Industry Overview

A Dynamic Industry

The Shale Industry is a dynamic one – now entering its second decade of development. When the late 2000’s shale boom began in the Appalachian Basin, there was an inverted supply and demand curve based on today’s needs. Operators (drillers) were moving into an area that already hosted some historical conventional oil and gas development, but did not have the infrastructure, workforce, or expertise in place. Many businesses expanded or new ones started to address these needs. 

As the shale industry matured, several industry segments in the Appalachian Basin were slow to engage or benefit from direct work with the industry. Manufacturing was one of the segments that had not yet fully capitalized on shale gas opportunities. While the shale industry was gaining a foothold within the region, and these segments were starting to engage the industry, the industry experienced a dramatic drop in natural gas and oil prices. These price drops curtailed development for approximately two years. There is some skepticism among political and environmental critics as to the true economic impact in the region. However, there is direct evidence of the positive economic impact that operators are contributing to development.

Since its inception, the natural gas and oil industry has been a cyclical one.The story is the same in the Appalachian Basin, where the industry has experienced several slow downs The first began late in 2015 as a result of the industry’s nationwide success in producing dramatic amounts of natural gas and oil from shale rock. The price of natural gas and oil plummeted, causing operators to significantly reduce operations while the market rebalanced. This slow down led many outsiders to claim that the shale industry was a bust and would not survive long term. While many companies who had not diversified or had a strong balance sheet did not survive, many companies came out stronger. The need to improve efficiency and drive costs down was highlighted throughout the industry. Companies came up with improved technologies and methods to make the industry profitable at a lower price of oil or natural gas. Currently, the industry is experiencing a downturn that has been exacerbated by the pandemic, which has caused a dramatic drop in the utilization of natural gas and oil products. 

Industry Overview

In the Appalachian Basin, the Shale Industry is strong and resilient. The Marcellus Shale has been the driving force, but the Utica Shale and various deeper and shallower shales also provide long-term opportunities. While the demand for products and services has changed over time, the industry thrives on technology and innovation. The manufacturing sector is synonymous with innovation and technology and has already been a key factor in the success of the shale industry.

The manufacturing industry is unique in that it has multiple opportunities to take advantage of the Shale Industry in the Appalachian Basin. Due to the vast quantities of natural gas being produced, the cost of energy has decreased significantly over the past decade. As more infrastructure is developed, businesses will have easier access to natural gas as a fuel source as well. Lower cost energy sources coupled with increased overseas labor costs and the rise of “buy local” sentiments, all contribute to a resurgence of the manufacturing industry in the United States. According to the National Association of Manufacturers, manufacturing output has increased by $12 billion annually since 2012 and American manufacturing has added the most jobs over the past year since 1995. The advantages of and opportunities within the shale gas industry will be around for several generations, and into the foreseeable future.

Upstream & Midstream

Drilling and completion technologies continue to improve rapidly, and operators count on innovation to drive the industry forward. In Pennsylvania alone, nearly 600 shale wells are expected to be spud in 2020, translating to nearly $5 billion of investment. As the development in the Utica Shale across Ohio and Marcellus development in West Virginia continues, the Appalachian Basin is expected to see over $7.5 billion annual investment, just on the upstream side of development.

Midstream development has ramped up significantly over the past several years, as well. Midstream development includes the construction of larger transmission lines and local gathering lines. Initially, estimates for the development of smaller gathering lines were around $2 million per mile. However, as these projects include larger diameter pipe and more infrastructure, the estimate is around $5 million per mile. Looking at several key reports, it is a safe estimate that over $5 billion in midstream development will occur annually to develop the shale resources.

In addition to the transmission of natural gas, oil,and natural gas liquids, storage is also a key component of the midstream sector. A recent study estimates that a storage hub in the Appalachian Basin will cost approximately $10 billion to construct and occur over multiple years.

Downstream

The cumulative impact of the shale gas revolution can most widely be seen through the growth of the downstream sector. The downstream sector is the utilization of natural gas and includes the development of electric generation facilities, ethane crackers, plastics and petrochemical facilities throughout the basin. As the ethane cracker facility in Beaver County continues construction, this has created an immediate need to educate the community on new and expanded opportunities. Additional ethane crackers are expected to be built in the Appalachian Basin and this will not only create downstream opportunities, but direct opportunities to help construct those facilities. These world-class facilities cost in excess of $6 billion to construct. 

Business Development

During the early phases of infrastructure build out, operators within the Appalachian Basin were scrambling to find local businesses to provide products and services. Numerous programs, expos, and events were developed to connect the industry with the local market. These gaps were quickly filled with local businesses diversifying their operations and new businesses setting up operations within the Appalachian Basin. The dynamics of the markets have shifted dramatically over the past decade. Currently, there is an oversupply of products and services for the oil and gas industry.

As shale wells proved to be more productive than even some operators anticipated, there quickly became a bottleneck to transporting the gas to market. Because of this, the industry saw a quick retraction in business and workforce development opportunities around mid-2015. This caused numerous local businesses to exit the industry, and created the perception in some quarters that the shale industry was exiting the Appalachian Basin. Due to several key developments, including new pipelines coming online to move gas to market, increased utilization across the Commonwealth, and the natural decline of the shale wells, industry activity ramped up again during 2017. For a variety of reasons, the start of 2020 has seen a decrease in activity. However, how the industry identifies new service providers has also seen a dramatic shift. While trade expos and networking events were the key drivers to entering the oil and gas industry early on, now operators are much more reserved in how and where they identify new opportunities. Businesses must be better prepared to articulate and demonstrate the value they provide the industry in order to get in the door. Understanding where the bottlenecks are also helps local businesses provide an entry into the industry.

Background Information

The Marcellus Shale was studied for decades and recognized as a source rock containing large reserves of natural gas. Nonetheless, it was never viewed to be economically viable. Operators did not have the technology to commercially develop the resource in a profitable manner. Through the advent of advanced technologies, hydraulic fracturing, and horizontal drilling, the first shale to be developed was the Barnett Shale in Texas. Development in the Barnett Shale took several decades and thanks to the persistence of several key players, technological improvements were implemented to make development economically viable. Mitchell Energy is credited with ultimately “cracking the code” and starting the Shale Revolution.

The Barnett Shale started seeing major investments in the early 2000’s and production increased in tandem. However, as technological advances, exploration, and employee migration occurred in the mid 2000s, the great land grab began in Pennsylvania as operators sought to secure a spot in shale development. The Barnett Shale continued to see major development investment as the Marcellus Shale was in its infancy during the late 2000’s. However, that quickly changed as the Marcellus became the top-producing shale play in the country in 2012 as the Barnett peaked at 5.7 BCF/day. Today, there is very little investment in the Barnett Shale except for the more liquids or oil regions.

By comparison, the Barnett Shale covers approximately 5,000 square miles and the Marcellus Shale is over 95,000 square miles. In addition to the Marcellus Shale, operators have begun development in earnest on the Utica Shale and several Upper Devonian Shales. There are additional shale plays within the region that operators are confidentially exploring. These additional shales have effectively doubled the acreage available for development in the Appalachian Basin.

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