Pennsylvania Economic Development Association Bob Garland Universal Well Services October 26, 2010

Transcription

1 Pennsylvania Economic Development Association Bob Garland Universal Well Services October 26, 2010

2 Long Oil and Gas Well History Long history of producing natural gas Fueling American homes since the mid 1800s

3 Per state Environmental Protection Secretary Kathleen A. McGinty in 2004: Pennsylvania exports more than $20 billion a year to import energy fuels. Nearly as much as the entire state budget. Yet, indigenous energy development has a multiplier effect in the economy that may generate as much as 1.6 times more revenue than from imports. Keeping energy dollars in state clearly is the first step in retaining and generating more jobs in Pennsylvania.

4 Not Here

5 The U.S. is the single most important customer for Venezuelan oil. Venezuela shipped an average of 1.2 million barrels of crude oil and petroleum products per day to the U.S. in 2008, a figure which accounts for at least half of Venezuelan oil exports and 9% of U.S. oil imports. How About Here?

6 Or Here?

7

8

9 Complex Hydro Carbon Diesel is a complex hydrocarbon, while natural gas or methane is a simple hydrocarbon. Simply, more carbon means more emissions have to be handled. The future looks toward hydrogen, minimal carbons. Simplest Hydro Carbon Natural Gas (methane) has highest hydrogen-to-carbon ratio of any hydrocarbon

10 NATURAL GAS IS AN AFORDABLE AND READILY AVAILABLE ENERGY SOURCE WE CAN TURN TO NOW FOR POWER GENERATION, INDUSTRIAL USE TRANSPORTATION AND HOME HEATING.

11 Why Marcellus Shale Now? Marcellus Shale known for more than 100 years Number of factors make it economically feasible Horizontal drilling Proximity to northeast population centers Energy cost trends More than 500 trillion cubic feet of natural gas

12 Benefits for Pennsylvania Pennsylvania imports 74% of natural gas Quantity in Marcellus could supply future gas needs for the northeast and beyond Estimated that PA could be exporter of NG by 2014

13 250 GW of new power generation by 2035 Natural Gas Power Plants 46 % by 2035 Natural Gas Vehicles U.S. has 110,000 (.9167%) Worldwide 12 Million Infrastructure (Fueling Choices)

14

15

16 ONE Trash Truck using NG will take 325 cars off the road!!

17

18 NATURAL GAS PRODUCING STATES Energy Security-70% of oil is Imported 32 OF 50 STATES HAVE PRODUCTION 85% SUPPLY FROM U.S. U.S. ENERGY INFORMATION ADMINISTRATION 97% SUPPLY FROM NO. AMERICA

19

20 Not Here China (Peoples Daily Online Oct. 9, 2010) Unconventional gas demand set to soar by 2020 (Coalbed Methane, Natural Gas and Flammable Gas) 70% of Power required now furnished by Coal Natural Gas consumption increased 16% China National Offshore Oil Company 1.03 Billion partner with CHK in S. Texas Unconventional supplies 3.8% today est. 9% by 2020 Attempting to develop their own resources

21

22

23 Drilling Horizontal Drilling Horizontal drilling: more product, a smaller footprint Multiple wells on single pad Horizontal bores in different directions, up to 5,000 feet Marcellus wells developed both vertically and horizontally

24 Drilling Horizontal Drilling

25 Restoration

26

27

28

29 Fracture Stimulation Wells stimulated through fracture process Water, sand and lubricants are used to prop open shale fractures Water allocation approval required Wastewater sent to permitted treatment facilities

30 Hydraulic Fracturing Illustration

31 Horizontal Drilling

32 Water Fracture Stimulation Fracture stimulation essential to extraction of gas from tight shale formation Water is primary constituent in fracture stimulation process Clean sand added as propping agent to hold shale fractures open Lubricants/chemicals represent minute proportion of fracture blend Most chemicals found in common consumer goods and cosmetic products Flowback water safely collected and transported to permitted treatment facilities

33 Infrastructure Pipelines needed to transport gas to market Gathering lines link wells to processing Processed gas re-enters larger transmission lines ROW for lines negotiated with property owners ROW maintained to ensure safety of delivery system

34 Economic Development New jobs, new opportunities for Pennsylvania Full range of professions, skilled trades: drilling, engineering, surveying, construction, earthmoving, environmental protection, transportation, equipment maintenance, legal, many more Industry has significant workforce challenges

35 Job Creation Impacts:

36 Direct + Indirect + Induced Jobs

37 Creating Jobs

38 2009 Marcellus Permits/Wells Drilled

39 2010 Marcellus Permits/Wells Drilled January-Sept.

40 .

41 What Americans Want For Energy ABUNDANT DOMESTIC CLEAN AFFORDABLE JOBS

42 The Marcellus Shale Gas Play in Pennsylvania Pitfalls and Potential for Pennsylvania's Economic Development Agencies Dearald W. Shuffstall II, Esq. Shuffstall, Reagle & Associates, PC 314 S. Franklin Street, Suite 201 Titusville, PA (814)

43 The Marcellus Formation

44 Pitfalls and Potential The potential FAR outweighs the pitfalls. The Marcellus Shale natural gas play is likely the Commonwealth's single greatest opportunity for re-industrialization.

45 Pitfalls Many economic development agencies in the Commonwealth own significant acreage which often includes the OGM rights. The exploration and production of gas inherently involves subsurface invasion. Environmental concerns (e.g. brownfield sites, DEP consent orders, etc.) have previously discouraged owners of industrial parks from exploring development of the OGM interests underlying their property using traditional vertical production. Horizontal well production in the Marcellus introduces both a pitfall and potential.

