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October 20, 2014
by David Conti


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A basis for concern

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We will start hearing this week from gas companies how they performed during the fiscal quarter that ended Sept. 30. Expect to hear a lot about dismal prices in the Marcellus shale.

The energy industry looks to daily trading at the Henry Hub in Louisiana to set the national price of natural gas, but producers often get a different price where they sell into pipeline hubs, which they call a basis differential. In the Marcellus, that basis has stayed in the negative column way too long for some companies.

“There’s a big basis problem in the Northeast,” Range Resources CEO Jeff Ventura told the Tribune-Review this month.

In April, producers delivering gas to five Marcellus hubs generally found those daily “spot” prices at about $4 per million British thermal unit, within $1 or less of Henry Hub. Prices at four of those hubs spent much of the summer $2 below the benchmark and have recently dropped further.

Only the TCO Appalachia Pool Hub, which reflects the price of gas heading into the Columbia Gas Transmission pipeline southwest of Pittsburgh, has kept pace with Henry, the Energy Information Administration said last week.

Gas companies with connections to several pipelines can bounce around to find the best prices. Three months ago, executives predicted an average negative basis this summer close to $1. We’ll find out how far off they were in the next week or two.

They can blame, in part, their own success.

Companies keep putting up record production numbers, both for Pennsylvania — nearly 2 trillion cubic feet of gas in the first half of this year, a 38 percent increase over the year before — and across the shale play, the most productive in the country.

Pipelines don’t have enough room to move that bountiful supply to where it’s needed. Ventura predicted it will take another two years for the pipes to catch up.

“The supply can’t get to where the demand is,” said Tom Murphy, co-director of Penn State University’s Marcellus Center of Outreach and Research.

Power companies in New England, still frost-bitten by last year’s polar vortex and worried about firing up the grid without the coal plants that are increasingly shutting down, are looking for electricity from hydropower plants in Quebec to get through the winter, Murphy noted.

A six-hour’s drive away in northeast Pennsylvania, a 27 percent increase in production this year created such a glut of gas that prices dipped below $1 there recently. The pipelines needed to get that gas past New York City might never be built.

The difference cuts into the bottom line and further unsettles executives planning for next year under the cloud of a potential severance tax promoted by Democrat Tom Wolf, who leads Gov. Tom Corbett in polls ahead of the Nov. 4 election.

Wolf acknowledged the price difference during a recent meeting with Trib reporters and editors, but still thinks an added tax is necessary to raise between $600 million and $1 billion a year.

“Price convergence will happen. It has in most other industries,” he said.

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October 5, 2014
by David Conti


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Methane crackdown ahead?

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The oil and gas industry celebrated last week when the Environmental Protection Agency said companies drastically cut total methane emissions from wells even as they increase drilling.

The EPA might not let the party last long, though.

The agency’s annual report on greenhouse gas emissions provided shale drillers with an effective retort against opponents, many of whom let their anti-fracking fervor fly during the recent Climate March in New York.

Scientists consider methane a more nefarious climate-changer than carbon dioxide. Critics say its release during fracking or from leaky pipes can negate the fact it burns more cleanly than coal when generating electricity.

The industry responded by putting a lid on a lot of those leaks. It cut overall methane emissions by 12 percent since 2011, led by a 73 percent reduction from fracked wells, the EPA said in its annual greenhouse gas inventory.

All this while the shale boom drastically increased the number of potential sources.

The Marcellus Shale Coalition said the data show “it’s simply a false choice” that we have to pick either the benefits of gas or protecting the environment.

“Creating good-paying jobs and growing the economy go hand in hand with our efforts to reduce emissions,” said Howard Feldman from the American Petroleum Institute.

Tighter regulations should get some credit, though, and likely will get some strong attention from the industry, said one environmentalist.

EPA Administrator Gina McCarthy, who has led President Obama’s charge against carbon dioxide from coal-fired power plants, told investors last month the agency is considering more methane rules for the oil and gas industry.

