Taking the Marcellus Shale gas boom from rush to responsibility

Posted: August 02, 2012

After four years of rapid growth, Marcellus Shale gas drilling has slowed. As The Inquirer reported last month, the number of drilling rigs in Pennsylvania has fallen 29 percent from a year ago. State data show the number of Marcellus wells drilled in July was 57 percent lower than in the same period last year.

Gas production in the Marcellus and other shale basins got ahead of demand, depressing prices to unprofitable levels. "We are all losing our shirts today," Rex Tillerson, the CEO of Exxon Mobil, said recently. Most producers have cut back, leaving many wondering if Marcellus drilling is a long-term development or a short-lived bubble.

Despite the current slump, though, gas production from the Marcellus and other formations is likely to keep growing for decades, according to a special report in the Economist magazine and other recent studies. And increasing shale-gas supplies will reduce energy costs, create jobs, and improve U.S. manufacturing competitiveness.

For our nation and state to realize these benefits, however, gas producers must earn greater public acceptance by proving their practices are environmentally safe and socially responsible.

Just a decade ago, shale gas accounted for an insignificant share of U.S. supplies. By 2010, shale formations supplied 27 percent of natural gas, and that share is expected to rise to 43 percent by 2015 and 60 percent by 2035, according to IHS Global Insight. Vaclav Smil, an energy expert, believes natural gas will eventually become the world's most important fossil fuel, edging out oil and coal.

The recent cutbacks will slow the pace of development, but less so in the Marcellus. Partly because of the proximity of the premium East Coast market, an analysis by Fitch Ratings predicts that Marcellus production will more than double over the next five years even if prices stay low.

Far-reaching benefits

The growing supply of cheap natural gas has already cut energy costs for consumers and businesses, and it's expected to reduce electricity rates in the near future. Low prices, along with tightening pollution standards, have led to a rapid increase in the use of natural gas by power plants.

Cheap domestic gas is also enhancing the global competitiveness of U.S. industries that use gas, such as steel companies, chemical manufacturers, and refineries. Dow Chemical, which was building plants overseas a decade ago, is one of many companies expanding its U.S. manufacturing facilities to take advantage of low-priced gas. According to the Economist, this could create a million new U.S. factory jobs by 2025. The effect will be multiplied if natural gas catches on as an alternative to gasoline and diesel.

Since natural gas produces half the carbon dioxide emissions of coal, power plants' increasing use of it contributed to an 8 percent drop in U.S. carbon emissions over the last five years. It should also reduce illness and deaths caused by coal-related pollution.

Addressing downsides

While it may be good for the country as a whole, however, shale gas is hard on the places where it's extracted, creating social strains, environmental risks, and economic hardships. Shale-gas extraction is a large-scale industrial process whose early stages are noisy and disruptive. Even under the best circumstances, there's a risk of air pollution, chemical spills, gas leaks, road damage, and other harms.

Things got out of hand over the last few years as gas drilling and infrastructure development grew at a gold-rush pace. As drillers discovered, anti-gas activists are willing to fight them every step of the way, increasing production costs, regulatory burdens, and public disquiet.

Many experts believe the risks can be kept within acceptable levels and steadily reduced as industry practices, government regulations, and technologies improve. Even so, the industry may have to live up to higher standards than would be required if it were more familiar and established in Pennsylvania.

A study by the MIT Energy Initiative concluded: "With over 20,000 shale wells drilled in the last 10 years, the environmental record of shale gas development has for the most part been a good one. Nonetheless, it is important to recognize the inherent risks of the oil and gas business and the damage that can be caused by just one poor operation; the industry must continuously strive to mitigate risk and address public concerns."

The International Energy Agency has proposed guidelines to minimize the health and environmental costs of gas extraction, including full disclosure of additives used in hydraulic fracturing; assessment and disclosure of environmental indicators, such as water quality and wastewater and methane emissions; and a robust, well-funded regulatory regime. The agency concludes that "a continuous drive from governments and industry to improve performance is required if public confidence is to be maintained or earned."

Many such measures have been adopted in Pennsylvania, though the state's progress in policing the gas industry has been obscured by heated political debates. Nonetheless, we must continue working to hold Marcellus drillers and regulators to the highest standards. The benefits of low-cost, domestically produced shale gas are so great that we have to get it right.

Arthur Sterngold is an associate professor of business and the former director of the Institute for Management Studies at Lycoming College in Williamsport. He can be reached at sterngold@lycoming.edu.

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