Shale Magazine

Summer 2013

www.SHALEmagazine.com

Is the Utica all it’s cracked up to be?

Ohio’s shale play has gotten some bad press, but drillers and midstream developers are moving ahead with billions in investments

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WELCOME It’s about who you know Everyone watching the Utica, or any other shale play, knows that possessing the right data is critical to success — whether it’s in drilling, investing, leasing, or most any other aspect of the shale resource business.

We’re skeptical whether we’ve seen much in the way of real data from Ohio’s shale play. Certainly we haven’t seen enough to fully judge the Utica, or possibly even its potential for oil.

If the old adage from the press, “follow the money,” holds true, this story is far from over. The money is still on the move, mostly flowing into big infrastructure projects that will unlock the true potential of the play and release the data we really need from wells that are pumping at full throttle.

That will take a while.

But there is some data we should all share that would lubricate the economics of our shale. It’s the same data you need to succeed in most other industries: the who’s who of the decision-making. Who’s got the juice when it comes to understanding the Utica shale, its regulations, contracts, business opportunities, work force management, engineering solutions . . . all the stuff that makes up the business of shale?

We’d like your help. Specifically, we’d like you to nominate the people you know who are the experts and critical players in the Utica, as well as the people you’d like to know more about. They might be geologists, procurement managers, drilling company executives or government officials. There are a lot of folks involved.

Nominate your choices at our website, at http://www.crainscleveland.com. We’ll report back in December, with a special Power Players edition. That should be some data we all can use.

www.SHALEmagazine.com 700 West St. Clair Ave., Suite 310 Cleveland, OH 44113 (216) 522-1383 • (877) 824-9373

PUBLISHER/EDITORIAL DIRECTOR Brian Tucker

EDITOR Dan Shingler

ART DIRECTOR Lauren Rafferty PRODUCTION MANAGER Craig Mackey

ADVERTISING DIRECTOR Nicole Mastrangelo

MARKETING DIRECTOR Lori Yannucci Grim

CONTRIBUTING WRITERS Dan McGraw • Chrissy Kadleck Frances Richards • Jeff Ubersax

PHOTOGRAPHY Marc Golub • Dan Shingler Chart Industries • Fuel Cell Corridor Energy In Depth, Ohio • M3 Momentum

SENIOR ACCOUNT EXECUTIVE Adam Mandell

ACCOUNT EXECUTIVES Lindsie Bowman • John Banks Dawn Donegan • Andy Hollander

SUBSCRIPTIONS To start receiving Crain’s Shale, please purchase a subscription to Crain’s Cleveland Business for one year at $64 or two years at $110.

For subscribers outside Ohio, one year is $110 or two years is $195. Call the Crain’s Cleveland Business Customer Service team at 1-877-824-9373 or email them at customerservice@crainscleveland.com.

Dan Shingler Editor 216-771-5290

You may also purchase a subscription online at www.crainscleveland.com/shale

REPRINTS AND PERMISSION Reprints: Call 1-800-290-5460 ext. 125

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TABLE OF CONTENTS Features 6 Fracked or fiction?

14 Fill ‘er up

The Utica shale’s gotten a lot of bad press lately.

So, is it a bust or a boom?

Ohio’s automotive-oriented manufacturing economy might cash in on natural gas cars.

10 Carrollton:

12 Seeking professional help

A small Ohio town has a huge opportunity and some big challenges ahead of it.

Some of Ohio’s best and brightest minds are finding they can work in their native state thanks to shale-related employment growth.

money matters 22 Betting on golden geese

Watching the Play 16 Hoping in numbers

Some newly wealthy landowners want to invest in the same shale industry that made them rich, and Wall Street is obliging them.

Landowners in eastern Geauga County are putting their parcels into ready-to-drill tracts for drillers.

20 The tax that bites Ohio’s CAT tax applies to oil and gas revenues paid to landowners.

Supply Chain 8 Chill baby, chill Just about everything that’s done with natural gas involves cooling and processing it -- and that’s just fine with Chart Industries.