Mark Brownstein, associate vice president and chief counsel for the Environmental Defense Fund, said he expects some word from EPA in a few weeks.

EDF has worked with the industry on reducing methane emissions. On Thursday, it released a survey highlighting 76 firms nationwide that are making equipment or developing technology such as infrared leak detectors for scanning pipelines.

Brownstein and others noted that the drop in methane emissions coincided with a rule EPA announced two years ago requiring that companies use only “green completions” at wells. That involves capturing fugitive gas that gets trapped in flowback water or might otherwise be vented into the air while workers finish wells and connect them to pipes.

Although methane leaks are down, the industry is putting more carbon dioxide into the air from compressor equipment and other related sources.

“Those sources are not regulated by EPA. In the absence of regulations, they’re going up,” Brownstein said. He wants tighter rules on emissions from compressors, pipelines and storage tanks.

When the EPA took testimony in Pittsburgh this summer on carbon rules for coal plants, some people predicted gas would be the agency’s next target.

Gentlemen, prepare your testimony.

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September 29, 2014
by David Conti


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Everybody’s doing it

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Soon enough, it will be easier to list the local energy companies that haven’t launched an MLP.

NiSource, the parent of Columbia Gas, Western Pennsylvania’s biggest gas utility, announced over the weekend it would spin off its pipeline operations into a separate public company and form an MLP to help it raise money.

The MLP — a master limited partnership — is a creature of tax law and financing that’s relatively native to the energy kingdom. As long as the venture gets nearly all of its cash from natural resources, real estate and commodities — particularly midstream pipelines and processing facilities in this gas patch — it doesn’t pay corporate taxes on distributions.

So those dividends run a bit higher, in the 5 percent to 6 percent range, making MLPs attractive to investors.

Which makes them attractive to companies such as EQT Corp., Consol Energy and Rice Energy that could use a little extra cash to fund their ever-expanding exploration in the Marcellus and Utica shale.

About a month ago, some analysts wondered aloud if MLPs might have run their course when pipeline giant Kinder Morgan abandoned the model with a consolidation.

Analyst Kent Moors, executive chair of the World Affairs Council of Pittsburgh’s global energy symposium, said that move wouldn’t signal a trend. The partnerships require constant expansion of assets, which might be a problem for very large companies, Moors said. But that’s no problem in the Marcellus.

Downtown-based EQT expects each year to feed its EQT Midstream partnership what it calls a “drop-down,” such as the 35-mile Jupiter gathering pipeline it sold to its MLP this year. Two years after forming, EQM reported $52.1 million in net income during the latest quarter.

The latest MLP in our shale play looks to have its own expansion plan, which one analyst said bodes well for its future. Cone Midstream, a venture formed by Cecil-based Consol and its partner Houston-based Noble Energy, had a good first day of public trading last week. CFO David Khani told the Trib investors liked its structure that allows for constant expansion of a gathering field “backbone” built by Cone’s parents.

Cecil-based Rice Energy announced its MLP plans last month.

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September 23, 2014
by David Conti


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Keeping grandma warm this winter

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Popular media co-opted the phrase Polar Vortex and made it a joke this summer when low temperatures dipped into the 50s in spots.

It was no joke for people on variable rate electricity plans who saw their bills quadruple last winter, though. And it’s a serious matter for energy executives.

Some people say PJM, the company that operates the regional power grid and related markets for much of the Mid-Atlantic, came a hair’s breath away from triggering blackouts Jan. 7 because supply could not keep up with record demand.

PJM denies it got that close, but its leaders have been talking ever since about ways to avoid a crisis during another rough winter. Nobody wants the situation that Murray Energy CEO Robert Murray described this week in Pittsburgh with his usual subtlety: “Grandma is going to get cold in the dark,” he said Monday during the Platts Coal Marketing Days conference.

