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August 25, 2015
by David Conti


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Slowing down?

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Leaders of Pennsylvania’s oil and gas industry are used to clenching their fists when Gov. Tom Wolf talks about their sector.

A recent missive from Harrisburg instead prompted a round of head-scratching among those working in the field.

The announcement this month that a water treatment company that aims to serves oil and gas producers was setting up a headquarters in the heart of shale country included a line that spurred some debate.

Neptune Solutions Co.’s “recent decision to place their headquarters in Washington County proves that the industry is showing no signs of slowing down,” read the quote attributed to Wolf.

To say this view of the industry’s status differs from that of producers and analysts would be an understatement.

Wolf’s news release followed two weeks of quarterly financial reports indicating the very opposite of what his quote portrays. Faced with the lowest gas and oil prices they have seen in years, companies are slowing or in some cases halting their drilling programs. Some are laying off workers. Contractors that rely on drillers are closing offices.

Through the first seven months of this year, companies have drilled 42 percent fewer wells in Pennsylvania than during the same period last year.

“Given these clear and widely-reported facts, it’s alarming and out of touch with economic reality that Governor Wolf stated just days ago ‘that the industry is showing no signs of slowing down,’” Dave Spigelmyer, president of the Marcellus Shale Coalition, said in a response to a draft of environmental rules for drilling that the state announced the following week.

Wolf spokesman Jeff Sheridan said growth in gas production over the past several years backs up the governor’s statement. Companies continued to pull record amounts of gas from shale wells through June, despite the low prices.

“Exploration and production companies across the Marcellus play are achieving this tremendous production growth by improving the efficiency and targeting of their drilling operations,” Sheridan said. “As the price of natural gas improves and pipeline capacity comes online to take gas to market, we expect to see capital investments and future growth.”

The industry and Wolf’s administration have not agreed on much since he took office this year on a promise to increase taxes on drilling.

Gas producers and their advocates frequently have cited the low prices as evidence this is the wrong time to increase taxes above the per-well impact fee they’ve paid since 2012.

Money from that fee accounts for less than 1 percent of Pennsylvania budget revenue as a whole, much lower than 39 percent Wyoming gets from severance taxes, the Energy Information Administration reported Friday.

According to the Wyoming Tribune Eagle, though, the governor there is considering tapping a rainy day fund. It seems oil and gas revenue is showing signs of slowing down.

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August 10, 2015
by David Conti


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A four-letter word

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Gas company executives spent the past few weeks bemoaning what’s become a dirty word in Appalachian shale: price.

A theme ran through most of their quarterly earnings calls. Spot prices that normally take a hit in the spring fell into a basement not seen in years as demand cooled and supply kept climbing.

The prices cut into profits and turned top shale gas producers to losses. Some companies are cutting spending to get through the next year or two until prices are expected to rebound.

Getting to that point in one piece might require navigating around a true four-letter word: debt.

When asked what would most likely trip up a gas producer looking to power through the low prices, Roy Powell rattled off a list of threats.

“Items 1 through 5 on the list are debt,” said Powell, a partner at Pittsburgh law firm Jones Day who works with energy clients.

Carrying heavy debt loads wasn’t a big problem for energy companies when they could roll it over at good rates. As low prices cut further into cash flow and hurt their ability to hedge sales at better prices, lenders might not be so kind.

“We haven’t seen a major turn yet by banks to put borrowers in the energy space into default,” Powell said. In the fall, though, when lenders look at their biannual adjustment of borrowing bases, producers could run into trouble.

Companies with high debt-to-capital ratios “might face headwinds from interest rates going up,” said Stewart Glickman, an energy analyst at S&P Capital IQ.

In advance of those lenders’ adjustments, we might see the increase in asset sales, mergers and acquisitions that experts have been predicting for a year.

“Some companies will need to sell assets at a reduced price,” Powell said.

A few potential buyers and sellers made themselves known. EQT Corp., whose debt ratio is about half of some of its competitors, said it’s looking to buy. Sellers haven’t given the right price, though.