18 A match made in heaven Shale gas and fuel cells seem like they’d make the perfect couple, if they can ever get together.

21 API certification It’s not easy or quick to get, but a Pennsylvania manufacturer hopes an industry stamp of approval will mean more sales.

Community Partners:

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24 Compressor stations The next phase of the Utica’s infrastructure development will involve a lot of diesel engines running 24-7.

17 Casing breach - who’s told?

Not everyone agrees on just when local officials should be notified in the event of a failed well casing.

27 Mineral rights cases headed to courts Now that mineral rights are worth something, expect them to be a source of conflict and litigation in Ohio.

FOR US, IT’S ALL ABOUT BREAKING NEW GROUND. At Vorys, we’ve been working with oil and gas producers and operators

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since the early 1960s. So when something new comes along, whether it’s new technology or new changes in the regulatory system, we have history and experience on our side. The oil and gas business works differently here in Ohio than it does in other places, and we’ve been actively involved in the development of the statutes, rules and regulations that guide Ohio’s industry. So whatever it takes to break new ground is nothing new to us.

Higher standards make better lawyers.® For more information on our work in oil and gas, visit vorys.com/uticashale.

Vorys, Sater, Seymour and Pease LLP 1375 East Ninth Street 2100 One Cleveland Center Cleveland, Ohio 44114 106 South Main Street Suite 1100 Akron, Ohio 44308

Fracked or fiction?

After a few drillers failed to find as much crude oil as they had hoped, some said the Utica was looking like a bust. But producers and midstream developers are still pouring billions into the play in anticipation of what’s to come.

By Dan Shingler

M3 Momentum’s processing plant near Scio, Ohio, should be up and running by the end of June, the company reports.

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I

t might not be a sign on the back of an eastbound pickup from Texas, but it’s a question on a lot of minds in Ohio lately: Utica or bust?

It was only a murmur before mid-April, beginning with whispers about why some of the Utica’s biggest leaseholders, and loudest boosters, suddenly were selling mineral rights they had fought to buy just months before.

First, Devon Energy plugged what it said were “disappointing” wells in Medina, Ashland and Knox counties and put up for sale its 244,000 Utica acres, including nearly 200,000 acres in eastern Ohio.

Others also were selling, or trying to sell. Texas-based EnerVest Ltd. fit the latter description — it already wanted to sell its rights to about 100,000 Utica acres (it announced in April it had failed to do so).

Then there was the Utica’s big daddy, Oklahoma’s Chesapeake Energy. The company that put the Utica on the map, its largest leaseholder and biggest booster, said April 9 that it was putting up for sale leases on 94,000 acres in the play. Those leases were on top of leases covering 337,000 acres Chesapeake had put up for sale last year, and which in late May were listed as available on the website of its marketer, Colorado-based Meagher Energy Advisors.

Chesapeake was the company that had bet the biggest on the Utica, driving up its own debt to unsustainable levels in the process. Suddenly, it was less gung-ho. It jettisoned its CEO, Aubrey McClendon, the man who once said the Utica would be “the biggest thing to hit Ohio since the plow.” Now it was taking its chips off the table?

Utica disaster?

That combination of events seemed to trigger an avalanche of bad press, and the play that was the darling of the media and a rising star in the oil and gas industry became painted as a choker.

“Ohio’s $500 billion oil dream fades as Utica turns gassy,” proclaimed a Bloomberg headline April 15.

“Utica Shale Disaster,” declared the industry publication Energy & Capital on April 17, followed by the Motley Fool’s headline, “Has the Utica lost its allure?” April 30.

Not that there hasn’t been good news, including in the pages of this publication. The number of wells drilled is actually still on pace with early predictions, according to researchers tracking the activity at Cleveland State University. Job fairs in Eastern Ohio still are packed, not only with applicants but also with companies looking for workers to help develop the Utica.

But the uncertainty and pessimism have not gone unnoticed, and might be producing unseen effects.

“We were planning to expand near Canton, but we might hold off,” said an executive of a global oil field equipment company.

“It’s starting to look like the Fayetteville . . . but don’t put my name in your article saying that.”