46 Pitfalls Pitfall to avoid: Elevated exposure to potential liability for drilling on property subject to current increased environmental scrutiny or regulation. Solution: Do not sign an industry standard gas lease. Instead, consult with an experienced oil and gas attorney (not just your regular environmental counsel) to draft a comprehensive, negotiated addendum to the proposed lease which includes, among many other things, the following: surface non-disturbance clause industry best practices clause (no vertical wells)

47 Pitfalls Pennsylvania Economic Development Agencies regularly act as lenders Often (but not always) local economic development agencies serve as lenders of last resort. Different lending criteria and standards may be applied by local economic development agencies than in the private sector. Nevertheless, fundamental principals regarding loan security should be observed.

48 Pitfalls Securitization of loans: if you take a mortgage as security for a loan within an area of gas production in the Commonwealth, you must understand your security position when both a mortgage and gas lease are of record If the mortgage is recorded before the lease, then the lease is subordinate to the mortgage If the mortgage is recorded after the lease, then the lease trumps the mortgage. So what? Who gets the royalties. Even when your mortgage has priority over a later lease, you will likely be asked to subordinate the lien of your mortgage to the gas lease. Do you have to subordinate? No, but consider doing so with careful attention to detail...

49 Pitfalls Pitfall to avoid: Losing security for a loan by simply subordinating your agency's mortgage to a gas lease. Solution: add language to the subordination agreement and to your base loan documents which grants a security interest in, and assigns the royalty income stream under, the gas lease in the event of default under the mortgage The gas company can continue to produce the lease. Royalty payments can be diverted to service mortgage debt in the event of default under the mortgage.

50 Pitfalls Pitfall: lending during a period of relative economic boom without full due diligence could lead to increased risk of bust as economic conditions change. Example oil boom in mid 1800's Solution: exercise reasonable, customary diligence by requiring applicants provide traditional information including a business plan showing projections and anticipated repayment terms and sources of revenue. Marcellus is not a magic word that guarantees repayment.

51 Pitfalls The value of OGM rights is NOT included in residential or commercial appraisals. These must be separately determined by a qualified appraiser. Pitfall to avoid: failure to account for the value of the OGM rights to real estate recovered in a mortgage foreclosure action and later sold to satisfy the debt. Solution: When foreclosing on real estate involving significant acreage, determine the status of the OGM rights and their current value by the use of a qualified appraiser.

52 Potential Growth the Marcellus shale gas play in Pennsylvania presents a tremendous opportunity for the growth of certain existing Pennsylvania industry New Industry new businesses will be created to address the needs of this unprecedented resource play Possible Direct Revenue for Economic Development Agencies

53 Potential New and Expanded Existing Direct Industry Legal Geophysical Exploration Geology Engineering Chemistry Environmental Sciences Manufacturing Accounting Drilling Companies Well Completion Companies Pipeline Companies Well Servicing Companies NGL Treatment Plants

54 Potential Direct Industry Drainage Earthmoving Erosion Control Excavating Grading Hardscaping Irrigation Timber cutting Terraces/Waterways Land Leveling Open Ditch Work On Site Waste Treatment Paving Ponds and Dams Reclamation Septic Systems Trucking/Hauling

55 Potential Ancillary Businesses/Industry Hotels/Motels Restaurants Housing rentals Housing sales Housing renovations Housing construction Car/Truck /Heavy Equipment Sales/Leases Material (gravel, etc.) Sales General retail shopping

56 Potential Help new and existing Pennsylvania businesses to survive and even grow during a national and global economic downturn. Conventional lenders are slow to learn the potential future impact of the Marcellus Shale on their existing customers Examples: Small excavation company on verge of failing in 2008 Small trucking company looking to expand, borrow 10 times more than they have ever borrowed Local economic development agencies should be prepared to evaluate these opportunities

57 Potential The horizontal drilling technology utilized in the Marcellus opens up the possibility of exploration and production of gas under small and large industrial complexes Gas leases can be extremely lucrative: Bonus payments ($300 to $7,000/acre or more) Delay rentals (expressed as a dollar amount per acre per year) Royalties (expressed as a percentage) Consult with your environmental counsel, but also consult with an oil and gas attorney familiar with these issue before signing a lease!

58 Pennsylvania Economic Development Association October 26, 2010 Burt A Waite, P.G. Moody and Associates, Inc. Meadville, PA Sayre, PA Houston, PA Fairport, NY (814)

59 Key Issues Water Sourcing Hydraulic Fracturing Stray Gas Presumption of Guilt Water Replacement Chapter 78 Waste Fluid Disposal 59

60 Water Sourcing Multiple regulatory oversight PA DEP, SRBC, DRBC Massive amounts are not that massive 42 of Rain Per Year 86,000 miles of streams One square mile = 73 million gallons of water (146 wells) Less water than watering golf courses in the SRB (48 mgd vs. 35 to 40 at peak development) 60

61 Hydraulic Fracturing What is it? None in a million Leaking impoundments / spills a risk Disclosure of chemical additives 61

62 Stray Gas Recognized as a concern New regulation package focuses on this issue Incidents are few, but potentially serious 1939 Geologic report Gas in aquifers Isotopic gas testing 62

63 Presumptive Law 1000 radius Designed to protect homeowners Pre-drill surveys are a key component (Don t Say No) 63

64 Water Replacement Most common complaint is turbidity Most temporary Supply temporary water Supply permanent replacement Must be as good as existing water in quantity and quality 64

65 Chapter 78 Significant changes to 1985 Reg package Much more reporting and transparency New casing and cementing requirements 65

66 Waste Fluid Disposal Treat and discharge was preferred method New Total Dissolved Solids (TDS) will change this 66