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How Natural Gas Is Changing Eastern Ky.

Major impacts in Kentucky from the rise of the Appalachian Basin energy hub are still a few years away

By Mark Green

A natural gas well in McRoberts, Ky., is among the tens of thousands drilled into Eastern Kentucky shale geology in the past decade-plus, transforming the U.S. into the largest gas producer in the world.

The impact of reliably plentiful and cheap natural gas from U.S. resources is disrupting decades-old economic and business norms in Kentucky, the nation and globally. However, the long-term and larger economic development effects are only starting to take shape and will occur in coming decades as the Appalachian Basin continues its develop into a major energy hub.

Kentucky economic development and utility officials report they do not yet see shale gas bringing changes in mood and thinking among business prospects they talk to who are considering new or expanded operations in the commonwealth. Energy sector experts, however, see strong potential for gas resources to bring prosperity to Appalachian Kentucky.

The effect of plentiful gas so far has been painful for Kentucky coal operations; most mining jobs have disappeared in the past decade. More broadly, some 300 coal-fired U.S. power plants have retired since 2010 as utilities shift to gas, according to a May report by National Public Radio.

Meanwhile, there is rising expectation that better prospects for central and upper Appalachia could start happening in 2021, when a $1.7 billion aluminum mill is slated to open in Greenup County in Northeast Kentucky. Braidy Atlas Mill will be the largest aluminum mill built in the U.S. in four decades, according to The Wall Street Journal, and plans to provide high-tech, low-carbon sheet metal to auto and aircraft makers.

Also in the works about three hours away in Belmont County, Ohio, a Korean industrial consortium plans an advanced $10 billion ethane cracker unit to produce plastic from natural gas feedstock. A little farther northeast, Shell Polymers has a $6-7 billion ethane cracker under construction on the Ohio River near Pittsburg, and two more crackers are planned on the Ohio-West Virginia border.

“When the steel starts coming out of the ground (at the Braidy site) … it’s going to create a buzz,” said Brett Mattison, president and COO of Kentucky Power, which will supply electricity to Braidy Atlas Mill and was involved in recruiting the project. “People will look at the resources – the gas, the Ohio River (as a transport asset), the highways in the region.”

There is an abundance of natural gas, and its price is stable “for the foreseeable future,” Mattison said.

Site selectors for projects under consideration are evaluating Eastern Kentucky and the upper Appalachian Basin.

“There are a lot of things out there, circling around,” Mattison said. “Once you get them (Braidy) up and running, you’ll start to see that you’ll have industry that wants to be close to the source” of the mill’s high-grade aluminum. He suggested operations in the automotive and aircraft manufacturing sector as likely prospects.

Prices lower, less volatile

Prior to the arrival of U.S. shale gas production in the last decade, industrial gas prices could drop 20% or rise 30% annually. Kentucky’s average industrial gas costs increased 124% in one six-year period from $4.63 per thousand cubic feet in 2002 to $10.41 in 2008, according to the U.S. Energy Information Administration. Recent Kentucky industrial gas costs have ranged from $3.84 in August 2018 to $5.26 in February 2019.

Along the banks of the upper Ohio River, 29 gas-fired electric power plants of at least 475 megawatts each are either recently completed, under construction or going through permitting, according to Site Selection magazine.

In the past decade, Louisville Gas & Electric and Kentucky Utilities, the state’s largest, has shifted from more than 97% coal-fired generation in 2000 to 80% today, a distribution that it expects to maintain for the next decade while keeping customer rates essentially stable, its leadership told The Lane Report this year.

Gas utilities in the state are distributors of the fuel who charge their customers a regulated fee for transmission; rates to residential and commercial customers are adjusted quarterly according to market costs from producers.

Prospective large customers with whom LG&E-KU has had conversations with in the past year or so continue to make overall cost their top decision factor, said John Bevington, director of business and economic development.

“Generally speaking, companies want to operate in the lowest-cost environment they can,” Bevington said.

And in today’s economy they increasingly want to be able to get into operation as fast as possible.

“In the past several years, our experience is that companies used to take two to three years to make a decision,” Bevington said. “Now they want to beat the competition to market.”

Fewer sites, fewer workers

After four or five years of record numbers of economic development announcements in Kentucky and elsewhere, there are fewer sites available to companies, he said. Communities, regions and states are taking any step they can afford to bring infrastructure such as utilities to sites they are offering.

“Those who are ready now are getting to the next step” in the site selection process, Bevington said.

There are a few industries and prospects that are gas-intensive, he said, and do not want to wait for gas lines to be built for a site. Overall, though, rather than “gas, gas, gas,” Bevington said, the key variable is “workers, workers, workers. A lot of conversation revolves around workforce availability.”

Mattison points to former coal miners as well as the remaining 230 workers at an AK Steel plant in Ashland that will close by year’s end as important to the region’s prospects to generate new industry and prosperity.