“It seems that sellers have not changed their value expectations to reflect a natural gas strip that is significantly lower than a year ago,” Executive Vice President Steven T.
Schlotterbeck said during a call after EQT posted one of the few profits that Marcellus producers reported for the quarter.

Rex Energy, which reported a $155 million loss, reiterated that it’s looking to sell assets or partner with another producer.

Consol Energy, squeezed by low coal prices in addition to gas, also is looking to sell assets.

“We have over $2 billion of monetization opportunities and a dedicated team to bring some of that value forward,” Chief Financial Officer David Khani told analysts. “Some of these opportunities are large and do in fact move the needle.”

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July 27, 2015
by David Conti


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Out of the dark

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There’s something about losing electricity in the house that wakes you up. And keeps you up.

The home electronics beep. The ceiling fan quits its normal whirring that you notice only when it’s gone.

Suddenly, it’s too quiet.

On a steamy July morning, it doesn’t take long for the house to start getting stuffy, even in the darkness before dawn.

Power companies, energy officials and elected leaders talk a lot about “reliability,” about finding ways to maintain it on the grid through the dog days of summer and iciest mornings of February. It was frequently mentioned during a recent Friday visit to Pittsburgh by U.S.Energy Secretary Ernest Moniz.

“As we face more extreme weather, we have to build our infrastructure in a smart way to also make it more resilient, so the power stays on all the time,” Moniz said after a breakfast meeting with energy sector and university leaders at the Energy Innovation Center in the Hill District.

As they talked reliability over bagels and coffee, though, people waking up in homes across the Allegheny River were trying to figure out ways to toast their bagels or brew their coffee without electricity.

A tree falling on power lines cut power to about 1,000 customers in the North Side and surrounding neighborhoods for hours, according to Duquesne Light.

It’s easy to forget how much we rely on electricity and how frustrating it is to shower and shave in the dark. “What time is it?” you wonder while walking past dark digital clocks on the way to the box with camping gear. Hopefully, you have a flashlight in there and a percolator to make coffee.

And a gas stove.

The frustration shifts to worry when the outage reaches the third hour. Did my iPhone get enough of a charge last night? How long will the fridge stay cold? Will the salmon we bought at the store yesterday go bad? Do I have an outfit for work that doesn’t need to be ironed?

You leave the house under-caffeinated, your suit is wrinkled, your stomach is growling, and your journey is only beginning. That intersection at Route 65 and the McKees Rocks Bridge is brutal even when the traffic lights are working. Hopefully, your phone has enough of a charge to alert your boss to how late you will be.

Certainly, these are all relatively minor concerns compared to what a disaster can bring, when it might take weeks to restore power. But they highlight why discussions about reliability are so important.

Improvements to the grid will cost us a lot of money in the next few years. The benefit, hopefully, is fewer frantic mornings.

At least, by the time you get home, the lights will be back on. That’s when the real work begins: Resetting all those flashing clocks.

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July 23, 2015
by David Conti


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M & A mostly MIA

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For nearly a year now, we have heard analysts predict a wave of mergers and acquisitions would sweep through the shale fields as natural gas and oil prices fell down and stayed down.

Marcellus producers struggling with debt, low cash flow or both keep popping up as “prime targets” for takeover, experts say.

The wave has yet to crash on this shore, though. Repsol’s purchase late last year of Canada-based Talisman Energy, Pennsylvania’s eighth-largest shale has producer by volume, might be the biggest recent deal to impact Appalachian operations.

Merger and acquisition activity in the industry has actually fallen this year, the U.S. Energy Information Administration said this week. Royal Dutch Shell’s announced buy of BG Group boosted the overall value of deals. But, EIA, reported: “The 137 deals announced in the second quarter was the lowest number of deals since fourth-quarter 2008 and 42% below the 235 median quarterly number of deals over the previous two years, indicating less breadth of activity.”

