Welcome To Pittsburgh, Natural Gas Hub of The Northeast

May 2010 Vol. 237 No. 5

Jeff Share, Editor

Murry S. Gerber has a vision for the natural gas industry and this country, one that includes the pipeline sector. In fact, if Gerber’s vision became reality, we would have the pipeline project to end all pipeline projects.

Gerber is executive chairman of EQT Corporation, a 120-year-old Pittsburgh-based company that traces its history back to the drilling of the first natural gas well by George Westinghouse in 1888.

Gerber’s first mission was to reorganize EQT from a regional natural gas utility into three segments: exploration & production with 14,000 gross production wells with 2009 gas volumes of 161,000 BBtus; midstream with more than 11,000 miles of gathering and transmission pipelines and 63 Bcf of storage; and natural gas sales with 275,000 customers.

In an effort to burnish the corporate image, he also directed a 2009 rebranding that changed the name of the company from Equitable Resources In., added a new logo and a new tagline, “Where Energy Meets Innovation.”

EQT is a key natural gas midstream player in the much talked-about Marcellus Shale in western Pennsylvania as well as the lesser-known Huron/Berea Shale located in eastern Kentucky, and southern West Virginia. Hence, the trained geologist is a very intense advocate for the development and increased use of natural gas.

“The shales that exist in this region provided an opportunity to develop and perfect technologies necessary to access reserves that were previously thought to be inaccessible. This has been a game changer in the significance of natural gas in this country’s energy future,” Gerber told P&GJ.

Two important events have led to EQT’s emergence in the shale play. One was its acquisition of significant shale reserves from Statoil in 2001, and its perfection of horizontal air-drilling techniques, which has exponentially increased EQT’s production levels.

The southside Chicago native worked in management roles for Shell Oil for nearly 20 years before he accepted the top position at EQT in June 1998. He was named Institutional Investor’s 2009 Natural Gas Executive of the Year. On April 21, he stepped down as CEO and was replaced by David Porges, previously president and chief operating officer.

Today, EQT has emerged as the largest natural gas producer in the Appalachian Basin. Past successes combine with a promising future indicate much is in store for EQT, the natural gas industry, and most of all, the American public, Gerber believes.

Future For NGVs
Gerber foresees a bright future for natural gas-powered vehicles (NGVs). He suggests that the pipeline industry and the nation can hearken back to the 1950s for an important history lesson. The crowning achievement of the Eisenhower administration was the development of the interstate highway system. So why not build a matching pipeline infrastructure along that highway grid that could provide natural gas to regions lacking access to the fuel with a distribution system that could fuel NGVs?

That’s plenty to chew on, but Gerber believes it can be an essential component in reducing America’s dependence on foreign oil. Until now, NGVs have generated much talk but little else in the U.S.

“The most important strategic issue facing my generation – and the great failing of my generation – is not providing a secure energy future for our children. Natural gas, either by wire into electric cars or by direct use in vehicles, is the best way to wean ourselves off the need for more foreign oil for our mobile fleet.

“There are huge issues with both approaches,” Gerber said. “I think the NGV issue is the least disruptive to the normal American lifestyle. I’ve advocated as a first step to have the ability to fuel NGVs coast to coast. In urban areas there is no problem with natural gas access; the problem is between the rural areas where distribution systems aren’t set up.

“Everyone talks about converting trucks and buses to NGVs but my vision is to take this step much higher. Why not put natural gas pipelines along the major highways criss-crossing the country, and from that grid, build back upstream to more rural areas?

“It’s not crazy,” Gerber insisted. “It’s certainly something we can do and we have the tools to be able to do it. It would create a tremendous amount of jobs in the construction and the pipeline network while also giving our kids more security. If we did that – and I believe we could do in less than 10 years if we put our minds to it – we would have the ability for Americans to have coast-to-coast dual fuel. Pull up to the pump and choose your fuel,” Gerber said.

Marcellus Shale
The oil and gas industry may have started 150 years ago in western Pennsylvania, but it’s been many years since people in that economically depressed region that gotten excited about business prospects. Today, the growing exploitation of the immense Marcellus Shale – which some say may contain more than 500 Tcf of natural gas – has everyone scurrying for a piece of the action.

EQT’s biggest assets are its production wells located on 3.4 million acres in the Appalachian Basin where the company was actively engaged long before it became “the” place to be. Drilling in shales is nothing new to EQT which first “cracked the nut” in the Huron/Berea Shale by developing air-horizontal drilling which made working big wells possible. That made not only the Huron acreage increasingly valuable but paved its way into the Marcellus Shale.

One of the greatest challenges in developing the Marcellus Shale has been the lack of infrastructure necessary to transport the natural gas to market. EQT is doing two things to address this issue.

