Shale gas boom offers opportunities

By Mark Green

Cheap, plentiful shale gas is transforming the U.S. economy, potentially creating a once-in-a-lifetime realignment in energy infrastructure and industrial capabilities that Kentucky’s energy and industrial sectors want in on.

Brighter long-term energy cost and availability prospects are one reason U.S. manufacturing is rebounding. Tens of billions of dollars in new U.S. capital investment have been announced for projects involving gas production, transport, processing and direct use – such as by the chemical industry, which converts raw gas feedstock into everything from plastics to jet fuel.

Gas pipeline_6260455
Tens of billions of dollars in new U.S. capital investment have been announced for projects involving gas production, transport, processing and direct use.

Kentucky economic development officials are adjusting their efforts in response.

“Targeted industries include manufacturers that process natural gas into higher value products, such as plastics, chemicals, gasoline and distillate fuels,” according to a Kentucky Cabinet for Economic Development statement. “We’re also looking at manufacturers of bulk products, such as fertilizers, who would enjoy an advantage because their products could be made in centrally located Kentucky and distributed locally and regionally without high transportation costs.”

An April 1 report in The Washington Post was headlined “European industry flocks to cheap U.S. gas.” No fooling, U.S. gas prices are now a quarter of rates in Germany and the rest of Europe. They’re forecast to stay low at least into midcentury – as far into the future as experts can now project – with energy supplies so plentiful the United States is expected to become an oil exporter within a decade.

Louisiana alone has more than $50 billion in announced capital investment in the past year.

Private-sector executives as well as public officials in Kentucky are assessing opportunities for a state with manufacturing assets, gas resources and a prime location on several of the nation’s main distribution pipelines.

Two major gatherings in May will focus intently on the question. The first is the Kentucky Association of Manufacturing’s 2013 Energy Conference May 14-15 at Lexington Convention Center. KAM’s annual legislative recap session turned into an annual energy summit beginning in 2011, said Karen Ellis, the group’s operations and communication manager, because there was growing demand from members concerned about power cost and efficiency practices.

The other event, scheduled for May 23 at the Hyatt Regency Lexington, will explore economic development opportunities. Entitled “Natural Gas: Moving the Needle in Kentucky,” the event is still being organized but seeks to attract representatives from every entity in the state with any natural gas involvement or interest. (Click here to register for the May 23 event.)

The Kentucky Clean Fuels Coalition is one of the sponsors. Greg Coker, director of external relations with Winchester-based Delta Gas and a former member of the Kentucky Public Service Commission, will be the facilitator.

‘What do we need to do?’

The intent is to share information, examine private and public options, air concerns, find out where the various players’ priorities align and where they conflict, identify strategies that will benefit the Kentucky economy and what obstacles stand in the way.

“We want to look at what’s going well,” Coker said. “Where are we getting stuck? What do we need to do to move the needle to increase natural gas? What needs to be done?”

The goal of the six-hour “Moving the Needle” event is not so much to emerge with solutions, he said, but to produce information and find out what issues must be addressed to advance Kentucky’s collective interests.

Among the diverse interests expected to be involved are the state’s local gas distribution companies; interstate transmission companies; the Kentucky Gas Association; coal industry representatives; power utilities; government agencies such as the Public Service Commission and the Energy and Environmental Cabinet; interest groups such as the Kentucky Clean Fuels Coalition, Kentucky Association of Manufacturers and its Chemical Industry Council; Kentucky Association of Economic Development; major transportation fleet operators such as UPS; and Waste Management, which has 40 trucks fueled by compressed natural gas in Louisville as part of its national conversion to CNG vehicles and opened the state’s first public CNG fueling site.

“We all have our own interests,” Coker said of the expected participants, and each is expected and encouraged to make them known May 23. “What we are saying is, ‘Let’s be Kentuckians today.’ ”

Part of his job as facilitator is to get participants to share information on what they oppose as well as support. This can prevent limited time, energy and resources from being wasted pursuing goals that will provoke economic or policy squabbles.