The conference continued Tuesday without the references to death-knells and Nazis that made Day 1 quite entertaining. But the Polar Vortex remained a hot topic, and shows some conflicts that really worry the industry.

PJM wants better commitments from generators that they will show up with big power when the grid needs them. This was a problem in January, according to market operations director Adam Keech.

Who provides big power? Coal plants. But they’re closing because of environmental regulations and other reasons. Bentek Energy analyst Anthony Sweet said at least 10 percent of those plants are set to close by 2019.

Who is trying to fill the gap? Natural gas. But basic supply and demand forces, combined with overall volatility and head-scratchers such as the fact the gas markets are closed on weekends and holidays, make relying on that a dangerous and expensive option. Because of pipeline limitations, power plants couldn’t get the gas supply when they needed it most. Spot prices in some places went up 10-fold.

David Owens, a vice president at the Tennessee Valley Authority, said some of his company’s plants burned fuel oil to generate electricity instead of gas. Not because they didn’t have the gas, but because of “economics.” As in it was cheaper.

PJM is working on firming up those capacity generators so they’re on the grid when needed, and coordinating gas and coal markets to minimize the crazy price swings. But it sounds like that will take a lot of time. As in not going to be finished by this winter.

Hopefully grandma doesn’t need an extra blanket and flashlight.

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September 22, 2014
by David Conti


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Introducing ‘On the Grid’

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The shale gas boom no doubt fueled Pennsylvania’s most recent rise to national energy prominence. Well production reaches record levels with each report and will likely top 4 trillion cubic feet this year.

The state’s role in powering the nation runs deeper than the Marcellus and Utica shale formations, though.

Two of the three most productive coal mines in the country call Pennsylvania home. They help feed an electricity sector that produces the third most power in the nation. So do the reactors at five plants that make Pennsylvania second only to Illinois in nuclear power generation.

Now generators from New England to the Carolinas are switching to natural gas and need new pipeline connections to the Marcellus and Utica.

The Keystone State is powering the grid, thanks to the success of natural gas, coal, nuclear and utility companies centered in Western Pennsylvania.

The stories behind that success have a new home at Trib Total Media.

OnTheGridLogo

On the Grid, premiering Monday in print and at triblive.com, will bring readers a fresh, multimedia view of the energy sector. Every other week, our pages will deliver new insight into the people, markets and issues driving the industry.

Every day, visitors to the new Web page can find breaking news and more in-depth stories from Trib Total Media and other reliable sources. Online readers can connect with energy voices through social media, explore interactive maps, see the latest video from the field and find out where shale rigs are drilling.

Here on the Flowback blog, we’ll bring stories together with deep perspective from industry sources.

Watch for new features to be added in coming weeks. And please send feedback and story ideas to dconti@tribweb.com.

In the meantime, this week promises to be a busy one.

Leaders of the coal industry that has called Pennsylvania home for more than 200 years will gather Downtown for two days of networking and workshops. Expect the tough international market and even tougher environmental rules on power plants to dominate many talks.

The Marcellus Shale Coalition’s annual Shale Insight conference will return home from a few years in Philadelphia and bring with it big names in politics and political analysis. A celebration of Marcellus drilling’s 10th birthday is in order, between plenty of panel discussions.

And as that conference wraps up here on Thursday, an important policy discussion will begin in Harrisburg. The Department of Environmental Protection’s Technical Advisory Board will talk about big changes in state oil and gas regulations, including a split in rules for conventional and unconventional drillers prompted by a budget bill in July.

Watch the board meeting online at dep.state.pa.us. And, of course, watch for updates On the Grid.

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September 16, 2014
by David Conti


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A well-studied industry

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A recent batch of studies focused on shale drilling, particularly its potential impacts on water supplies above the Marcellus, has dominated energy headlines this month.

Sometimes it seems we need a study to determine the potential impact of all the studies.