First, its midstream business unit is increasing its ability to transport natural gas to market. This is through utilizing EQT’s existing Equitrans Pipeline and through the Sunrise Pipeline, currently under development.

There was existing pipeline infrastructure in place that was formerly was used to transport natural gas north to fuel the steel mills in northwest Pennsylvania. EQT’s pipeline company, Equitrans, is re-engineering the pipeline to reverse its flow and expand its capacity in order to utilize it to transport Marcellus production to the five major transmission lines that deliver gas to Northeast markets.

“Rebirth of the Appalachian Basin required a complete recapitalization of midstream assets and a complete rethink of the strategy for how midstream should be built to serve the needs of this expanded production,” Gerber said.

This called for a substantial investment in EQT’s infrastructure over the past five years to replace outdated and undersized equipment. But the results have been pleasing. The production business grew 20% last year and is likely to continue to grow at rates above 30%, he said.

“This necessitates not only for us, but for other players in this basin, the need for an upgraded infrastructure, mostly in the high-pressure gathering, extraction and processing areas,” Gerber said.

“Until very recently, there was little interest by midstream players to develop both the low- and high-pressure gathering as well as the compression, extraction and fractionation facilities necessary. EQT had to expand our midstream business by necessity because no one was going to do it for us.”

Huron/Berea Shale
EQT controls 2.5 million acres in the Huron/Berea Shale, by far the most dominant player. Although it doesn’t have the allure of Marcellus or some of the other prolific shale plays, EQT has done very well with Huron, Gerber said. For an average cost of about $1.5 million, each well produces about 1.5 Bcf.

While Marcellus seems to offer limitless possibilities, half of EQT’s production comes from the Huron/Berea play. To make Huron/Berea viable, EQT connected to nearby long-line transmission pipelines with its own high-pressure discharge lines. It built a large line named Big Sandy that connects to TGPL downstream of a extraction processing plant EQT built in Langley in eastern Kentucky.
Through a series of newly built suction systems that connect to the high-pressure discharge lines, gas is transported to Langley where liquids are extracted, the dry gas flows on Big Sandy up to TGPL and later to Columbia Gas pipeline among others. This has literally created a hub for ensuring that gas from eastern Kentucky and southern Virginia reaches multiple outlets.

Those technological advances have allowed EQT to increase production from Huron/Berea while maintaining an industry-leading low-cost structure, Gerber said. Last year, EQT drilled its 800 horizontal Huron/Berea well, and 33% of fourth-quarter sales were produced from those wells.

Midstream Growth
Gerber has challenged his management team to continue to find innovative ways to maximize the production of natural gas while reducing the cost structure. Last year EQT had record annual sales of produced natural gas of 100.1 Bcfe, which was 19.5% higher than in 2008. Proved reserves increased by 31% to 4.1 Tcfe.

EQT drilled 702 gross wells during 2009. Of these wells, 403 were horizontal wells, 347 targeting the Huron/Berea play and 46 targeting the Marcellus play. It also drilled 217 vertical wells in the coalbed methane play, mostly in the Nora Field. The company was successful on more than 99% of the wells drilled in 2009, despite 79% being drilled on locations that had been defined as probable and possible.

Gerber sees continued growth in the midstream sector with EQT continuing to occupy a leading position.

“Onshore gas production had been in decline for several years, which left many people pretty sanguine about their ability to transport gas because even during the early stages of the shale development they presumed that their gas would flow in existing under-utilized pipelines. We made that mistake, too, because we presumed that our gas would flow, but when everyone is producing more, suddenly there’s not enough capacity.

“As a result, we’ve had backups in the Rocky Mountains most spectacularly that REX (Rockies Express) had to come in and help resolve and Appalachia is potentially in that same exact position, though not so much for the big interstate pipelines,” Gerber said.

Though there will be an occasional need for a new long line, he said most of the infrastructure growth will come upstream from the interstates with complicated series of suction and high-pressure discharge systems that tie into compression and processing.

So producers who have been used to paying very low prices based on depreciated values of pipes, etc., now have to either build for themselves or support construction of costly infrastructure, Gerber said.

Environmental Responsibilities
Gerber is also acutely aware of his company’s need to protect and repair whatever environment it works in.

“We believe that any development is going to have some impact. Our desire is to leave the area the way we found it. For instance, we put roads back in very good condition. Our sites are invisible – when you look at a hillside where there are EQT wells you can’t see them. After the initial development is done we put everything basically back the way we found it. We just leave a small wellhead and a solar panel as an energy source to collect information,” he said.

“In the Huron, we use nitrogen so we don’t have a water problem. In the Marcellus we clean the water we use to drill and recycle 100% of the fluids we use to fracture our wells. That reduces the need for any kind of underground storage. Our wells are extraordinarily well-protected in the aquifer areas,” he said.

