Origins Of The Marcellus Natural Gas Boom
PITTSBURGH (AP) – Before Marcellus Shale became the second biggest natural gas field in the world and a household term in Pennsylvania, it was just another obscure, ancient rock layer.
But a convergence of Wall Street interests, corporate money and academia helped transform Marcellus almost overnight from rock to rock star, spurring predictions of a natural gas bounty in the U.S. and unleashing a massive land rush across the commonwealth.
Anchoring one end of the story of Marcellus Shale’s migration from textbook nerd to the darling of prospectuses is Range Resources, the energy company that first successfully harvested gas from the rock, and two local boys – president Jeffrey L. Ventura, who hails from Penn Hills, and Baldwin Borough native and University of Pittsburgh graduate William Zagorski, the company’s vice president of technology.
At the other end is Terry Engelder, 65, a Penn State University geologist who calculated that mind-boggling amounts of natural gas could be extracted from the shale.
“It was almost an out-of-body experience to realize that there may be something here that was a real game changer in terms of America’s energy portfolio,’’ Engelder said.
Operating independently but on parallel paths, Range and Penn State presented back-to-back reports in December 2007 and January 2008, respectively, that put Marcellus on the map.
Range’s Dec. 10, 2007, news release to investors debuted production results for five horizontal wells drilled into the rock stratum. Figures for four of the wells were impressive.
Until then, Range had obliquely referred only to drilling in the Appalachian Basin or its “Pennsylvania shale play.’’ Now Range put a name to the potential moneymaker: Marcellus Shale.
Then on Jan. 17, 2008, Penn State issued a news release headlined “Unconventional natural gas reservoir could boost U.S. supply,’’ courtesy of Engelder’s calculations.
Those dual results battered standard notions about producing natural gas from the Marcellus Shale, a nearly 400-million-yearold geologic layer long thought to be, literally, a tough rock to crack.
By 2000, Range already had large land holdings in southwestern Pennsylvania. That position included acreage in Washington County being used to explore two rock formations – Oriskany Sandstone and Lockport Dolomite – for gas. Range sank $6 million into the project. Though the company saw some promising data from a well dubbed Renz No. 1, its efforts flopped.
“It was on its way to becoming a pretty expensive dry hole,’’ Zagorski, 53, recalled.
Around that time Zagorski took a fortuitous business trip to Texas. A geologist friend there showed him data about the Barnett Shale formation in the state, from which natural gas had been recovered successfully.
To Zagorski, who had spent a career studying the Appalachian Basin, the characteristics were strikingly similar to another shale with which he was familiar: Marcellus.
“When he showed me all of the information on the Barnett Shale, it was like, ‘Oh my God.’ We’ve got all this acreage, we’ve got it all right in our backyard in Washington County,’’ Zagorski said.
Zagorski consulted decadesold U.S. Geological Survey maps. He found references to wells dating back to the 1930s that had experienced blowouts, or huge, brief rushes of natural gas that occurred when the Marcellus layer was penetrated.
“The clues were always there,’’ Zagorski said. “Technology had to catch up.’’
Zagorski had been prepared to suggest that the company sink another $2 million into the project. But Ventura and the top executives had bigger plans.
Ventura, 53, signed off on a much more expensive and aggressive strategy, which fit into his vision for the company.
Despite technical challenges, drilling for Marcellus was considered low risk – far less risky, for instance, than offshore drilling – because Range knew the gas definitely existed over an enormous area, albeit trapped in the shale, Ventura said.
Shale is considered a “source rock,’’ as in the ultimate source of oil and gas, produced from the decay of organic materials over millions of years.
For much of its history, the oil and gas industry sought to extract oil and gas not from the source rock, but from reservoir rocks, such as limestone, through drilling shallow wells.
But in the early 1980s, Texas oilman George P. Mitchell pursued a fringe strategy – exploring the Barnett Shale.
“Which is a crazy idea because you’re taught as an oil and gas engineer to stay away from source rock’’ due to of a variety of anticipated problems with the ultradense shales, said Range spokesman Matt Pitzarella.
Accounts indicate Mit-chell was driven to the Barnett formation because he was worried about how long gas could continue to flow from shallow, conventional wells and did not want the infrastructure that had been built up to go to waste.
Mitchell’s company used an existing technology called hydraulic fracturing to penetrate the shale, which involved injecting liquid at high pressure into a well to crack the rock.
One of the young petroleum engineers involved was Ray N. Walker Jr., now senior vice president of Range’s Marcellus operations.
“Ray would tell you in his words it was a miserable failure. It took like a decade before they ever made it work. Everyone said George Mitchell’s crazy, it’ll never work. And then in the early `90s, in the Barnett Shale, it started working,’’ Pitzarella said.