If we are going to see more unions and purchases, Goldman Sachs Global Investment Research has some ideas for candidates. According to SNL Financial, the firm identified top Marcellus producers Range Resources and Cabot Oil & Gas as top targets this year.

Major companies such as Exxon Mobil, whose XTO Energy is No. 16 among Pennsylvania’s shale gas producers, could be ready to buy, Goldman said this month. Other potential Appalachian targets identified in the report were Rice Energy, Magnum Hunter Resources and Carrizo Oil & Gas.

Not mentioned was Consol Energy, a focus of fresh acquisition talk this week since its largest shareholder, activist investor O. Mason Hawkins’ Southeastern Asset Management, called for the sale or spinoff of some of the Cecil company’s gas assets.

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July 13, 2015
by David Conti


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Adding water

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The discussion in Pennsylvania energy policy normally revolves around finding ways to ship all this shale gas across state lines to more lucrative markets.

What about the state’s other bountiful natural resource, water? Some might think we need to keep that precious asset in-state based on a recent government-backed gas drilling study.

Four U.S. Geological Survey researchers looked at how much water oil and gas producers use during hydraulic fracturing and found a few trends.

Although it varies by region — likely based on the shale drillers are tapping — the average amount has gone up considerably since 2010. And the Marcellus and Utica shales beneath Pennsylvania and nearby states are among the reservoirs that take the most water to frack, upwards of 9 million gallons per well.

The potential implications include using up valuable fresh water in parched lands and finding a way to dispose of the flowback, the researchers wrote in the American Geophysical Union’s journal Water Resources Research.

Don’t expect this report to set off too many alarms in our shale fields, though.

Despite the increased water use, consumption by agriculture and power plants dwarfs the draw by oil and gas, government figures show.

We’re also, well, awash in water, at least in the southwest corner of the state where it’s felt like monsoon season since Memorial Day.

Even in the northeast corner, which until Friday had been under a drought watch since March, drilling continued. The Department of Environmental Protection said the dry conditions in those counties resulted in no restrictions for any industry. Low flow on waterways that triggers restrictions from the Susquehanna River Basin Commission have eased.

And not all of that water being used by drillers is fresh. In fact, much of it is not.

They are increasingly treating and reusing flowback from one well to frack the next well. About 90 percent of the water that comes back out of a well during fracking and production goes into the next job, according to University of Pittsburgh researcher Radisav Vidic.

A bill that recently passed the state Senate would make it easier for them to use treated min e drainage water for fracking, which would help clean up another industry’s waste.

The real lingering question remains not whether drillers will use up all the fresh water, but what will they do with all the wastewater when there are no more wells to frack. Vidic is among researchers looking at better treatment options.

Other recent studies by the USGS highlight what’s becoming the least popular option: deep-well injection. Concern about earthquakes tied to those disposal wells won’t dry up anytime soon.

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July 1, 2015
by David Conti


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Impasse

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Want to know what someone thinks about Democratic Gov. Tom Wolf’s veto last night of the Republican-crafted Pennsylvania budget? Ask their view on a severance tax on natural gas drilling.

Not surprisingly, reaction to the move falls along these lines: Supporters of the levy are happy that Wolf put the kibosh on a spending plan that didn’t consider his campaign promise to increase taxes on the industry. Those who think shale companies are paying enough took Wolf to task.

“It is unfortunate that the governor has made a severance tax on natural gas production his primary line (in) the sand in the debate over the budget,” said Lou D’Amico, head of the Marshall-based Pennsylvania Independent Oil & Gas Association.

D’Amico, who has fought against the added tax since Wolf made it a focus of his campaign last year, picked apart the governor’s strategy of painting opponents as anti-education.

“Why not place an excise tax on Gov. Wolf’s former cabinet making business to help fund education? If the governor opposed that idea because of its negative effect on the sale of cabinets, would he be against education and children?” D’Amico asked in a statement this morning.

PennFuture, an environmental group that pushes for tighter regulation of the industry, prodded supporters on its website to make their opinions known on taxes, too.

