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    It's mostly sunny in Pennsylvania after Nov. 2 mid-term elections

    Don Stowers
    Editor-OGFJ

    The Nov. 2 elections were a boon to shale operators in Pennsylvania, the state with most Marcellus Shale production and reserves. Shortly before the election, outgoing Gov. Ed Rendell, a Democrat, had issued an executive order banning new gas leases on state lands, holding hostage around 1.5 million acres, including 800,000 acres in the Marcellus shale formation.

    The lame-duck governor apparently was getting even with Republicans for blocking a severance tax on Marcellus gas extraction. In September, Democrats in the state assembly proposed a rate that doubled the one in neighboring West Virginia, already the nation's highest tax on natural gas. Fortunately, Republicans were able to block it out of concern that capital investment in the Pennsylvania portion of the Marcellus would decline dramatically and state revenues would decline accordingly. That's when Rendell issued the order.

    However, after the votes had been counted on Nov. 3, a Republican, Tom Corbett, told reporters that one of his first acts in office would be to lift the moratorium on Marcellus drilling permits that Rendell had ordered. Corbett called the moratorium "blatantly wrong."

    "These people bought these leases with an expectation of being able to drill as long as they adequately presented papers to get their permits and they ought to be able to get their permits," he said.

    Corbett also promised a change in the state's regulatory process, notably permits from agencies such as the Department of Environmental Protection. He said regulations themselves are not so much the problem as inconsistent application from region-to-region.

    Most petroleum industry observers see the Marcellus Shale, which covers an area of about 95,000 square miles in six states, as one of the largest and most economic shale plays in the country. Positives are that the Marcellus is relatively shallow (generally between 5,000 and 8,000 feet) compared to other shale formations in North America, which reduces drilling and completion costs, and it is close to large markets on the East Coast.

    Negatives are that the land is mostly hilly or mountainous, access is less than ideal, infrastructure is lacking in some areas, and land holdings are fractured. Furthermore, a large portion of the public in that part of the country doesn't like the oil and gas industry and adamantly believes that hydraulic fracturing chemicals can contaminate drinking water in underground aquifers. These people hold political clout in some states and local jurisdictions.

    Although the political situation seems to be changing for the better in Pennsylvania with the election of Gov. Corbett and US Sen. Pat Toomey, along with more business-friendly members of that state's congressional delegation, everything isn't completely rosy for Marcellus players. Some industry analysts and researchers believe that a lack of NGL takeaway capacity could apply the brakes to the current boom.

    Raymond James questions whether the liquids-rich portion of the Marcellus will present a liability to producers. In its Oct. 25 research report, RJ says that the problem is ethane. While there is sufficient demand in the Northeast for propane for residential heating during the winter and butane and natural gasoline can be sold in Northeastern refining markets, ethane is primarily used to produce ethylene, a chemical used to make plastics — and there is virtually no market for ethane in this region of the country.

    Bentek's Rusty Braziel, writing in the August issue of OGFJ, observed that, "Producers in areas suffering downstream capacity constraints [such as the Northeast] may find the economic benefits of high-BTU gas will be difficult to realize. Worse yet, in some cases, such constraints can be so severe it may restrict the volume of gas that can be produced, setting a limit on the number of wells that can be drilled and completed."

    Braziel's conclusion is that, "From an overall market perspective, it would be unlikely that ethane rejection could have a significant impact on natural gas supply. However, on a localized or regional basis, ethane rejection could increase natural gas supplies beyond gathering and pipeline transportation capacity, which could depress local prices and limit local production."

    Raymond James noted that NGLs like ethane can be corrosive to pipelines and must be removed from the raw gas so that the treated gas can meet the quality standards required by pipeline operators before being shipped. As a result, producers in the Marcellus will have to come up with a way to dispose of the ethane removed from the gas stream or they may be forced to shut in production.

    So if political problems weren't enough, the question of ethane disposition has reared its head. Let's hope a solution is found soon. Penn State University estimates the shale gas boom will boost that state's economy by $8 billion and provide 160,000 new jobs by 2015. This is critically important when the official jobless rate is nearly 10%.

    Have an opinion about this? Visit  www.ogfj.com to comment.

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