In what may prove to be the first strike in the quest for billions of dollars worth of natural gas from the massive Marcellus shale region, Royal Dutch Shell PLC (Shell Oil) has paid $4.7 billion to East Resources Inc. for the gas rights to 650,000 acres of Marcellus shale land. Currently East Resources produces only the equivalent of 10,000 barrels of oil a day from its properties. In 2009, however Kohlberg Kravis Roberts (KKR) provided the relatively small gas-development company funds to develop its holdings.
The Marcellus shale land covers more than 60.8 million acres stretching from Tennessee into Canada including a wide swath of western and central Pennsylvania and upstate New York. In addition to the Pennsylvania shale properties Shell also purchased 350,000 acres of shale gas rights in Texas and Colorado. As recently as 2002 the Marcellus shale was discounted by geologists as a major potential gas source. Exploratory wells found gas, but the rate of flow was not considered sufficient to support commercial production.
Today, however, everything has changed with the introduction of a new horizontal drilling technique that connects chambers of natural gas buried within the shale.
Some expert estimates of the total capacity of the Marcellus shale is 500 trillion cubic feet of natural gas, with 50 trillion obtainable with current technology - enough to generate enough electricity to meet U.S. needs for ten years. Connecticut uses 168 million cubic feet of gas per year.
New York state officials have halted drilling permits as they weigh the environmental impact of drilling. Not so the Pennsylvania Department of Environmental Protection, which has already permitted 519 wells - 196 of which are now in production.
The gas is expected to reshape the Northeast's energy landscape, and possibly its economy as well as it comes online.
The value of the "obtainable" gas is expected to be at least $1 trillion, and property owners are expected to be selling drilling rights across the region.
Property owners will receive about $300 per acre for the right to drill, which will increase tenfold when and if drilling begins, and a royalty as high as 18 percent if gas is extracted.
Currently the Northeast imports most of its natural gas from Canada and the Gulf of Mexico.
Drilling costs in the shale are higher than traditional wells but the gas is expected to accelerate the current decline in price. The current price of natural gas, reflecting a growing international supply and a weaker industrial demand, has fallen more than 50 percent since 2005. New large sources of the fuel are coming online across the world, even in oil-starved Israel, and new techniques for drilling for "shale gas" are expected to be introduced across the globe as well.
At current prices natural gas is one-third the cost of oil on an equivalent-energy basis.
In Connecticut, most residential gas users will not see the lower prices reflected significantly in their rates immediately, as most utility contracts are negotiated years in advance. Current energy contracts reflect the higher prices of recent years.
However, according to the U.S. Department of Energy, costs to industrial users in Connecticut dropped 25 percent between 2008 and 2009 and the downward trend appears to be continuing.
The new gas finds can't come quick enough for some, as coal-powered electricity producers in Connecticut (representing 14 percent of electricity generation) and Massachusetts (25 percent) reacted to recent criticism by the Union of Concerned Scientists, by citing historically high gas prices and an unstable supply for their use of coal, including nearly $400 million annually of imported coal from Columbia and Indonesia.
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