The Fayetteville shale play, in Arkansas, looked better at first than it turned out to be, this executive said. It was still productive, but never grew to support the amount of drillers or drew in as many big drillers as initially hoped. He and others now are waiting to see if the Utica takes a similar course.

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Supply Chain

Chill baby, chill Chart Industries makes the equipment needed to compress, cool and process natural gas -- and the industry’s boom is playing right into its hands.

By Dan Shingler

Northeast Ohio’s Chart Industries is shipping heat exchangers and other big equipment to natural gas facilities all over the world at an accelerating pace, says CEO Sam Thomas.

I

t would be tough to imagine a development better for Chart Industries Inc. than the natural gas boom that is fueling the company’s rapid growth, says CEO Sam Thomas.

The company, based just south of Cleveland, makes heat exchangers and other

equipment that are used to compress and process natural gas all along its trip from the wellhead to consumers and chemical processors.

Thanks to the shale boom, Mr. Thomas predicts Chart will double its revenues over the next few years.

“I think in five years the company, which this year is going to be perhaps $1.2 billion, will be a $2.5 or $3 billion company, and almost all of that growth will be natural gas related,” Mr. Thomas said in a recent interview.

Doubters might want to pause, because continued on page 30

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Carrollton:

Small town, big issues Shale drilling is changing the face of one Ohio town, bringing riches for landowners, taxes for local government and conflict between drillers and environmentalists.

By DAN McGRAW

Carroll County’s courthouse has seen more than its share of landmen working on mineral rights leases and is now at the center of the Utica’s drilling activity.

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E

very Monday in Carrollton is auction day across from the county fairgrounds, just a few minutes from the town square.

It is where bales of hay, bed frames, spools of wire and kitchen knives are bid upon in the parking lot, with the cattle bidding coming later on inside at the auction ring. The snack bar is run by Mennonites, and their special on this Monday in May is tacos.

The reports say that there about 80 new millionaires in this county, most of them dairy farmers who got the big checks from the gas drillers. But from the crowd at the Carrollton livestock auction it is hard to tell which ones got checks with lots of zeroes and which ones are just there to find a deal on some car parts. These are folks with ball caps and jeans or overalls, all with a bit of mud on their boots, and mostly old pickups in the parking lot.

Inside waiting for the cattle bidding to start is a man who got one of those big checks. Like almost everyone at this auction, he won’t give his name when asked questions by a reporter. Not so much because of a dislike of media or privacy issues, but because drawing attention to yourself in this part of Ohio is what the locals perceive as arrogance.

This farmer grows chestnuts and hay, and owns a water drilling company that does most of its work in Akron and Canton.

He moved to his 160-acre property nearby about 20 years ago to get away from the city, and leased his mineral rights to a drilling company last year. While not getting a check worth millions, his check at least had five zeroes on it. The drilling has just started, and he expects it to be done by the end of summer. As far as when monthly mail-box money from the royalty checks will start, he can only shrug.

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Farmers Know He finds the debate over gas drilling somewhat comical — especially when it’s among city dwellers from the East Coast who oppose fossil fuels yet still use oil and gas to drive their cars and heat their homes.

“None of these people know where the things they use come from,” he laughs. “But farmers know more about the land, about how it is a commodity that supports them and their family, and how this gas drilling money is just a part of that.”

Farmers also know what it’s like in hard times and how important it is to save, he points out, making their recent windfall all the more welcomed, but not life-changing by choice.

“What people don’t realize is that most of these farms have been owned in the family forever, and no one ever made much money,” he says. “But even though they never made much money year to year, they would never do anything else. And that’s why you aren’t seeing these people getting the big checks and leaving or building a huge house. They buy a new combine and keep baling the hay and milking the cows.”

But no one should be surprised that they were willing to lease their mineral rights and allow drilling on their land.

“A lot of factors have come into play at this time and place for the drilling, including the economy and energy issues. In the end, we really don’t have a choice.”

