Could the Appalachian Basin Be the Next Silicon Valley of American Energy Infrastructure?

West Virginia University (WVU) has just released its second geologic study relating to the Appalachian Basin. This latest study addresses the feasibility of storing natural gas liquids (NGLs) in states along the Ohio River based on the region’s geology. In short, the study finds Ohio and West Virginia are prime spots for storage, and if such infrastructure is developed, it could provide significant economic benefits in the Appalachian Basin.

This latest WVU report, when coupled with WVU’s 2015 study that found the Utica Shale formation has much more recoverable oil and natural gas than previously thought, could also be foreshadowing an entirely new phase of oil and gas development in Appalachia’s future. It should be noted that neither study takes into account some variable economic realities such as commodity prices, taxation, regulatory issues related to exploration and production, or NGLs storage. However, both studies do provide a clearer picture of a scenario previously unimagined in the region: Could the Appalachian Basin be the next Silicon Valley of American energy infrastructure?

Findings of WVU’s 2015 study are already becoming reality

In 2015, WVU foreshadowed that the Utica Shale could be “comparable” to the Marcellus. According to the study, the Utica has an astounding 782 trillion cubic feet (Tcf) of technically recoverable natural gas – more than 20 times the 38 Tcf previously discovered in a 2012 United States Geological Survey (USGS) assessment.

In addition, the study predicted that many newly-found drilling locations will produce hydrocarbons more efficiently than in some previous areas, writing that,

“As the play develops, one can expect an increase in productivity as the best areas are discovered.” (p. 165)

It also indicated that the vast Point Pleasant Formation of Ohio has exceptionally high recoverability potential compared to other areas of the Utica, due to its unique chemical composition:

“Evaluation of bulk mineralogy, Total Organic Carbon amounts, carbonate content and thermal maturity data all point to an interbedded limestone and organic-rich shale interval in the Point Pleasant Formation as the preferred drilling target” of the Utica Shale play (p. 179).

And, while it’s only been two years since the study was released, it appears WVU is on the right track with its geological assessment of Utica Shale exploration potential.

During the project’s research period (2012-2013) Utica Shale drilling was at its peak. Then, drilling practically came to a screeching halt due to low commodity prices. However, even with a significant reduction in drilling over the past two years, Utica Shale production has continued to surge, as is evident by Ohio’s recent second quarter production results, which show Utica Shale natural gas production rose by 16 percent compared to second quarter 2016 production. Utica production also increased by four percent this past quarter when compared to the first quarter of 2017, for a total of 388,560,451 billion cubic feet (Bcf).

In fact, this summer was a milestone for the Appalachian Basin — which includes both the Utica and Marcellus shales — as it was the only region in the country to see natural gas production growth in 2016, with a combined total of 2.5 Bcf of natural gas per day (Bcf/d). The Energy Information Administration (EIA) September Drilling Productivity Report (DPR) also shows that natural gas production in the Appalachian Basin is accounting for 42 percent of the total natural gas production nationwide! These impressive figures are notable considering the Appalachian Basin would provide the feedstock for a storage hub.

Also noteworthy is the fact that the industry had pumped $22 billion into Ohio’s economy alone back when the 2015 WVU study was released. Fast forward to 2017 and that number has more than doubled in just two years, swelling to over $50.4 billion, according to Cleveland State University. In other words, WVU’s first geological study and foreshadowing of things to come has in fact started to become an economic reality.

Let’s take a look at the key findings in WVU’s latest study:

#1: First and foremost, underground NGLs storage in the Appalachian Basin is not new, and the geology confirms the region can readily support more of it.

While the history of underground NGLs storage is not directly covered in WVU’s report, the first successful project was completed in 1915 in Ontario, Canada, with the United States developing its own the following year in Buffalo, N.Y. Today, the U.S. has more underground gas storage projects than any other country.

According to EIA, as of 2015, West Virginia had 31 existing storage fields totaling 529 Bcf of NGLs, Ohio had 24 totaling 578 Bcf, and Pennsylvania had 41 totaling 771 Bcf. Clearly, underground NGLs storage is not new across the country, and with 96 existing storage fields, that is especially true in the Appalachian Basin.