Instead of exotic formulas for hydraulic fracturing fluids used elsewhere, such as in North Sea fields, Mitchell’s company simplified the process and used water, Pitzarella said.
It was a monumental achievement for the industry.
In 2002, when Devon Energy Corp. bought Mitchell’s company, it combined hydraulic fracturing with horizontal drilling.
“That was the ‘aha’ moment. At that point, it was this worldwide breakthrough,’’ Pitzarella said. “At that point everyone was looking for the next Barnett.’’
Backed by Zagorski’s enthusiasm and Ventura’s corporate clout, Range’s team re-entered the old Renz No. 1 well, which they had been preparing to abandon.
They used hydraulic fracturing technology to crack the rock with a mixture of water, sand and chemicals at high pressure down a vertical shaft. The results were “reasonable,’’ according to Ventura.
Eventually they switched to horizontal drilling. The first three wells were nothing special.
“The question was, how do we crack the code?’’ Ventura said.
At that point, Range, a $400 million company with a stock price of $4 per share, had sunk $150 million into the project. The decision was made to cap the investment at $200 million by the end of 2007.
“We had a lot of money in, a lot of science in. We needed a breakthrough,’’ Ventura said.
In August 2007 they got one.
Zagorski readjusted the level at which the fourth horizontal well bored through the shale layer, and the Gulla No. 9 well went online.
“We got a well just like a Barnett well,’’ Ventura said.
Range said it first mentioned the Renz well publicly in April 2005 and trickled out other Marcellus results as time passed, but without fanfare.
Subash Chandra, managing director of Wall Street investment banking firm Jefferies Group, called Range “notoriously tightlipped with drilling results.’’
During that time other gas companies were poking around in the Marcellus and monitoring one another’s progress.
Range continued drilling through November 2007, and by the next month, the company was ready to reveal its results to the world.
“That’s really when the play took off and other companies really started to wake up,’’ said Ventura, who noted that Range is now an $8 billion company with a share price that tops $50.
A native of Wellsville, N.Y., near Rochester, Engelder grew up near a major regional petroleum source called the Bradford Oil Field. The air was thick with oil fumes in surrounding villages, and a smashed finger that was caught between two pieces of pipe is a constant reminder to Engelder of his time as a teenage roust-about.
By the time Engelder was hired by Penn State in 1985, he had been doing research on gas shales since the 1970s and was knowledgeable about fracturing in the shale. That background set the stage for his long association with the petroleum industry.
In October 2007, Engelder was named a distinguished lecturer for the American Association of Petroleum Geologists. That position brought him to the attention of Chandra, the investment banker.
Wall Street’s interest had already been piqued by the success of the Barnett Shale in Texas, but analysts thought it was a unique formation.
Just as Zagorski had realized, Chandra grew to understand that Barnett and Marcellus bore intriguing similarities. What investment firm Jefferies Group needed was someone who knew the rock.
“We looked around and Terry seemed at the time to be a geologist focused specifically in Pennsylvania or the Appalachian region,’’ Chandra said.
In December 2007, Engelder put on a webinar with more than 100 potential investors lined up by the Jefferies Group.
Neither Engelder nor Chandra could recall the exact date of the session, but Engelder believes it was set up before Range released its results and took place shortly after.
Engelder said after 45 minutes, someone posed a simple question for which he had not prepared: “How much gas is there?’’
In 2003 the U.S. Geological Survey assessed 7 percent of the Marcellus formation –the thickest portion in central Pennsylvania
– and calculated it contained 1.93 trillion cubic feet of gas.
Engelder crunched the numbers for the entire play after the conference call.
“I wadded up that paper and threw it in the trash,’’ he said. “I was, frankly, staggered at the potential for the Marcellus.’’
Engelder proposed that 50 trillion cubic feet of natural gas could be recovered from the Marcellus formation, or the same amount the entire country uses in about 21/2 years.
The result was the Penn State news release. That day, wire service United Press International quoted Engelder as saying, “The value of this science could increment the net worth of U.S. energy resources by a trillion dollars, plus or minus billions.’’
Whether Wall Street cared about Engelder’s data is debatable.
“To Wall Street, the difference between 5 total cubic feet of gas and 500 is not important. Either way it’s a lot of gas,’’ Chandra said. “I think it was more of an event in the popular press.’’
Engelder sees the natural gas trapped in Marcellus Shale as a way to sever U.S. dependence on foreign oil, offset declining energy supplies and produce cleaner energy. He also envisions a supply of natural gas so large that its price will be stabilized.
“In terms of an American lifestyle or the lifestyle of a citizen of Pennsylvania, they’ve enjoyed the energy from other places in the United States or other places in the world and, basically, it’s their turn,’’ Engelder said.
He has since revised his estimates upward by nearly a factor of 10, to 489 trillion cubic feet, or enough for 20 years in the U.S.
The true reserves, he believes, might be even greater.