American Oil and Gas Reporter - January 2015 - 190

The Presidential Papers
projects and opportunities. Practically all
of the forecasts on this topic predict that
this activity will last many years into the
future.
Many of IOGAWV's members are located in two shale plays: Marcellus and
Utica. Based on current production, some
are calling the Marcellus the largest gas
shale play in the world. This notoriety
has attracted numerous investors and new
players into our region. The competition
for leases has caused lease bonus payments
and royalty percentages to increase, resulting in lessors becoming wealthy
overnight, and in some cases becoming
millionaires.
Compensation for land uses such as
access roads, pipelines, drilling locations
and water impoundments has financially
benefited many surface owners. The upstream sector of our industry has grown
with drilling contractors, service companies and many other related entities thriving because of the surge in activity.
The midstream industry has blossomed
with pipeline contractors and other midstream providers expanding in an attempt
to meet the demands for new infrastructure.
Downstream operations, such as methane
crackers and manufacturing plants needing
polypropylene for their products, are purchasing properties and making plans to
build.
Restaurants, hotels, truck dealers,
banks, legal firms, and many others also
are benefitting. Tax revenues to the state
and counties have gone up and are expected to continue increasing. Jobs within
our industry are increasing, and that has
sheltered the state from many of the job
losses being suffered in the coal industry.
Conventional Operations
IOGAWV is pleased for the association
members who are benefiting from developing the Marcellus and Utica, but it
also recognizes that there are other members who aren't. Many producer/operator
members only have conventional vertical
wells, and either have not had the opportunity or can't afford to participate in
these new shale developments. Many of
these members are struggling to make
ends meet.
Basic economic theories of supply
and demand have become a reality in the
Northeast natural gas market, with price
drops resulting from the supply of natural
gas far exceeding demand for the product.

At current pricing, many conventional
gas wells simply don't produce enough
to break even. Some operators are facing
tough decisions, including shutting in
wells until prices recover, laying off employees, selling out or declaring bankruptcy.
To complicate the conventional producer/operator's plight, the positive cost
basis adjustment that historically has been
enjoyed in the Northeast has eroded and
now is a substantial negative adjustment.
This likely will persist until ongoing
efforts to correct the supply and demand
imbalance are placed into service.
In addition to low prices and negative
basis, the glut of gas being transported
has brought to light the value of space in
pipelines. With pipeline capacity and bottlenecks inhibiting the gas volumes being
transported, firm capacity has become a
valuable asset. This asset, however, costs
money and increases the cost of getting
gas to the market, thereby reducing the
net price to the operator even more.
With negative adjustments, transportation charges, gathering and processing
charges, fees, taxes, royalties and operating
costs all taking a portion of the revenues,
it is very difficult to break even. At current
gas prices, much of the Marcellus and
Utica development now is concentrated
in the liquids-rich areas because dry gas
production alone will not support the investment required.
The best way to remedy an oversupply
situation is to create more demand. A
number of projects are under way, but are
two to five years away from being put
into service. These projects include additional pipelines to transport gas to other
markets, reversing the direction of flow
on pipelines, exporting gas as liquefied
natural gas, and expanding the use of
compressed natural gas as vehicular fuel.
Several federal issues on our radar include efforts by the Environmental Protection Agency to redefine "waters of the
United States," and the agency's efforts
to tighten air quality standards. These
issues and others are watched closely by
our legal counsel in Washington. We actively intervene and provide comments
whenever necessary.
On the state level, IOGAWV also
monitors issues constantly. One of these
surfaced early in 2014, when an industrial
tank near a public water intake for the
Charleston municipal water supply sprang

190 THE AMERICAN OIL & GAS REPORTER

a leak and shut down water deliveries to
300,000 residents in and around
Charleston. With the legislature in session
in Charleston at the time this occurred,
the emotional and political pressures
caused by this crisis resulted in legislators
passing a bill that added crippling regulations to all storage tanks throughout
the state. If we are unable to convince
the legislature to fix this bill, compliance
costs will cause many conventional producers to go out of business. We are
fighting hard, and believe there is a reasonable chance for some relief.
The other issue involves lease integration or pooling, which enables economical and efficient development of the
Marcellus and Utica formations. The possibility for investments being diverted to
other states that have pooling is very
real.
A pooling bill was submitted to the
legislature during the 2014 session that
stressed fairness to all stakeholders, including operators, lessors, mineral rights
owners and surface owners, but it failed
to get any traction. Efforts have been put
forth to educate legislators and stakeholders
of the reasons this is necessary for continued investment and development of
the Marcellus and Utica in our state. We
believe the bill will be reintroduced this
winter.
Anyone who has educated himself to
understand the importance of fossil fuels
in our everyday lives cannot dispute the
fact that the newfound abundance of
fossil fuels in the United States is improving the lives of many people. The
positive effects are felt by residential
consumers enjoying reliable and lower
priced natural gas and electricity, industrial
users having firm supplies and lower
prices, manufacturing and chemical companies provided with long-term assurance
of polypropylene and ethylene, the country's allies throughout the world having
safe and reliable supplies without the
fear of interruptions or extortion, the U.S.
military seeing the decreased necessity
to secure an overseas supply, and our
workforce enjoying a good supply of dependable, high-paying jobs.
I am confident that in spite of how
much the government tries to deter its
use, fossil fuels will prevail as our major
source of energy. Be proud of your contribution to our domestic oil and gas industry.
Ì

American Oil and Gas Reporter - January 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - January 2015