The region itself is ideal for this type of storage of NGLs. Two important characteristics of an underground storage reservoir are its capacity to hold NGLs for future use and the rate at which gas inventory can be withdrawn – known in industry parlance as its deliverability rate. As of 2015, nine percent of the gas storage facilities in the United States were in mined salt caverns; this number does not include mined hard-rock caverns that store liquid petroleum natural gases (LPGs), five of which are in Ohio.

The latest WVU geology study found that there are a lot more opportunities that exist to develop additional underground natural storage facilities and infrastructure,

“Preliminary rating work resulted in the selection of 12 [NGLs] storage fields and 113 depleted gas fields for further evaluation.” (page 155)

The goal of the Appalachian Storage Hub is to store and deliver 110 million barrels of NGLs.

#2: Storage facilities are needed to keep NGLs local

The 181-page study was conducted to help foster the use of local NGLs found in the Marcellus and Utica shales. The study specifically highlights the geological rationale for underground NGLs storage, which are essentially warehouses that allow consumers, such as ethane cracker plants, to have a steady supply of natural gas year-round and without interruption.

The liquids-rich Appalachian Basin has essentially been a drain on producers, as a local home for the end use of NGLs such as ethane has not previously existed. Massive petrochemical projects like the Shell ethane cracker in Pennsylvania and the proposed PTT Global Chemical ethane cracker project in Ohio will change that dynamic, and by doing so, the need for NGLs storage will become critical.

The WVU study explains the need to keep NGLs local this way,

“Because of the amount of natural gas liquids (NGLs) contained in this production, development of these shale plays has the potential to have a large impact on the petrochemical industry. In the United States, petrochemical projects are expanding. Industry investment and jobs have increased; the value of NGLs has increased; and fractionation capacity has increased as new processing plants come on line. The great, untapped resource from the Marcellus and Utica play areas is ethane. Due to the lack of a local market providing a higher value alternative, most of the ethane from the Marcellus and Utica is rejected, that is, left in the gas stream for sale. For the ethane that is recovered, it is all leaving the area and going to Canada, Texas, Louisiana and export markets in Europe to support the petrochemical industry in those locations.”

The American Chemistry Council (ACC) recently released a study which speaks more specifically to the issue of the need for storage, as explained by Cal Dooley, President of ACC,

“The Appalachian region has distinct benefits that could make it a major petrochemical and plastic resin-producing zone. Proximity to a world-class supply of raw materials from the Marcellus/Utica and Rogersville shale formations and to the manufacturing markets of the Midwest and East Coast has already led several companies to announce investment projects, and there is potential for a great deal more.”

The Appalachian Basin also happens to be in the heart of historic areas of manufacturing. For example, according to the West Virginia Department of Commerce,

“With four of the world’s largest chemical firms and other chemical manufacturers in the Chemical Alliance Zone (CAZ), West Virginia is home to one of the highest concentration of chemical manufacturers in the world.”

Similarly, Ohio is already a leader nationwide for plastics manufacturing, and has long been hailed the “Rubber Capital of the World.” A site selection trade publication correctly noted that the key to expanding the regions’ already booming plastics manufacturing industry is to:

  • Have access to raw materials. (such as NGLs)
  • Keep the cost of energy low. (such as powering the region with affordable and reliable natural gas electric)
  • Have access to transportation. (such as the Ohio River and railways that stretch along the Ohio River).
  • Have a local workforce.
  • Have a base for energy infrastructure. (such as an Appalachian storage hub)

 

Source: Trade & Industry Development: Strategies for Today’s U.S. Plastics Industry Site Selection. Ohio is the third largest state in the country for plastics employment.

And all of this manufacturing relies on NGLs found in locally produced shale. The WVU study suggests that a robust regional hub would support a regional energy infrastructure nerve center, utilizing pipelines, underground NGLs storage in salt-depleted gas reservoirs, and NGLs storage fields which would all ultimately be used by cracker plants that provide the feedstock to support manufacturing.

Table 4-13. Detailed rating results for the top 30 opportunities, summarized by storage container type and geologic interval.