Conference organizers believe the window of economic opportunity for Kentucky and other states and regions to land the capital investment, jobs and tax base now in play due to the shifting energy landscape is probably only a year or two.

“We’re truly an energy state,” said Scott Smith, a principal of Lexington energy consulting firm Smith Management Group and another organizer of the gas gathering. “We’ve got an opportunity for our people. How do we leverage this? The location is perfect.”

Kentucky’s Louisville-Lexington-Northern Kentucky business core is within a day’s overland delivery of two-thirds of the U.S. market. Interstate highway, rail, water and air transportation assets have helped it become a logistics industry center: UPS, which operates its Worldport at Louisville International Airport, is the state’s largest private employer, and Germany-based DHL has one of its three international air freight hubs at the Cincinnati/Northern Kentucky International Airport in Hebron.

Value-added projects mean jobs

“Where you could really score is bringing industry into the area that could use the gas to manufacture products,” said Smith, a mechanical engineer by training and a former official in the state Department for Energy Development and Independence. “We need value-added use of gas locally. We need jobs. It’s critical for Kentucky.”

chartSmith has worried increasingly the past few years about declining coal operations in Eastern Kentucky because of federal Environmental Protection Agency policy that is making the Appalachian mining business more difficult. Already declining state mining employment fell a further 18 percent from February 2012 to February 2013, according to the March report from the Office of Employment and Training in Frankfort.

Smith suggests seeking Obama administration support in recruiting job-creating projects into the region where EPA policy is eliminating them. Modern coal operations are big electrical power users, so there is a sufficient power grid to supply incoming industry, and there’s plenty of rail capacity as well. If coal jobs continue disappearing in a region whose take-home pay was already low, let gas pump new dollars into its economy.

Eastern Kentucky was the scene of much shale gas drilling five years ago, but that activity has tapered off as Marcellus shale wells in Pennsylvania, West Virginia and western New York and Ohio have been developed. Devonian shales in Kentucky yield mostly “dry” methane gas while Marcellus shale includes the “wet” natural gas liquids ethane, butane and propane – higher-hydrocarbon and more-energy-dense liquids that are more profitable.

Wells in Marcellus shale formations also have an economic advantage over Devonian shale when drillers conduct the gas-releasing practice known as hydraulic fracturing that has made the shale gas boom possible. Devonian shale “fracking” requires injecting wells with liquid nitrogen – difficult to handle at minus-321 degrees Fahrenheit – while Marcellus shale is fracked with high-pressure water, sand and salts.

Additionally, prolific Marcellus gas production has driven prices below the profitability floor for much Devonian shale.

“It’s depressed the market for everybody,” said John Rogness, director of energy generation, transmission and distribution at the Kentucky Energy and Environment Cabinet. “Most of the gas we’re seeing (on the market today) is gas coming out of the wells producing the natural gas liquids. The real value is in natural gas liquids. They are going after it as hard as they can.”

The past couple of relatively mild winters have lowered demand and prices also, Rogness said.

“If we get a couple of really cold winters, the price will go back up,” he said, and “dry” gas wells will go back into production.

Interstate pipelines create unlimited supply

However, shale gas production is not crucial to overall state supplies, Rogness said, because Kentucky is at a crossroads for really big interstate pipelines, including the nation’s main gas transport route from the Gulf Coast to the Northeast.

[pullquote_left]Eastern Kentucky was the scene of much shale gas drilling five years ago, but that activity has tapered off as Marcellus shale wells in Pennsylvania, West Virginia and western New York and Ohio have been developed.[/pullquote_left]

“We’ve got all the gas we can use and then some,” said Rogness. “Any industry that wants to come in will have access.”

For industry-related transportation, he views the state’s navigable waterways as a “very fortunate” asset complementing cheap and ample energy.

Energy and Environment Cabinet officials also are deeply concerned about the state’s loss of coal jobs. Cabinet Secretary Len Peters expresses the view that it will take “a pretty significant industry” to offset those job losses, Rogness said. “Fifty (jobs) here and 50 there is good, but it’s not going to offset” the thousands of mining paychecks being lost.

