Buried treasure

By GRACE WYLER

gwyler@vindy.com

111In the past two years, energy producers have flocked to the Marcellus shale formation, a 400-million-year-old natural-gas region that spans 54,000 square miles across much of Pennsylvania, Ohio, New York and West Virginia. The shale is named for Marcellus, N.Y., a town just west of Syracuse where a distinct outcropping of the shale rock can be seen.

Most of the drilling so far has been in Pennsylvania, but the Mahoning Valley already has started to reap the benefits of the supply-chain network that is cropping up to support the emerging Marcellus shale energy industry.

V&M Star’s $650 million investment in a new pipe mill here is a direct result of an expected rise in demand for steel tubular goods used in the Marcellus shale play. Other companies — including steel-tube manufacturer TMK IPSCO in Brookfield, Boardman-based Dearing Pump and Compressor and Patriot Water Treatment in Warren — recently have expanded in response to the rise in natural-gas exploration.

Until recently, the gas in the Marcellus shale formation was thought to either be unreachable or too expensive to obtain.

But new drilling techniques developed in smaller shale basins, such as the Barnett shale in Texas and the Haynesville shale in Louisiana, have opened up the potential for drilling profitable wells in the Marcellus shale and led to a dramatic increase in the shale’s estimated natural-gas reserves.

Terry Engelder, a geoscientist at Pennsylvania State University, estimates that the Marcellus shale could contain as much as 489 trillion cubic feet of recoverable gas — enough to meet total U.S. natural gas demand for 20 years.

“This is a game changer,” Engelder said. “In terms of its effect on the American energy potential, this is the biggest thing to happen in a long, long time.”

Fully developed, the shale would be the largest in North America and the second-largest in the world, with the potential to produce the energy equivalent of 87 billion barrels of oil.

The potential magnitude of natural-gas production in the Marcellus shale has piqued the interest of several major players in the energy industry. Royal Dutch Shell recently paid $4.7 billion for East Resources, which owned 1.2 million acres of Marcellus shale. Companies from Europe, China, Japan and India have invested in the shale.

Domestic energy companies cannot afford to ignore its potential, Engelder said. He predicts these companies will continue to expand in and around the shale.

As a result, the Mahoning Valley may be poised for further shale-related development as companies look to position themselves closer to both the Marcellus shale and high-population natural-gas markets in the Midwest and Northeast.

MARCELLUS STEEL

Drilling is not likely to take place in the Mahoning Valley because the natural gas in the western part of the Marcellus shale requires more refinement. However, the area can benefit from the supply-chain network emerging to support the shale’s exploration.

“We want to get as much of the spin-off of this development as possible,” said Arnold Clebone, regional economic-development director with the Ohio Department of Development.

The Valley likely will draw shale-related development because of its low cost of living, highly skilled labor force, support for business and “attractive tax environment,” Clebone said.

TMK IPSCO, one of North America’s largest producers of oil-field tubular goods, recently invested $10 million in a plant in Brookfield, where it will make product for customers using horizontal drilling in the shale.

TMK IPSCO chose Brookfield over other sites in Pennsylvania because of the area’s proximity to interstate highways, the strength of the work force and the support from local government and community leaders, said President Vicki Avril.

The Marcellus shale play is “in its infancy,” Avril said. The region should expect more shale-related business growth as drilling and exploration pick up speed, she added.

“All of us in the field are talking about supporting the growth of the shale plays in the region,” Avril said. “If you look at our competitors and those we service, they are all talking about whether they should set up shop here.”

Natural-gas drilling has increased demand for typically expensive pipe and tube products, as well as more specialized products such as TMK IPSCO’s connectors, said Dan Hilliard, who writes for Steel Business Briefing North America, a trade publication based in Pittsburgh.

Development in the Marcellus shale industry is going to continue to drive the expansion and growth of the steel tubular industries in the region.

“To develop the shale properly, you need steel,” Hilliard said.

Regional manufacturers have a significant advantage in shale development because of their proximity to their drilling customers, Hilliard said.

V&M Star’s new pipe mill is a result of the company’s need to expand its capacity to produce the high-grade, small-diameter steel pipe used in Marcellus shale exploration, said Roger Lindgren, former president of V&M Star.

V&M chose to expand in Youngstown in part because of its proximity to customers in the shale, which allows the company to more easily adapt to their customers’ changing needs as drilling technology continues to develop, he said.

The new drilling techniques that are being used in the Marcellus shale require specialized, high-quality steel tubulars and connections, Lindgren said.

Moreover, drilling sites in the Marcellus shale do not have space to store extra parts. So companies servicing shale customers must have the capacity for “just-in-time” delivery, Lindgren said. He added that some of V&M’s suppliers also may choose to relocate to the region to have this type of access to customers.

V&M’s investment may be just the tip of the iceberg.