That not having a “choice” is a common refrain among business leaders and politicians in Carroll County. Nature put the

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Seeking professional help The Utica shale is creating jobs that go beyond transient rigworkers and truck drivers. It might be helping to reverse Ohio’s brain drain by giving engineers and other professionals a reason to live in the Buckeye State.

By Chrissy Kadleck

J

obs: the four-letter word most projected, coveted and uttered alongside the promise of Ohio’s shale economy.

Not the flash-in-the-pan positions that transport temporary workers here for a few months, but rather real, sustainable, wellpaying jobs here to stay in the Buckeye State. Those are an economic development dream come true for legions of workers, cash-strapped cities and townships and dogged city officials.

They’re being created too; perhaps in somewhat indefinable fits and starts so far, but companies are coming to eastern Ohio.

They are opening offices and hiring workers from this area, while also attracting others to relocate here permanently – and fueling an expectant oil and gas industry.

Take CESO, Inc., an established civil engineering and surveying firm out of Dayton. The company opened a Canton office about two years ago with a few people from their southwestern Ohio headquarters.

“Last year was a real growth year for us and now we have 38 people here,” said Steve Olson, vice president and head of the Canton office, adding that 25 people were hired in 2012. The firm is currently engaged in projects involving road evaluation and

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Todd and Allison Wheaton were happy to find shale jobs in their fields and in their home state. improvement, the placement, design and access of drilling pads, as well as route development and design work for pipelines and fuel delivery stations.

“We are continuing to grow and add people but we are definitely committed to long-term sustainability,” Mr. Olson said.

“We’re diversifying both in our client base and in our service lines… so we aren’t just staffing up for oil and gas.”

About 80% of CESO’s Canton work force is from the Cleveland-Akron-CantonYoungstown area, including Mr. Olson, an architect who was previously a principal at Richard Bowen & Associates, where he worked on national retail accounts. He’s been in the Cleveland area for 12 years and was enticed to change gears in his career and “reinvent” himself to participate in the shale economy.

“Everyone is hoping the sustainability of the shale play is as predicted. A number of us have left previous careers and joined forces because we believe in the opportunity,” he said. “We are very encouraged by the drilling results and everything we have been hearing about the interest level from large national companies.”

Another engineering firm, Lancaster,

Pa.-based Rettew, opened its North Canton office in the fall of 2011. Like CESO, it’s been growing fast and has so far hired 35 employees.

“The majority of hires have been Ohio local residents,” said Rob Lauriello, vice president at Rettew, though he also said that the company has had some existing employees transfer from its Pennsylvania offices.

“The oil and gas industry has brought tremendous opportunity for job growth in Ohio. The industry provides positions at all levels, from oil field workers to manufacturing positions to professionals. The positive economic impact to Ohio will be felt for decades,” Mr. Lauriello predicts.

And even though the energy industry was the catalyst for Rettew to open its Ohio office, “other business development opportunities have arisen to serve clients throughout the locale, such as with our land development, transportation, or municipal engineering capabilities,” he said. “These projects and prospects will likely lead to more job growth in our Canton office over time.”

Any job projections are dependent on the pace of the oil and gas industry in Ohio,

Mr. Lauriello said, but Rettew’s strategy is to have about 60 people in the office and expand its industry base.

While there will be plenty of rig workers that come to Ohio to help drill the Utica shale — workers who might also move on when their rig goes to another play —- companies such as Rettew and CESO show that there’s ample job growth for professionals as well.

The Wheatons In fact, the Utica is even luring some talent back to the Buckeye State. Take Todd and Allison Wheaton, environmental scientists based in Rettew’s Canton office, who are married to each other and the shale industry.

The couple, each of whom were raised in Ohio and educated at Kent State University, left the area in January 2009 after struggling to find work. They saw the opportunity booming around the Marcellus shale in the Pittsburgh area.