“We’ve given a lot of thought what to do in the energy industry to fill in the gaps,” he said. But so far they’ve found no real answers.

State officials are interested in trying to help facilitate the use of compressed natural gas (3,600 psi) as a motor fuel, an idea that is generating increasing discussion in the private sector but which is facing what industry watchers refer to as solving the “chicken-or-the-egg” problem. The question, though, regards which will come first: CNG vehicles or CNG filling stations. It is economically difficult for either to enter the marketplace without the other.

Kentucky, like other areas of the nation, had some CNG infrastructure in the 1990s, but cheap oil and gasoline prices made it unsustainable. There were nine fueling stations and LG&E had 117 natural gas-powered vehicles

“Been there, done that, got the T-shirt back in the ’90s,” said Melissa Howell, executive director of Kentucky Clean Fuel Coalition, a nonprofit organization born in 1993 that now has about 55 members.

Today, however, Howell said she is excited about what looks like the elements of a sustainable effort taking shape, including supply, demand and technical support for equipment and vehicles. That is driven by cheap prices that make natural gas fuel equivalent to $1.50 to $2.40 a gallon gasoline or diesel.

The 40 natural gas trucks Waste Management operates along with its fueling station got a little company in late March when Louisville-based M&M Cartage, a regional trucking company with 265 employees, announced delivery of its first natural gas-powered semi, a 2013 Freightliner.

“We would like to operate 100 CNG trucks over the next four years,” said M&M President Don Hayden. “CNG is an environmental and economical option to traditional diesel.”

The company now has 170 semis and 450 trailers that travel 12 million miles annually. It plans to evaluate the vehicle on routes in Metro Louisville and across Kentucky. The City of Somerset recently added a natural gas fueling station and several vehicles, too.

Motor fuel’s ‘chicken-and-egg’ issue

Low prices are creating a growing sense of inevitability about natural gas as a transportation fuel, despite its chicken-and-egg problem. While still rare in Kentucky and surrounding states – Tennessee has three refueling stations, Indiana nine, West Virginia none – the Los Angeles region has had dozens of sites for years after government use of natural gas vehicles was mandated. Oklahoma is the only state with a full network of  some 60 refueling stations.

Oklahoma has been a big gas producer for decades, but Coker said its plunge ahead with statewide coverage was eased because it has one gas distribution utility that became the provider while Kentucky has five. Additionally, state law prohibits Kentucky’s Public Service Commission from regulating natural gas as a motor fuel and regulated utilities from selling gas as a motor fuel.

Howell, Coker, Rogness and others all say Kentucky needs to act to encourage natural gas transportation fuel usage so that the commonwealth does not end up a “drive-through state” as companies shift their fleets away from more expensive products.

LG&E cannot become a motor fuel provider under current state law but is watching developments intently.

“It’s been a game changer,” LG&E Vice President of Communications Chris Whelan said of shale gas.

State officials are interested in trying to help facilitate the use of compressed natural gas (3,600 psi) as a motor fuel, an idea that is generating increasing discussion in the private sector.
State officials are interested in trying to help facilitate the use of compressed natural gas (3,600 psi) as a motor fuel, an idea that is generating increasing discussion in the private sector.

State officials say protecting the coal industry is a top challenge.

With natural gas costs low and predicted to remain that way, the state’s top power utility is shifting slightly away from coal-based electricity generation, which over the years has been the cheapest option and given Kentucky some of the nation’s lowest power costs because it is mined in eastern and western regions of the commonwealth.

LG&E is closing coal-fired generation facilities at its Cane Run, Green River and Tyrone sites and adding gas generation at Cane Run. This will decrease coal’s share of generation capacity only from 95 percent to 90 percent, however, and coal will remain LG&E’s predominant fuel, Whelan said.