Miners and steel plant employees “have the exact skill set for aerospace and metallurgy,” Mattison said, but they need new jobs soon or they will leave the region. “We have got to have diversification.”

World’s next major energy hub

Gas reserves thought to exist in shale formations indeed were accessed successfully in the last decade when directional drilling technology was combined with hydraulic fracturing. This decade, the United States became the world’s largest natural gas producer and a net exporter.

Longtime U.S. gas and oil epicenter Texas still produces the most natural gas, but the Appalachian portions of Pennsylvania, Ohio and West Virginia have more proven gas reserves than the geographically larger states of Texas and Oklahoma combined, according to the U.S. Energy Information Administration. Site Selection magazine reported in January 2019 that the Appalachian Basin looks like the world’s next major energy hub.

Eastern and southeastern Kentucky saw lots of drilling activity a decade ago, but its thousands of wells are mostly capped and their gas “stranded” for now in favor of more productive gas resources and infrastructure in the Marcellus Shale of western Pennsylvania and southeast Ohio.

Kentucky’s public and private economic development, utility and energy community members say today that there is lots of potential, but at this stage the benefits of the commonwealth’s resources remain mostly theoretical. There is not a collection system to bring most of Kentucky’s gas to market.

“We’ve got to get people thinking,” said Scott Smith, senior consultant with Lexington-based Smith Management Group. “We’re being shortsighted in how we leverage our natural resources.”

Eastern Kentucky has stranded gas and oil resources and needs jobs and economic diversification, Smith said.

Probably one disincentive to invest in gas collection infrastructure in Eastern Kentucky is the fact that plenty of gas is available already. Multiple major U.S. gas transmission pipelines between Gulf Coast production facilities and Northeast users run right through the state.

“Kentucky is lucky that we have a lot of the transmission pipelines,” said Lindsey Ransdell, a senior project manager with the state Cabinet for Economic Development.

Lucky because it is rare that an existing or prospective industry operation does not want natural gas to power operations or heat large interior spaces.

“It is a requirement for any industrial project,” Ransdell said, but cabinet project managers report no change in the past five years in the role gas availability plays.

Much more significant, said cabinet Communications Director Jack Mazurak, is making gas available to new sites that Kentucky is marketing to prospects.

“That’s a big stepping stone for the state and communities,” Mazurak said. “How do you fund that (pipeline to a site), especially if you have to run that for miles?”

Plenty of power for?….

Kentucky has a large and growing primary metals sector whose individual members are all “huge users of electricity,” Ransdell said. She cites Century Aluminum in Hawesville in Western Kentucky and Nucor Steel Gallatin in Gallatin County between Louisville and Cincinnati among others that are the single highest load generators for their electric utilities.

Because multiple Kentucky utilities are members of multistate networks and have “access to as much extra power as they need,” she said, the state has sufficient capacity across the commonwealth to meet all foreseeable demand.

The state’s cheap energy costs, long the lowest in the eastern half of the U.S., mean there is little to no discussion of the ever-increasing gas resources coming from the Marcellus Shale region.

Ransdell said questions of adequate access to gas would “only come into play if you had a really huge, ridiculously massive user.” Members of the international chemical industry are such users, and there have been some international chemical companies looking around the state, she said.

Kentucky has “a pretty robust chemical and plastics industry” already, Mazurak said. Louisville has had multiple chemical operations for decades in its “Rubbertown” district, and the state’s largest chemical industry cluster is in Calvert City in Western Kentucky.

Smith echoes the view that “Kentucky has a very robust chemical sector,” and suggests the state should consider a strategy such as recruiting a small ethane cracker project for Eastern Kentucky that might use its stranded gas assets in a financially viable manner if operations were located physically near now-capped wells, lessening the need to create a large collection network.

“The politicians and policy people say, ‘Well, we just can’t get our (gas) product to market. Instead, let’s bring Mohammed to the mountains,’” Smith said. “Crackers can be small, but to get economies of scale everybody wants to build a big cracking unit.”

Eastern Kentucky does have railroad infrastructure from many previous decades of major coal operations that can ship out the various plastics and other products ethane cracking creates, he said.

Smith is a member of an oil and gas work group that Kentucky Energy and Environment Secretary Charles G. Snavely created to work on updating the state’s regulatory environment to facilitate modern development and help position the state to take advantage of market opportunities.

Sheila Porter is a senior business development manager with Direct Energy, which provides gas, electricity and energy services to 4 million North American customers across all 50 states.

Porter has noted more discussion of gas among customers. Over the past two to three years as the price volatility risk has decreased, customers are willing to look at longer-term contracts, she said.

Even longer term, Porter looks at the rise of U.S. natural gas and says, “I like to believe it is the bridge fuel to what we will get to in 50 years or so.”

Mark Green is editorial director of The Lane Report. He can be reached at [email protected].