Pennsylvania and West Virginia Fastest-Growing States in Natural Gas Production but Act 13 Ruling May Impact Pennsylvania Production

In an early release overview of its Annual Energy Outlook 2014 released on December 16, 2013, the U.S. Energy Information Administration (EIA) forecasts that natural gas will surpass coal as the dominant source of U.S. electric power generation by 2040, with gas increasing to 35 percent of total electric generation compared to 32 percent for coal.  Much of the increased gas  production comes from traditional Appalachian coal producing states. 

In a report released on December 17, 2013, EIA reported Pennsylvania to be the fastest-growing natural gas producing state from 2011-2012 with an increase of 72 percent.  EIA anticipates that Pennsylvania will overtake Louisiana (which saw a modest decrease in production) and rise to second place nationally in natural gas production in 2013 behind only Texas.  West Virginia showed the second highest growth in natural gas production at a rate of 37% in 2012, placing it in the top ten U.S. producers for the first time.  EIA estimated that the Marcellus Shale play will provide 18% of the U.S. gas production this month.

The increased production in the Marcellus Shale play is causing spot market prices in the Northeast to drop further below the benchmark Henry Hub spot price located in Elrath, Louisiana.  Natural gas prices in the Mid-Atlantic region have traditionally been higher than Henry Hub because of the cost to transport the gas from Texas and the gulf region.   The EIA explains the factors behind the growth as follows:

Growth is mostly from dry gas production in northeastern Pennsylvania. This coincides with infrastructure improvements in the region, as gathering lines and pipeline capacity expansions have helped flow more gas to market. Production in West Virginia reached 2.4 Bcf/d in August, which is 0.8 Bcf/d above the August 2012 level, with 0.6 Bcf/d of that growth occurring in 2013. The liquids-rich areas of the state experienced the most growth as a result of the beginning of operations at two new natural gas processing facilities—the Mobley (Wetzel County, WV) and Natrium (Marshall County, WV) plants—and the expansion of several existing plants.

EIA, Today in Energy, October 9, 2013.

The low spot prices have impacted production.  Justin Carlson analyzes natural gas markets for Bentek Energy and spoke at the Penn State Natural Gas Utilization Conference held in Pittsburgh on September 10-11, 2013.  In an interview with StateImpact Pennsylvania, Mr. Carlson explained that there were about 800 idle Marcellus wells in Northeastern Pennsylvania and about 350-400 excess Utica wells waiting to come on line.  With the development of processing infrastructure, gas pipelines and new projects such as the ethane cracker, Mr. Carlson expected to see opportunities for more demand.  StateImpact Pennsylvania, With a Glut of Gas, Industry Looks to Increase Demand, September 10, 2013.

While prices are expected to rise with an increase in demand as the industrial and power generation sectors switch from coal to natural gas and as gas is converted into liquefied natural gas (LNG) for export abroad or compressed natural gas (CNG) for use in the transportation sector, the Pennsylvania Supreme Court decision issued on December 19, 2013 invalidating portions of Pennsylvania’s Act 13 raises questions about whether Pennsylvania will be able to sustain production increases.  The court’s 4-2 decision held the law violated the Pennsylvania Constitution but the majority disagreed on why, with three justices citing the Environmental Rights Amendment and one justice citing due process.   Two justices dissented and the entire opinion consumed 200 pages.

It will take time to learn how the complicated ruling will impact production.   Marcellus Shale Coalition President Dave Spigelmyer issued a statement advising:  “We are reviewing the Supreme Court’s decision in full to evaluate its impact on our operations across Pennsylvania.”  Governor Corbett who championed Act 13 expressed disappointment with the ruling.  “We are continuing to review today’s decision.  We must not allow today’s ruling to send a negative message to job creators and families who depend on the energy industry.”

Stephen Smith focuses his practice on environmental and energy-related matters including regulatory counseling and litigation, administrative law, governmental affairs and lobbying. He represents clients before federal and state courts and administrative agencies. He provides client counseling and advice on compliance, permitting and agency communications as well as business transactions.
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