last five years.
The combustion of coal releases large quantities of toxic pollutants into the atmosphere, including mercury, sulfur dioxide, nitrogen dioxide and soot. In the U.S. alone, these contaminants lead to thousands of premature deaths each year from heart ailments, respiratory disease and lung cancer attributed to the operation of coal-fired power plants. The growing use of gas instead of coal to generate electricity should reduce these fatalities because burning gas produces fewer toxins.
While it may be good for the U.S. as a whole, shale gas production is hard on the places where the gas is extracted, creating social strains, environmental risks and economic hardships. Things got out of hand over the last few years as gas drilling and infrastructure development grew at a gold-rush pace, evoking strong opposition from groups that felt the environmental and social costs were unjustifiably high. As the gas operators discovered, anti-gas activists are willing to fight gas producers at every step in the process, increasing production costs, regulatory burdens and public disquiet.
Shale gas extraction is a large-scale industrial process whose early stages are noisy and disruptive. Even under the best of circumstances, there's a risk that drilling operations may cause air pollution, chemical spills, methane leaks, road damage and other impacts. Many experts believe the risks can be safely kept within acceptable levels and steadily reduced over time as industry practices, government regulations and technologies improve. Even so, the industry may have to live up to higher standards than would be required if gas drilling was more familiar and well-established in Pennsylvania.
An MIT Energy Initiative study concluded: "With over 20,000 shale wells drilled in the last 10 years, the environmental record of shale gas development has for the most part been a good one. Nonetheless, it is important to recognize the inherent risks of the oil and gas business and the damage that can be caused by just one poor operation; the industry must continuously strive to mitigate risk and address public concerns."
In "Golden Rules for a Golden Age of Gas," the International Energy Agency (IEA) proposes guidelines that gas producers and regulators should follow to minimize the public health and environmental costs of shale gas extraction. These include requiring full disclosure of additives used in hydraulic fracturing; assessing and disclosing key environmental indicators, such as measures of water quality, waste water and methane emissions; supporting a robust regulatory regime that's adequately staffed and funded, and several other provisions. The IEA report concludes: "The technologies and know-how exist for unconventional gas to be produced in a way that satisfactorily meets these challenges, but a continuous drive from governments and industry to improve performance is required if public confidence is to be maintained or earned."
Many of the IEA's proposals have been adopted in Pennsylvania, although the state's progress in policing the gas industry has been obscured by heated political debates. Nonetheless, it's important to keep up the pressure and hold Marcellus drillers and regulators to the highest standards. The benefits of low-cost and domestically-produced shale gas are too valuable not to get it right.
Sterngold is an associate professor of business and the former director of the Institute for Management Studies at Lycoming College.
