Marcellus and Shale Gas Energy Supply Chain

March 29, 2011
How the energy industry can maximize ROI with established supply chains for shale gas.

Civil unrest in the Middle East, natural disasters and climate change concerns have driven up the cost of oil and coal production. This has caused many countries, including the United States, to explore alternative energy sources to augment these forms of power and become more self-reliant.

One place energy companies are looking is deep within the earth to extract previously untapped natural gas reserves from both the Marcellus and Utica Shale formations. Shale gas has the potential to supplement the nation's energy supply and to keep customer utility rates in check. Technological advances have provided cost-effective and environmentally sound ways of recovering the natural gas buried one to two miles beneath the surface.

The Marcellus Shale formation is 400 million years in the making, stretching from the edge of Maryland to New York, Pennsylvania, West Virginia and encompassing the Appalachian region of Ohio along the Ohio River. The boundaries of the deeper Utica Shale formation extend under the Marcellus Shale region and beyond.

Experts estimate the Marcellus Shale formation could contain as much as 489 trillion cubic feet of gas -- making it the largest shale formation in North America and second-largest in the world. Ultimately, this resource has the potential to produce the energy equivalent of 87 billion barrels of oil -- enough to meet total U.S. natural gas demand for 20 years.

Shale gas is extracted through a process called hydraulic fracturing. Vertical wells are drilled deep into the ground, and then horizontal wells are drilled like tributaries far beneath the surface. This approach significantly reduces desecration of the surface environment while maximizing the amount of natural gas that can be extracted from a single surface well.

A recent Penn State University study indicates companies involved in the Marcellus Shale gas development plan to increase their investment to more than $11 billion in 2011, up from $4.5 billion in 2009 and $8.8 billion in 2010. These initial investments were mainly focused on land leases and exploration. The study reported that the next wave of investment would focus on creation of the energy-industry supply chain supporting Marcellus Shale gas extraction and distribution.

Tier I and Tier II suppliers need to select a location that 1) provides cost effective and easy access to all states involved in the Marcellus and Utica Shale gas industry, 2) offers a ready supply of skilled labor to staff their operation, and 3) minimizes their tax burden to help maximize profit.

Supply Chain at Speed of Today's Business Environment

As the Marcellus and Utica Shale gas industry develops, Tier I and Tier II suppliers are quickly discovering Ohio is the ideal location to establish their operation because it is able to provide all three of the necessary criteria. This is not altogether surprising given the state's legacy as a strong supply chain and manufacturing state.

Everything that made Ohio the ideal location choice for suppliers to the automotive industry is in place for Tier I and II suppliers to efficiently and affordably supply the Marcellus and Utica Shale gas industry; central location, transportation infrastructure, skilled workforce and a favorable state tax structure.

Extracting and distributing shale gas requires a lot of supplies from drill bits, pipes and fixtures, machinery, sand, water, containers, measurement tools and safety equipment just to mention a few examples. And, every well is unique, making it important to have fast access to a full range of support services to ensure commercial success.

State Support in Building a New Supply Chain

Companies in Ohio that border Pennsylvania and West Virginia, such as V&M Star, TMK IPSCO and Dearing Compressor & Pump Company, have recognized the location advantage Ohio offers and have made strategic capital investments to expand their capacity. They have been quick to recognize the value of existing infrastructure, such as interstate highways and local roadways and water treatment facilities, to enable rapid business growth associated with supplying the Marcellus and Utica Shale gas market.

Ohio's location provides cost-efficient access to all of the states containing Marcellus and Utica Shale formations making it an ideal location for just-in-time suppliers providing equipment and materials to natural gas extractors.

In 2010, V&M Star Steel invested $650 million in a new pipeline mill, directly attributed to pipeline expansion for Marcellus and Utica Shale natural gas. Proximity to customers drilling in the Marcellus and Utica Shale areas was the driving force behind V&M Star Steel's multi-million dollar investment in a new pipe mill, according to the company's former chief executive officer.

Ohio's workforce offers quality and quantity -- and unparalleled work ethic. The state offers unique workforce programs for continuing education to help employers' conduct necessary training in partnership with industry.

Ohio's competitive tax structure supports the growth of supply chain companies involved in the extraction of Marcellus and Utica Shale. Ohio's broad-based, low-rate commercial activity tax rewards entrepreneurship with no tax on the first $1 million in gross receipts. Companies with sales between $150,000 and $1 million pay a flat fee of $150. In Ohio, the playing field is level because all companies are taxed at the same low rate.

Supply chain companies who locate operations in Ohio to support the Marcellus and Utica Shale natural gas industry can reduce their operating costs, because there is no tax on inventory or corporate income -- and boost the return on their investments with no tax on purchases of machinery and equipment.

But, perhaps the most significant tax benefit that supply chain companies that locate in Ohio can obtain is that products fabricated in Ohio but sold to customers outside the state are not taxed.

Ohio has laid the foundation for extractors and supply chain companies to achieve prosperity and success in the Marcellus and Utica Shale natural gas industry for generations to come.

Maximizing ROI with Advanced Energy's Supply Chain

Exploring advanced energy sources has never been more urgent for America's goals to reduce foreign energy dependence. As the development of Marcellus and Utica natural gas reserves grows, more and more supply chain companies will seek an accessible and affordable location to companies involved in shale gas commercialization.

Energy companies are already realizing the benefits of access to an established supply chain to maximize their return on investment in Marcellus and Utica Shale, but it takes a world-class supply chain network for energy companies to achieve the fastest return on their start-up investment.

Ed Burghard is a retired Harley Procter Marketer, Procter & Gamble, and executive director of the Ohio Business Development Coalition, a nonprofit organization that markets the state of Ohio for capital investment.

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