Daniel B. Markind, Esq.
Weir and Partners, LLP
Natural gas usage keeps rising, despite the hurdles it has faced. Daniel Markind highlights accomplishments and challenges at the state level.
Without a doubt, the election of Donald Trump was the big story of 2016. While Barak Obama never came out fully against shale gas and oil, and indeed reaped its benefits, their production did not fit his “clean” agenda and the Obama Administration never was welcoming to the new technology or the industry. The new President will have a different mindset. It remains to be seen what specific steps Donald Trump will take, and what reaction those steps will engender.
At the state level, the gas and oil supply glut is over and 2017 looks more promising than 2016, albeit with numerous challenges. Among the most interesting states, here are some of the highlights:
Pennsylvania – The most encouraging sign in 2016 for Pennsylvania was the willingness of the State Legislature to work out a compromise on the Act 78 and 78a Regulations. While many might not like the specifics of the regulations, the fact that the Legislature cut a deal is encouraging in itself. Additionally on the plus side, Shell finally agreed to build its ethane cracker plant in Beaver County outside of Pittsburgh. On the minus side, Pennsylvania as a whole seems unable to grasp the enormity of the opportunity in front of it. Poor outreach in the Southeastern part of the State, where the majority of the votes are, continues to hamper statewide efforts to construct infrastructure and connect the gas fields in the Southwest and the Northeast with their markets and with the refineries in Marcus Hook. The decision by Philadelphia-based Braskem not to build a $500 million plastics plant in Philadelphia – as it desired – but instead in Texas, in symptomatic of the State’s historic “a day late and a dollar short” mentality. The overall opportunity is still there for Pennsylvania, but every day it is not grasped is one day closer to the time the economic window shuts.
New York – Governor Andrew Cuomo’s natural gas moves seem inherently contradictory. At the same time that he places a moratorium on hydraulic fracturing because of environmental hazards, he announces that State offices will convert to natural gas because it is cleaner. He then blocks the Constitution Pipeline and helps scuttle the Northeast Direct Pipeline. All of this occurs as his state’s usage of natural gas increases by 18%. The Constitution Pipeline action is the most vulnerable. It involves using State power to try to subvert explicit Federal approval. If President Trump wants to unblock the clogged pipeline infrastructure program, this is a place to start. While a neophyte, Trump has shown himself to be a savvy politician. Cuomo is also. Do not be surprised if Trump and Cuomo operatives quietly are discussing a staged scenario in which Trump will blast Cuomo over the pipeline delay, threaten to hold back certain federal funding and approvals to New York State, and Cuomo “resists” for a while. Cuomo will then give in as the Federal pressure mounts. In return, Cuomo will receive certain concessions that Trump would give anyway. This theatre protects everyone’s political interests and is reminiscent of how Lyndon Johnson worked with Republican Senator Everett Dirksen in the 1960s. At least I hope they’re thinking this way.
West Virginia – The most immediate result of a Trump Presidency here will be the end of the “War on Coal”. Ending such governmental opposition however will not change the economics, which point squarely in the direction of natural gas. I doubt that West Virginia coal miners will see too much relief, but at least there may be other jobs for which they can be retrained.
Ohio – Ohio has flown below the radar compared to Pennsylvania while quietly doing a better job of building its pipeline infrastructure. They’ve seen an increase in Utica drilling as well as Marcellus. The drilling rig count in Ohio now is 19 compared to 15 at this time last year. The Bureau of Land Management just approved drilling in Wayne National Forest, adding to the robust activity in Monroe and Belmont Counties. Without access to export facilities such as those in Texas or Pennsylvania, Ohio’s ultimate economic potential is more limited. Still, Ohio has done a much better job than Pennsylvania of taking advantage of its largesse.
Texas – Texas continues to be the energy juggernaut of the country. Almost every six months it seems a new and massive deposit is found, with the latest being the Wolfcamp Shale in the Permian Basin. Unlike Pennsylvania, the energy industry impacts just about every part of this state, giving all regions a stake in it. Historically business-friendly, Texas continues to see a net inward migration of residents as many other States see the opposite. Also, Texans have experience with the boom and bust cycles of the industry, so they don’t jump off the cliff when the price collapses. One cautionary tale for President Trump as he tries to “drain the swamp” is that in Texas oil and gas production remains under the domain of the Texas Railroad Commission. The new President will learn that state and federal agencies have amazing resilience and the ability to morph into areas where they seem to have no relevance.
Oklahoma – Oklahoma’s 2016 was dominated by earthquake news, likely related to wastewater disposal in injection wells. Historically the EPA’s preferred means of disposal, the injection wells are being blamed for changing Oklahoma from a state with little seismic activity to one in which in 2016 over 1,800 earthquakes of a magnitude 1.5 or greater were registered. While the state traditionally has been friendly to the energy industry, it is hard to see how this seismic activity continues before public opinion revolts. Savvy Oklahomans should be looking for alternative disposal means and technologies, as they likely will be needed in the near future.
Colorado – To the surprise of many, no anti-fracking ballot initiatives made it onto Colorado State ballots in November. In addition, Colorado in 2016 welcomed the discovery of the huge Mancos field in the Western Ridge of the Piceance Basin. This field contains enormous amounts of both shale gas and oil. Of course all estimates are just that, and Colorado is a purple state with a rich environmental tradition. Development will not come without a fight, but responsible development works at all levels for the people of Colorado and indeed the world.
North Dakota – Since the price crash, Williston has not been in the news every week, and the crash hit North Dakota hard. In February it was reported that the price drop left the State with a $1 billion budget hole. But unlike other states North Dakota has a tradition of keeping its public finances solid. It retains an AAA state credit rating (New York’s and Pennsylvania’s is AA, California’s is A and Illinois is A- for comparison). The Bakken shale oil is still there, but as it ramps up again Bismarck likely will be stricter about its regulations and enforcement. Too many reported incidents of sloppy disposal practices will probably force the state to be tougher this time around.
California – Governor Jerry Brown refused to support a State moratorium but Monterey County took matters into its own hands in November, becoming the first California oil-producing county to enact a drilling ban. How it will play out in the courts, of course, is anyone’s guess. The law of unintended consequences already is at work, as the San Ardo Elementary School District is teaming up with Chevron to fight the ban. The tiny school district receives almost 90% of its budget from the oil industry. Without that revenue, the district put on hold a bond issue approved by the voters in November and may have to close. Nothing is as simple as it seems to those who don’t look closely.
Oregon – Finally, this state is interesting even though there is little to no hydraulic fracturing taking place. Oregon is the terminus for pipelines existing and proposed. FERC in March took the rare step of rejecting the Jordan Cove LNG terminal in Coos Bay, Oregon, then denied a re-hearing on this in early December. In June however an oil train derailed near Mosier in the Columbia River Gorge, sending up a massive plume of black smoke and reminding everyone that the alternatives to pipelines are neither environmentally friendly nor particularly safe. Oregon is a state so environmentally conscious that until two weeks ago it did not even allow traditional rock salt on its roads due to the environmental degradation from water runoff(rock salt being among the largest source of pollution in Pennsylvania’s rivers). The Mosier derailment is the latest warning not to let the perfect become the enemy of the good.
It certainly will be an interesting 2017.