“It was a chance for us both to work in a field we enjoyed. We never intended to leave Ohio, and had planned to move back to be closer to our families as soon as we could both find a decent opportunity to do so,” said Mr. Wheaton, 30, a native of North Canton. “Working in the Marcellus Shale Play in southwestern Pennsylvania is in many ways similar to what I see in the development of the Utica Shale here in eastern Ohio. The main difference I see here in Ohio is the less intense regulations, which leads to a much faster pace of development. It’s not uncommon to see a soybean field transformed into an active well pad with a drill rig in place with a two-to three-week timeframe, shortly followed by pipelines to move the extracted gas to market.”

Other similarities to the Marcellus Shale development are the massive influx of out-of-state workers, he said.

“I know I was overwhelmed by the amount of Texas, Oklahoma, Louisiana, and Arkansas license plates I originally saw showing up in Pennsylvania. After experiencing this in Pennsylvania I was not as surprised when I saw this migration into eastern Ohio as the shale jobs opened up here,” he said.

Mrs. Wheaton, 28 and a native of Wadsworth, said that during the three-and-a-half-year span in Pennsylvania the couple worked for three different environmental consulting firms – together – and gained “invaluable on-the-job experience which led us to finding a great opportunity in Ohio when the Utica Shale began to take off.”

“Moving back to the area was always a goal for us, and it has meant a great deal to both of us to be able to work and raise a family in Northeast Ohio. Both of our families could not be happier having us close by again,” she said, adding that they are expecting a baby boy this July. “Typically, we don’t see a lot of married couples working together in this industry. For us, it’s sort of become a centerpiece for our marriage because we’ve been working together for so long and it just works. I like to think we push each other in ways that make us individually better.”

They agree that there’s nothing better than working in your own “backyard.”

“It has been a great experience working in Ohio again. This is where I grew up, and with so many out-of-towners coming to Ohio for work, I am proud to say this is my home and I’m doing my part to see that its environmental resources are protected,” she said. “I think it’s important to have a voice in our community and to let people know we are here.” continued on page 25

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Natural gas vehicles are showing up more often at U.S. auto shows.

Fill ‘er up

Companies in Ohio that make nothing for drillers still plan to cash in on the shale gas boom -- by helping the U.S. convert to natural gas vehicles.

By Frances Richards

N

orth American natural gas, including untold amounts waiting to be unearthed from the Utica shale, soon may be coming to a garage near you — possibly the one attached to your house.

Although natural gas vehicles (NGVs) have been around for decades, the price difference between filling a car with gasoline or filling up with natural gas now is staggering in favor of natural gas and is expected to remain so for the foreseeable future, say energy industry experts.

Consider that a gallon of gasoline costs $3.50 or more at the pump for regular unleaded. Tapping into your home’s existing natural gas line by installing a special filling unit brings the cost of fueling up down to a mere 55 cents per gasoline gallon equivalent (GGE), while refueling at a public station costs around $2 per GGE. According to the Department of Energy, there are roughly 114,000 natural gas powered vehicles (NGVs) in the United States and nearly 15 million worldwide. Vehicles that run on compressed natural gas (CNG) are a good fit for high-mileage fleets, such as taxis and buses, that operate within a limited range.

For those needing to travel long distances such as long-haul

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trucks, liquefied natural gas (LNG) is a better option because more of it can be carried onboard. Natural gas is stored either by being compressed to 3,600 pounds per square inch or liquefied at -260° F. Although most NGVs in the United States are owned by fleet operators and used as work trucks, buses, garbage trucks and taxis, consumer vehicle use is growing. Passenger cars can be converted to accept natural gas as a fuel source while keeping the original gasoline tank in place so that either fuel source can be used as needed, eliminating range anxiety. Several heavy-duty NGVs and a few light-duty vehicles are available from original equipment manufacturers, while most other vehicles can be converted to natural gas operation.

Those backing the use of natural gas as a transportation fuel tout its low cost, clean-burning properties and domestic availability.

“The U.S. remains a victim of the OPEC cartel when it comes to oil prices,” said John Hofmeister, former president of Shell Oil Co., during his keynote speech at Crain’s recent Shale Summit held in Mayfield Heights. “Using natural gas as a transportation

and trucking fuel to displace some of our foreign oil dependence makes sense economically and in terms of energy security. We have an abundance of natural gas right here in North America and we keep finding more.�

Mr. Hofmeister also noted the danger of relying on oil imports from countries that are either politically volatile or hold antiAmerican sentiments, mentioning Saudi Arabia and Venezuela as examples.

