Natural Gas Is King in Pittsburgh – Deja vu All Over Again?

I was reading an article from the New York Times the other day, and the first line of the article was, “Natural gas is King in Pittsburgh.”

The article described how much natural gas development is under way in the region; that with respect to overall enterprise cost, “gas is far cheaper as fuel than coal,” especially for manufacturing; that it is reinvigorating the economy of Pittsburgh, and attracting capital to the region; and finally, that natural gas is a clean fuel.

The date of this article was October 18, 1885.

It sometimes gets lost in the ongoing hype about the Marcellus and Utica Shale that we have had a natural gas industry in this part of the world for over 125 years. It began as the unwanted stepchild of the oil industry, which traces its roots to Oil Creek, near Titusville, Pennsylvania, 100 miles north of Pittsburgh – where Colonel Edwin Drake concluded five months of drilling to a depth of 69-1/2 feet on Saturday, August 27, 1859 to complete the nation’s first oil well. For the next 40 years, wildcatters roamed the Pennsylvania and Ohio countryside looking for more oil; and when their efforts yielded gas instead of oil, it was often considered to be a nuisance. As historian Ruth Sheldon Knowles puts it, “With no market for natural gas, anyone unfortunate enough to find gas instead of oil simply let the well burn.”

By 1885, however, as the New York Times article suggests, a market for natural gas had begun to develop. “Every steel and iron mill, glass factory, and manufactories generally of any consequence, besides many private dwellings, now depend upon gas for fuel,” said the Times. “Every day natural gas keeps in motion acres of machinery, heats thousands of tons of metal, and molds into shapes for articles of commerce millions of pieces of glass. The Philadelphia Company, which is the largest concern, alone supplies with fuel 66 glass factories, 34 rolling mills, 5 steel works, 45 large manufacturing establishments, 44 other works, and 900 dwelling houses.”

Fast forward to the turn of the 20th century, and observers were already telling a different story about natural gas in Pennsylvania. In a 1904 Baedeker guide to Pittsburgh, the travel editors wrote, “There is no question but that the supply is gradually giving out; and it is already too high-priced for the rolling mills, which are reverting to coal and other forms of fuel gas.” Local supply and demand exerted a powerful force on the price of gas, of course, within the closed system of natural gas pipelines that existed in Western Pennsylvania at the time. The biggest impact was not really a dwindling of supply in the region, however, but the effects of the radical departure of drilling capital from Pennsylvania to Texas after the discovery of oil on Spindletop Hill in Southeast Texas in 1901. The Rockefellers and everyone else quickly moved their dollars and their large-scale operations to Texas, leaving the natural gas industry in Appalachia to operate at a mere pulse. Supply was down not because there was no gas in the ground, but because producers had more lucrative places to chase oil. The Baedeker writers disdainfully concluded, “Those who wish to visit a gaswell (of no great interest) should apply at the office of the Philadelphia Co., 437 Sixth Ave.”

Today we live in a vastly different market for natural gas. Natural gas now constitutes 25% of our national energy consumption, and provides around 1/5 of all U.S. electricity. Natural gas has not only ceased to be an unwanted stepchild, but a driver of industry activity all on its own.

Among today’s majors and super-majors, for example, ExxonMobil has in recent years sought to diversify its activities, investments and reputation away from being solely one of the world’s largest private oil producers – away from the vagaries of a worldwide industry plagued by political strife and economic uncertainty – by spending money on natural gas, and spending some of it in Pittsburgh, right here in our own backyard. Natural gas, for ExxonMobil and its rivals, has, over time, become a good bet for the future.

And yet, Pittsburgh is still not safe from the caprice of global capital, as evidenced by ExxonMobil’s announcement a month ago that it would be redeploying assets from its shale gas operations (such as those in the Marcellus) to “liquids-rich” areas such as the Bakken play in North Dakota, in light of there being few signs of an uptick in the desperately low price of natural gas. Commodities experts such as Robert Raymond now speak of a “chronically oversupplied market” of gas in which “the demand curve doesn’t keep up with supply,” ultimately creating the same result that was masked by the “low supply-higher prices” scenario described by Baedekers in 1904: less capital is available for the development of dry gas in our region.

What can we learn from this? The truth is, big petroleum companies have been bouncing in and out of Appalachia for a hundred years – in small commitments, whenever other conditions have suited. Their decisions to do so have had little to do with our collective responses to the industry, or lack thereof.

Just as we can see the seeds of the instability of the market for natural gas in a Baedeker’s guide from 1904, however, we can also see the roots of what can sustain a market for natural gas in an article from the New York Times in 1885. The euphoria of the anonymous Times reporter was mainly focused on the use of gas for manufacturing – specifically, the powering of “machinery.” In Pennsylvania today, natural gas is still relatively disconnected from power generation, but the situation is changing: as of the first two months of this year, natural gas represented just 27% of the sources for electricity production; but as compared to last year during the same period, gas’ role as a source for electrical power jumped by 72%. The trend is shifting in gas’ favor, largely due to what has been referred to as an unprecedented amount of planned coal-fired power generation retirements, driven by environmental regulations, and no sign that the demand for electricity will be decreasing. To the contrary, forecasts show that electricity demand is expected to increase steadily over at least the next 15 years. Gas, because of its proximity, abundance and relative low cost, seems to be the obvious choice for the future of power generation in Pennsylvania.

Just as local power needs turned an unwanted stepchild into Pittsburgh’s “King” back in the 1880s, it is certainly possible to imagine that the development of natural gas can be sustained in our region for reasons wholly independent of the mission du jour of a multinational petroleum company. Local demand, bolstered by an overhaul of the way power is produced in Pennsylvania and within the context of a changing market for natural gas, will give us an independent reason to sustain the development of the Marcellus and Utica shale plays. Sometimes it doesn’t hurt to take a look at our past to remind us where our future may lie.

———-

Posted by Ron Schuler
Ron Schuler is the managing member of Spilman’s Pittsburgh office, and previously served as an executive with a regional oil & gas exploration and production company.

Ronald W. Schuler

Advertisements

One thought on “Natural Gas Is King in Pittsburgh – Deja vu All Over Again?

  1. Pingback: INGOTS – or A Historical Look At PA’s Natural Gas Industry | Spilman Marcellus & Utica Shale News

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s