“We need to keep the pressure on. Tell your legislator that a serious budget must include a severance tax that invests in energy efficiency programs and a clean energy future,”the group said.

Wolf’s office took to Twitter to emphasize the points he made in announcing his veto. Note the top two bullets:

wolftweetIt might be a long impasse.

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June 29, 2015
by David Conti


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Adding it up

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As budget season wears on in Harrisburg, there’s little sign of lawmakers and Gov. Tom Wolf agreeing on his natural gas severance tax plan.

Despite opposition from the Republican-controlled General Assembly, Wolf’s proposals to boost sales, income and gas taxes has maintained support among about three out of five Pennsylvania voters, a Franklin & Marshall College poll showed this month.

The top reasons cited for that support line up with Wolf’s biggest campaign promises last year: Nineteen percent said we need to tax the shale drilling industry and 17 percent called for more funding for schools.

The Democrat tied the issues together by saying gas companies don’t pay their “fair share” in taxes, and by earmarking a big chunk of the money he hopes to raise through a severance tax to public schools. Indeed, he has accused those who oppose the tax scheme of being against fixing schools.

Hogwash, industry leaders say.

The issue of whether drillers pay taxes has its origins in the decision in 2012 to charge a per-well “fee.” It raises about $225 million a year.

Kevin Sunday, government affairs manager for the Pennsylvania Chamber of Business and Industry, might have summed up that issue best in a recent tweet:

“Only in PA do we say that the gov’t collecting nearly a quarter billion dollars from private sector is not a tax,” he wrote.

A more nuanced debate over the education issue has surfaced. The industry can make a strong argument that it is supporting education across the shale fields.

Chevron Corp. is putting $20 million into an initiative aimed at training a new generation of energy workers in 27 counties above the Marcellus and Utica shale plays in which it’s an active producer. Sources of the money include labs in public school districts and scholarships to the community college-based training program ShaleNet.

Cabot Oil & Gas this year awarded $10,000 grants to six career and technology school programs (we used to call those vo-tech) in northeast Pennsylvania, where the company is most active.

Consol Energy Inc. recently gave $5,000 scholarships to three seniors graduating from Moon, Montour and West Allegheny high schools and is giving smaller grants to teachers in Greene County. EQT Corp. doled out $670,000 in scholarships through its mentoring program ASPIRE since 1995.

Range Resources put $345,000 into FFA (Future Farmers of America) scholarships since 2010, $310,000 into the Pittsburgh promise scholarship program, $355,000 into the Challenge Program, and hundreds of thousands more dollars into youth agricultural programs.

Washington County districts that signed leases with Range have raked in another $15 million in royalties.

Of course, most of these industry donations are not going into the general funds of school districts that say they need more money. The industry gets to decide where these checks go, and the payments don’t add up to the $1 billion Wolf seeks.

But his plan is unlikely to raise that much either, many observers say. And if energy firms trimming budgets because of low prices need to cut further to pay more taxes, it wouldn’t be surprising to see some of these programs on the chopping block.

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June 25, 2015
by David Conti


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Local talent headed to pipeline group

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The new Pennsylvania Pipeline Infrastructure Task Force looks like it will have at least some Pittsburgh-area representation.

House Speaker Mike Turzai this week appointed a fellow North Hills resident and rising energy star to the board that is tasked with recommending ways to ease the pain of building out billions of dollars worth of gas pipelines over the next few years. Lauren Parker, 33, a civil engineer from Wexford, is a Butler native and Robert Morris University alum.

Picture of Parker

Lauren Parker

“Lauren’s knowledge of the impact of regulation on consumers and businesses in the oil and gas industry is extensive and impressive,” Turzai, a Republican from Marshall, said in a news release.  “Studious, open-minded and collegial, she will have a positive impact on the PIFT’s mission.”

(For the record, it’s PITF. PIFT sounds like you’re voicing displeasure at the topic.)