As drilling continues, natural-gas pipeline infrastructure also will have to be developed to transport gas from the wells to consumers, Lindgren said.

Youngstown is well-positioned to take advantage of this as a hub between high-population end-markets in the Northeast and Midwest, he said.

“There will be commercial and business development to support the production and distribution of natural gas,” Lindgren said. “Any time there is a boom in this type of drilling, there is invention; companies spring up.”

THE ‘MARCELLUS MULTIPLIER’

Drilling in the Marcellus shale will require more than steel, however. Natural-gas production will increase demand for goods and services from a variety of sectors, including heavy-equipment manufacturing, engineering, chemical manufacturing, environmental reclamation, construction and trucking.

Kathryn Kleber, president of the Marcellus Shale Coalition, a trade group, dubs this extensive supply chain the “Marcellus Multiplier,” as it compounds business-to-business spending and job creation.

“There is an infrastructure network of supply companies all across the formation,” Kleber said. “We probably don’t have sufficient capacity locally here to deliver on the demand. It’s a great domestic opportunity.”

Overall, companies involved in Marcellus shale development plan to increase their investment spending to $8.8 billion in 2010, up from $4.5 billion in 2009, according to a PSU study released in May. Investment spending is projected to be more than $11 billion in 2011.

While initial investment went toward land leasing and exploration, the majority of next wave of investment will go toward the development of the energy-industry supply chain around the Marcellus shale, the report says.

Dearing Compressor & Pump Co., a Boardman-based manufacturer of industrial pumps and compressors used in natural-gas drilling, recently invested about $3 million in a new assembly plant to expand its production capacity.

“We recognized the need for expansion about a year ago, and I would say 99 percent of it was driven by the Marcellus shale,” said Becky Wall, a co-owner. “We were able to start reacting to the business potentials in the Marcellus shale sooner than other companies.”

Dearing’s business always has been in the Appalachian Basin, so the company has been uniquely positioned to take advantage of Marcellus shale development because most of the company’s competition has been based in the Southwestern U.S., Wall said.

But Marcellus shale drilling has started to attract competitors, she said.

“The drilling focus has moved from most other parts of the country into Pennsylvania and other states in the Marcellus shale,” Wall said.

Another shale-related opportunity for the Valley may be in water treatment and storage.

To increase a well’s output, drillers force millions of gallons of water, sand and chemicals into the well at high pressure. This fractures the shale formation and releases the natural gas trapped in the small pore spaces. It’s a process known as “hydrofracturing” or “fracking.”

This process yields a briny wastewater that must be transported to a wastewater treatment or disposal facility.

In Trumbull County, Patriot Water Treatment is proceeding with plans to build a 2.7-acre processing-center plant in Warren Commerce Park that would treat and store fracking wastewater.

Youngstown has a plentiful water supply and excess water storage capacity that might be used to store and possibly treat wastewater byproducts, said Mayor Jay Williams.

One of the city’s assets is its position to the interstate highway system, which would facilitate transport of water and other goods and services to Marcellus shale well sites, Williams said.

“We have had some discussions with companies that would store water here, so it has some economic potential,” Williams said. “Nothing concrete at this point, but I think it is reasonable to state that this prospect exists and becomes more viable as extraction continues.”

Overall, the PSU study estimates that the Marcellus shale drilling industry directly created more than 21,000 jobs in Pennsylvania in 2009. While no equivalent data exists for Ohio, the Pennsylvania number illustrates the impact that Marcellus shale development could have on the regional economy.

NATURAL-GAS FUTURE

Although Pennsylvania has disproportionately benefited from the emerging natural-gas industry, U.S. Rep. Tim Ryan of Niles, D-17th, believes the significant economic impact of the Marcellus shale industry will lead to widespread regional growth.

“The Marcellus shale will give us the opportunity to build a natural-gas cluster,” Ryan said. “Given the fact that V&M is already expanding here, it is going to give us a chance to really exploit the Marcellus shale and parlay that into middle-class jobs.”

Natural gas also will play a key role in meeting U.S. energy demands, Ryan said.

Natural gas now makes up 22 percent of U.S. energy supply, and its market share in electric power generation is increasing, the congressman added.

The economic opportunities driven by Marcellus shale fit into a larger regional energy economy that will create “green” jobs while reducing carbon emissions and dependence on foreign oil, Ryan said.

Natural gas has lower carbon emissions than coal and oil by roughly 60 percent and 30 percent, respectively, according to the Penn State study.

It has been proposed as a potential transportation fuel, as well as a “bridge fuel” for alternative-energy sources such as solar and wind power, until energy storage can be developed, Ryan said.

Regional universities and businesses could play a role in advancing research and new energy technology, Ryan said.

“We will benefit from technological development,” Ryan said. “We will benefit from the idea that here is where things are happening, here’s where things are being created.”