#3: A hub will mean many forms of storage and infrastructure across the region, not a single facility

While some may assume a hub means a giant facility that stores NGLs, the Appalachian Storage Hub, as defined by the WVU study, is in fact a combination of several storage facilities utilizing various methods of storage options from mined-rock caverns, to depleted gas reservoirs, and especially underground salt domes. These storage centers would connect to various proposed ethane cracker plants via a series of pipelines. In that regard, the hub would include practically the entire Appalachian region from Pennsylvania, West Virginia, Ohio and even down to Kentucky.

In other words, the hub is not one location or one facility, it’s more similar to the term “Silicon Valley,” which is a figure of speech used to describe America’s high-tech economic sector. Today, Silicon Valley employs about a quarter of a million IT workers, thanks to a network of companies and locations in close proximity to each other regionally.

Similarly, the WVU study shows that underground NGLs storage could easily support a regional Appalachian Storage Hub which would span along the Ohio River across sections of Pennsylvania, Ohio, West Virginia and Kentucky.

WVU’s 2017 geologic hub foreshadowing vs. economic realities

With the Shell ethane cracker plant in Pennsylvania well underway and news of a final decision by PTT Global Chemical to construct another ethane cracker in Ohio, it should not be surprising that the private sector has already determined the need for underground NGLs storage.

More than $20 million has already been spent toward a major NGLs storage project in Clarington, Ohio, with room for expansion to the north, south, and across the river in West Virginia, which will be called the Mountaineer NGL Storage facility. This facility was featured in the WVU study as a key geologic site for development, and the president of that facility, David Hooker, said,

“This is a strong project that will satisfy the growing demand for reliable storage services to the many pipelines, rail, truck, and barge infrastructure currently being built to transport Marcellus and Utica natural gas liquids throughout the Northeast and Mid-Atlantic. We are eager to move into the construction phase and fulfill this critical need for storage.”

Hooker hopes to have the project, which includes three pipelines to a new NGLs storage facility, up and running by 2019. Mountaineer NGLs will be located in the Salina F4 Salt formation. The salt caverns will be capable of holding 500,000 barrels of ethane, butane or propane every six to eight months once in operation. This project will be the first active Appalachian Storage Hub facility.

In addition to the investment money already being spent in the region, the ACC study found that the creation of NGLs storage infrastructure in the region could yield up to 100,000 permanent new jobs, and up to $2.9 billion in new federal, state and local tax revenue annually. U.S. Senator Joe Manchin (D-W.Va.) has described  the hub this way,

“This is a game-changer for us. It’s a real field of dreams.”

When exploration and production companies bet early on the success of the Utica, experts immediately studied their efforts and echoed those companies’ belief of the Utica’s tremendous potential. That potential has turned into a very real shale renaissance, and it appears that the same scenario may be happening now with the Appalachian Hub.

Conclusion

Will the Appalachian Storage Hub become a Silicon Valley of shale, creating an energy infrastructure nerve center capable of catapulting a manufacturing renaissance that will thrive with locally produced Marcellus and Utica Shale resources? Time will tell. What we do know is that this latest WVU study is eerily similar to it last, and if history does in fact repeat itself and, as Sen. Manchin said, this hub could very well be a “field of dreams.”

 

Comments

  1. Tom Pendergast says:

    Hi Jackie! Thanks for a great article. I know you put a lot of work into this.
    I have some questions:
    There seems to be some difference in the requirements for underground storage of propane and butane (aka LPG?) compared to ethane but I don’t know why they’re different.
    Marathon operates five hard-rock excavated caverns in Ohio, two, I think near Cattlesburg and three in New Sparta (between Findley and Canton) but only for propane and butane for blending with gasoline summer and winter grades. In Sarnia, Imperial, Nova and maybe Shell operate salt caverns for propane and butane as well as ethane. Do their ethane-storage caverns need to be at least 2,000 feet below the surface at about 2,000 psi? Do ethane storage caverns need to have higher pressure than those for propane and butane?
    A couple of little quibbles:
    Salt domes are common along the Gulf Coast where Mont Belvieu is. The Salina formation up here isn’t a salt dome but a more or less continuous horizontal salt structure. Is that right? Either way, they’re both suitable for creating storage caverns.
    You wrote “388,560,451 billion cubic feet (Bcf)”: Does that mean the same thing as 3.8 Bcf, 3.8 Tcf or 3.8 quadrillion cubic feet? I guess you meant 3.8 Tcf.

    Anyway, I really do value your fine articles.

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