Parker works at Robinson-based Civil & Environmental Consultants and serves on several committees with the North Fayette-based Marcellus Shale Coalition. You might remember her profile in the Trib’s Energy Spotlight feature from On the Grid in April, when she was named the Breitling Energy Future Industry Leader during the Northeast Oil and Gas Awards in Pittsburgh.

We’ll keep you updated on the naming of other members to the task force, which Department of Environmental Protection Secretary John Quigley will lead.
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June 22, 2015
by David Conti


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Drainage vs. withdrawls

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A few weeks ago, we reported on a push by freshman state Sen. Camera Bartolotta to make it easier for gas drillers to use treated acid mine drainage water in fracking.

The bill has a ways to go, but passed its first test today when the Senate Environmental Resources and Energy Committee — of which the Washington County Republican is vice chair — approved it.

“Utilizing treated mine water in natural gas operations holds the potential to significantly reduce the withdrawal demands on Pennsylvania’s rivers and streams,” Bartolotta said in a release. “Questions regarding liability are the biggest barrier preventing more companies from taking advantage of this environmentally friendly process.”

Those withdrawal demands generally have been overshadowed by disposal demands because most big drillers began using recycled flowback and production water for fracking where they could several years ago.

The key to using either source of tainted water is the idea that fracking water doesn’t need to be pristine when it goes down the well.

Freshwater for fracking could be at a premium, especially in the northeast corner of the state, if the drought there persists and drilling ramps back up.

We have plenty of mine drainage across Pennsylvania, much of it leaking into creeks. If a correctable liability issue is keeping some drillers from giving it a better use, this legislation could make a real difference.

Advocates say that would be a win-win for the industry and environment.

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June 15, 2015
by David Conti


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Shale jobs recount

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The drop in natural gas prices has prompted some layoffs in Pennsylvania as shale companies slow their pace of drilling.

Certainly it hasn’t amounted to a drop of 160,000 jobs, though, as one might surmise from the quickest of glances at the state Department of Labor & Industry’s latest Marcellus Shale Update.

The department this month said natural gas extraction, suppliers to the industry and “companies that provide goods and services” to its workers employed an estimated 89,314 people in the third quarter of last year. In April, the department said Marcellus industries and related economic activity supported 249,436 jobs during that same quarter.

The new number does not reflect a rash of pink slips in the shale fields, though subsequent quarters could show some reductions given the cuts in spending by drillers this year. Instead, this resulted from a recount by Gov. Tom Wolf’s administration, which said it found “glaring errors” in the methods previous administrations used to tally up jobs.

“The numbers were so glaringly wrong they had to be corrected,” explained John Hanger, Wolf’s policy director, who said he and Labor & Industry Secretary Kathy Manderino decided to recalculate the data.

The new approach changes a counting method that dates back to Ed Rendell’s administration — in which Hanger served — and happens five months after fellow Democrat Wolf replaced Republican Tom Corbett. It also comes at a particularly prickly time for Wolf’s relationship with the industry as he seeks new taxes on gas that the Independent Fiscal Office said would be the highest of any gas-producing state.

Hanger said the timing is not related to the tax debate, and it took several months because, “there’s a lot going on starting a new administration.”

The industry still smells politics in the switch.

“Why put this important economic analysis in the hands of the governor’s political team rather than relying on career state policy analysts, and break from the good government precedent set by both Governors Rendell and Corbett?” asked Dave Spigelmyer, president of the North Fayette-based Marcellus Shale Coalition.

The old method led to inflated numbers, Hanger said, by including all members of certain job classes — including highway workers and state environmental regulators — even if their jobs didn’t touch shale. Indeed, Corbett took heat for the calculations in 2013.

The new method starts with the same number of people “directly” employed in six categories and then estimates jobs in “indirect” supply chain and “induced” industries such as food services and health care.

Hanger said data indicating nearly 90,000 jobs from gas show “it’s an important and impressive industry” that Wolf wants to succeed.

The industry sees a glaring disconnect between that wish for success and the drive to raise taxes, but Spigelmyer said “we nonetheless remain hopeful that we can work constructively with the governor and his staffers.”

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