The EPA is conducting what should be the definitive examination of whether today’s methods of extracting gas from deep underground — from site prep through fracking to production — endangers our drinking water, and how.

In the meantime, we are exposed to frequent, piecemeal research that critics often say is influenced by whoever is funding it.

Last week a Yale study caught national headlines with reports that it determined drilling is bad for you. Gas wells are doing something to the air and water in Washington County making it more likely to develop rashes and upper respiratory problems if you live nearby, writers said.

But the study didn’t actually connect health problems to wells, which would require a close look at people’s medical records, its lead author said. The study only surveyed households and didn’t explore other explanations for what ailed them.

Critics said we couldn’t trust a study funded by anti-drilling environmental groups such as The Heinz Endowments. The head of that foundation responded by criticizing the critics, accusing the industry of following a rapid-response playbook.

Of course, several environmentalists followed that same playbook in responding to a Penn State study publicized the same day that predicted frack water will stay locked in the shale and not migrate north to drinking supplies. You can’t believe that one, they said, because it was funded by the drilling industry and employed a Shell scientist.

A study released this week claimed to find the source of stray methane in water supplies in Pennsylvania and Texas, saying it was faulty gas wells and not the fracking itself. It was bolstered by a Department of Energy study that showed frack water staying put in the shale far below a few wells in Greene County.

But even the government called its study “limited,” focused only on one well pad, which belies some of the sweeping headlines it earned. And the stray methane study drew its conclusions from a form of molecular analysis that one expert questioned as being relevant.

The EPA says it hopes to issue results of its water study this year. Hopefully researchers haven’t muddied the waters so much with conflicting studies that the government can’t clear the air on this question.

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September 8, 2014
by David Conti


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More Benjamins from the Land of Lincoln

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Could the EPA regulations everyone is blaming for the demise of American coal actually improve the bottom line at the industry’s most public face in Pittsburgh?

If Consol Energy Inc. gets a good price for its 1 billion tons of reserves in the Illinois Basin, the Cecil-based company might thank a market turned a bit upside down by the government crackdown on air emissions.

Power companies that use coal to generate electricity once avoided the basin’s dirty, high-sulfur coal because of the pollutants it creates when burned. But companies that invested in scrubbers or new plants to meet new and proposed air rules are now seeking out the sooty stuff because their equipment can burn it cleanly and cheaply, Bloomberg news reported over the weekend.

With new demand for dirty Illinois coal in clean-tech plants, mining companies and investors are taking a second look at tapping the resource. Enter Consol, which is looking to offload what it considers a “non-core asset” in the Land of Lincoln.

Consol CEO Nick DeIuliis said during the company’s latest earnings call it’s looking to get the best price for the reserves “either through selling it in one piece or breaking it up into multiple pieces that will make sense for multiple buyers.”

A spokesman said he had no updates on attempts to sell the coal. DeIuliis said in July he hoped to have an update during the next earnings call.

Consol last year sold several older mines to Ohio-based Murray Energy but has poured big money into its Bailey complex operations in Washington and Greene counties. Although Bloomberg notes that sales of more expensive Appalachian coal are down and some companies are closing or selling mines, Consol said it has no intention of selling its core-operations, which include the Bailey mines and the Buchanan mine in Virginia.

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September 3, 2014
by David Conti


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A billion-dollar debate

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The debate over how to tax record levels of gas coming from Pennsylvania shale wells did not end with the signing of state budget deals over the summer.

As political analyst Joe DiSarro predicted in March, the severance tax vs. impact fee battle remains one of the hottest topics in the gubernatorial race. And it continued to play big this week.

Democrat Tom Wolf, a York County businessman looking to unseat Republican Tom Corbett, says we’re not getting enough money from drillers. He proposes a combination of per-well fee and a tax based on sales and production that adds up to the equivalent of a 5-percent levy.

This week he said such a plan would raise $1 billion, much of which he wants to put into education, funding state pensions and filling a budget deficit.