The company is currently investing $2.3 billion to improve scrubbers and add baghouse systems to remove particulate matter from emissions at its coal-fired plants.

LG&E recently created the new position of vice president of natural gas operations to gather management functions including procurement, storage, engineering and compliance under one office. Lonnie Bellar holds the position.

While LG&E does expect its gas business to increase, Bellar said, the impact of cheap, plentiful shale gas is still filtering into the economy. Industries such as housing are still absorbing the data and must get comfortable with it before any wholesale shift to residential gas usage will happen.

Big manufacturers are sophisticated buyers

Meanwhile, the company is getting inquiries from business and industry about converting operations to gas power and putting in transportation refueling facilities.

“Mostly LG&E is listening, especially to manufacturing customers,” Bellar said. “They are sophisticated” users who have a history of making energy procurement decisions.

LG&E itself must internalize and assess the information it is gathering before it makes any decisions about, for example, marketing increased gas usage to its broader customer base that does not have the sophistication of long-established major manufacturers.

Additionally, Bellar explained, the long-term prospects for natural gas production, cost and usage are not set in stone. It is possible shale gas fracking could be targeted for stepped up environmental regulation as Appalachian coal has been recently.

“There is some regulatory uncertainty. Is it going to manifest in a way that limits our production capability? ” he said. “The reason natural gas is low is the production capability that exists.”

For now, that capacity remains sky high.

Estimated technically recoverable U.S. natural gas resources have nearly doubled in the past decade, according to the U.S. Energy Information Administration (EIA). Shale gas resources are distributed widely, but current estimates are that more than half of the U.S. gas resource base of 862 trillion cubic feet is concentrated in the Northeast’s Marcellus formation.

There is some uncertainty because the vast size of the Marcellus formation makes detailed testing impossible, but expectations are that U.S. gas production will increase 44 percent from 2011 to 2040, from 23.0 trillion cubic feet to 33.1 trillion cubic feet, which would ensure continued low prices for supplies so ample that the U.S. is expected to become an exporter.

Marcellus shale gas is so plentiful that is it beginning change the flow in the nation’s pipeline transportation system, which has been predominantly from production and imports in Oklahoma, Texas, Louisiana and the Gulf Coast.

Precise interstate gas pipeline maps are protected national security information since 2001, but the EIA website does reflect that the nation’s largest natural gas transportation corridor extends northeast from the Louisiana-Texas Gulf Coast to Kentucky, where it branches north and northeastward.

Bluegrass Pipeline is state’s first big project

One of the most recent capital projects announced in March, is the Bluegrass Pipeline project that will be a partnership between Boardwalk Pipeline Partners, now based in Houston but headquartered in Owensboro until only a few years ago, and Williams, based in gas-intensive Oklahoma. The planned pipeline will move hydrocarbon-rich natural gas liquids such as propane and butane to processing facilities in the Gulf Coast.

Pipeline projectThe project has no dollar figures attached to it at this point, Boardwalk Pipeline Partners representatives said, but upon the expected opening in 2015 it will have a capacity of 200,000 barrels a day, which could be increased to 400,000 barrels a day with additional pumping power. Taking a yet-to-be-determined route through Kentucky from western Ohio and West Virginia, it will reverse the traditional hydrocarbon flow from the Gulf Coast to the rest of the nation.

Cabinet for Economic Development officials express excitement about such projects.

“The developers plan to build numerous processing plants and storage facilities along the route, and Kentucky will be looking to attract some of these projects,” according to a cabinet statement responding to questions about the impact of shale gas.

Among the possibilities: Kentucky’s existing transportation hubs on interstate highway, rail and water routes could become refueling stations for trucks, river tugs and railroad engines that have converted from diesel to natural gas. At present, transportation fuel projects are considered to offer the best initial potential return for the least investment.

Mark Green is editorial director of The Lane Report. He can be reached at [email protected] Follow Mark on Twitter @markgreen.

Please wait...

Subscribe to the FASTER LANE business newsletter.

Subscribe and receive breaking Kentucky business news and updates daily.