“Neither we nor the EPA has seen any damage from fracturing in any of the wells,” Gerber continued. “We’re more concerned with what happens with the fluids on the surface than we are underneath. We don’t want to extract too much water from the streams that would cause an undue change in the flow rates.

“We measure internally our spills in gallons, not barrels. We have a very strict tolerance. We have very few notices of violation by the EPA as our spill rates have fallen dramatically over the last five or six years, and they should,” Gerber said.

“State governments are doing a great job in regulating both fracturing and in surface conditions. We adhere and exceed all of those metrics and think that people violating them should be heavily penalized,” he added.

Future Plans

Gerber will become executive chairman of EQT but will have plenty of work awaiting him externally as he advocates a Marcellus bill that addresses severance taxes and other ancillary issues. .

Pennsylvania Governor Ed Rendell, a prominent Democrat, has expressed displeasure with the gas industry for paying little heed to legislative issues, noting that Gerber was the only producer who attended a scheduled meeting with the governor to discuss issues revolving around Marcellus development.

Gerber said his goal is to ensure that Pennsylvania has a good regulatory framework for developing the Marcellus Shale. He said the rules and regulations are outdated, seemingly going back to 1859 when Col. Edwin Drake discovered the modern-day oil and industry in nearby Titusville.

Instead, Gerber said the Keystone state needs a framework that balances the need for a severance tax to cover some of the costs that industry is generating – particularly for the stresses it creates on the infrastructure and roads – with an updated legislative and regulatory framework that contains organized rules regarding:

1) forced pooling;
2) how post-production expenses are deducted from royalty payments;
3) how surface owners are compensated from developers interfering on their land because in many places, surface and mineral rights are severed from one another.

“Most states in one way or another have dealt with those issues pretty well. We want to ensure that whatever severance tax is collected is distributed to local communities that may be affected by drilling operations.”

Gerber will also take an active role with the Allegheny Conference, which has begun to encourage business development from companies that need natural gas as a fuel or feedstock, such as chemical plants or steel mills.

“We are in the process of scheduling meetings to see under what conditions industry would relocate to Pittsburgh to sit on top of this Marcellus Shale and use it here rather than build very expensive infrastructure to move this gas out. We believe that if we play our cards right, that it’s worth a half million jobs to Pennsylvania, mostly in the west, and of those 300,000-400,000 could be permanent,” he said.

Industry has died a slow, agonizing death throughout Pennsylvania during the past 50 years. One sad joke is that Pittsburgh has become one of the cleanest cities in the country since the steel mills shut down, meaning there is very few good-paying industrial jobs. Those conditions are everywhere in Pennsylvania, leading to stagnant growth and decaying communities.

Gerber might be an extreme optimist, but he firmly that the accessibility of abundant reserves located in the U.S. now make it cost-effective to bring those manufacturing jobs back home.

“Having manufacturing using natural gas in Philadelphia is not crazy either. Anything we can do to use the gas generally in the region would be good. There are already pipelines that go that way. If we can take off gas in Pennsylvania, then the producer doesn’t have to pay that extra cost to get it to New York, Boston or wherever. This could have state-wide implications outside of the Marcellus Shale basin,” he said.

State and local officials will have to make a strong case. Potential tenants need assurance of a long life of production available. Although there is plenty of confidence that the Marcellus and Huron basins have prolific gas reserves, the manufacturing sector has heard that story before.

“This shale – Fayetteville, Haynesville, Barnett, Huron, Marcellus – is the real thing. They must be convinced of that. Second, they have to be convinced they can get consistent pricing. What we and the rest of the gas industry are saying now – which is different from a few years ago – is that we should be willing to enter into long-term contracts to ensure customers get a consistent pricing scheme,” he explained. “

So, when all is said and done, would it be fair to say that Pittsburgh has the potential to be the East Coast hub for natural gas?

“I wish you would say that,” Gerber agreed. “There is no question that that is true and what we have been bold enough to say previously is that the Marcellus could be bigger for Pittsburgh than steel was, if we can utilize this asset by developing it and encouraging manufacturing to grow up around it. I believe it’s going to be true.

“One thing I noticed upon coming here in 1998 is the shock of losing the steel industry in western Pennsylvania. That still has not gone away. People here are always concerned about getting a share of a shrinking pie. It’s a big change to consider the possibility that the pie will actually get bigger.

“We’ve made some gains over the last decade but they were almost all lost in the recent downturn. We’re about net zero since 2000 in new jobs and that’s not good. People are still apprehensive but it is not crazy to think that we can turn that attitude around and bring the jobs that we don’t have,” he concluded.

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