Corbett has rejected more taxes on the industry. Today, the industry’s biggest lobbyist posted a video touting the benefits of the impact fee.

The two-minute clip from the Marcellus Shale Coalition shows how townships, state agencies and all 67 counties have shared and spent $630 million in impact fee money over the past three years. The group has blasted any argument to replace the fee with a tax.

The clip and accompanying announcement from the North Fayette-based coalition never mention the governor’s race or a severance tax. But the coalition has become more politically active in recent months through its United Shale Advocates campaign, which is encouraging people to register to vote.

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September 2, 2014
by David Conti


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Border-line study

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Driving north out of Bradford on U.S. 219, you’ll see two distinct signs announcing that you’ve crossed into New York.

The condition of the road turns from OK to deplorable, a departure from what we’re used to in these parts.

And signs on the side of that decrepit road make it clear that a booming business in the Keystone State has no place in New Yorkers’ state of mind.

Picture of anti-fracking signs

Credit: WNYC

Fracking isn’t allowed in New York. Nor is it welcome in many spots, if the yard signs all around the Finger Lakes wine country is any indication.

A state moratorium remains in effect while officials study potential health effects of shale gas drilling and hydraulic fracturing in the same Marcellus shale and other formations that run beneath both New York and Pennsylvania.

Industry advocates say New York is missing out on its potential rewards of employment and tax revenues. For example, Susquehanna County on Pennsylvania’s northern border, the top gas producer in the state, received $5.4 million in impact fees on wells this year and its townships and boroughs collected another $8.4 million combined.

The area across the border around Binghamton, N.Y., has lost 64 percent of its manufacturing jobs base since 1990.

Researchers backed by one of New York’s oldest charitable foundations want to know what kind of effect the ban is having on families. Penn State University sociology professor Molly Martin is going to compare economic indicators in counties on both side of the border to see who’s been better off over the past six years.

Tax records, teen pregnancy levels and crime rates should give some indication of where families have won or lost in the battle over drilling, the researcher says.

Watch for signs of the study’s results in about a year.

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August 27, 2014
by David Conti


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Counting golden eggs

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A few months ago, Washington County Commissioner Larry Maggi summed up his fear of what fellow politicians might do with higher taxes on the state’s gas drillers.

“They see a golden goose and want to strangle it,” said the Democrat, whose county is benefiting greatly from the $200 million the state has been collecting annually in per-well impact fees.

Photo credit: Dallas Morning News

Photo credit: Dallas Morning News

A wolf seems to be nosing around that, er, goose house.

Democratic candidate for governor Tom Wolf this week employed similar imagery to describe the potential he sees in an extraction tax to fund his list of spending priorities.

He told Trib reporters and editors on Tuesday that the gas industry is “the goose laying the golden egg,” before giving some examples of how he wants to dice it. Several hundred million dollars more going to the general fund could help fuel struggling schools, prop up the underfunded pension system and plug the budget deficit, he said.

“That would make Pennsylvanians a partner with the industry,” he said about what he called a “reasonable” severance tax.

Wolf called claims by the industry that higher taxes would push drillers to less-expensive shale plays “disingenuous” because “the market is here.” That drew a rebuke from the shale lobby.

“While shale development will remain here, the industry’s growth potential – and the broad-based associated benefits that could be fully realized – will be unnecessarily jeopardized. To suggest otherwise is disingenuous,” said Marcellus Shale Coalition President Dave Spigelmyer.

Wolf said he wanted to add a tax based on how much money wells were making on top of the per-well fee that mostly benefits host communities, bringing the total collected to about 5 percent of gas revenue. A state estimate this year put the impact fee’s equivalent at about 2 percent.

Wolf conceded that calculating the tax rate could get tricky — should it be based on wellhead prices or the much higher benchmark prices that energy companies are not getting?

He also did not explain how that gas money — about $500 million if we’re going from 2 percent to 5 percent — would pay for all those initiatives.

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