Speed bumps However, before the general population starts driving NGVs, substantial issues remain to be solved. For one, there are not enough CNG filling stations. The U.S. Department of Energy lists just 12 public stations in Ohio for CNG, which passenger cars can use to fill up.

And vehicle conversions are not cheap. The necessary components include a fairly expensive tank to hold the gas ($2,500 to $3,500, depending on size), a controller, decompressor, tubing, fuel injectors and a few other small parts. For a car, the complete system can cost from $6,000 to $10,000, plus another $2,500 or so for installation. Trucks cost more. Adding a home refueling unit will set you back another $3,500.

NGV proponents know those costs are high, but believe they will come down. “The price of conversion could come down to around $5,000 once these systems are in common use,� said Dan Moore, whose Cleveland-based NatGasCar company performs car conversions, sells conversion kits to certified installers, works with OEMs on new NGVs, and also sells refueling units for residential and commercial use. “But if you have a big car and drive 100 miles a day, it makes sense to convert today,� Mr. Moore contends. “Natural gas is here to stay and the price will remain dramatically lower than cartel oil. Instead of a few OPEC members determining the price of gasoline, we have thousands of people supplying natural gas right here in Ohio. It’s a completely different system. We’ll have cheap (natural) gas for at least the next 10 years. Nobody knows what will happen after that.�

Andrew Thomas administers the Energy Policy Center at Cleveland State University and agrees with Mr. Moore. “We need to make the move to natural gas as a transportation fuel. Different upward and downward pressures will have an impact on price, but the cost of natural gas will ultimately depend on how much is found in our domestic shale,� said Mr. Thomas, who also spoke at the Shale Summit.

Fleets lead the way A new report titled “Light Duty Natural Gas Vehicles,� published in late 2012 by Colorado-based Pike Research, explores the global NGV market for smaller vehicles, including passenger cars. Analysts confirm that the light-duty truck segment leads the North American market, which largely consists of fleet purchasers rather than individual consumers. Fleet sales of NGVs are growing at a rate of nearly 11% annually in North America.

The majority of these NGVs are vehicles that automotive OEMs have prepped with upgrades, such as pre-drilled engine blocks to accept CNG systems, and have sent to suppliers that install the (CNG) equipment. Honda is the only OEM making a

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Watching the play

EGL founders Mark Dolezal, Tom Henry and Curt Huffman

Hoping in numbers

A group of landowners in Geauga County have banded together and are offering drillers access to 40,000 acres they say could easily be made into drilling units.

By Dan Shingler

G

eauga County has not yet become a hot spot for shale drilling — but if it does, more than 500 landowners there are ready for it.

They’ve all joined forces with a nonprofit known as the Eastern Geauga Landowners, which hopes to attract drillers by offering them ready-to-use tracts of land that are large enough to accommodate a shale gas well — normally about 640 acres. At the same time, the group hopes to protect and benefit its members by providing them a vehicle by which to share information on drilling activity, exploratory activities and, perhaps most importantly, offers made to lease mineral rights in the area.

“More information is good for every-

body,” reasons Mark Dolezal, one of the group’s founders.

Mr. Dolezal, along with fellow property owners Curt Huffman and Tom Henry, founded Eastern Geauga Landowners in 2011. In 2012, the group was incorporated as a nonprofit.

The group’s mission is to gather and share information, while also educating other area landowners about shale gas drilling and the demand and prices for mineral rights. While fracking is a contentious issue in the western part of the county, where “No Fracking” signs outnumber “Frack On” signs by a wide margin, the more rural eastern part of the county seems to support drilling. Since Eastern

Geauga Landowners was formed, more than 500 landowners from three counties have joined; they boast a combined total of more than 40,000 acres in eastern Geauga, Ashtabula and Trumbull counties.

Eastern Geauga Landowners doesn’t negotiate leases, provide legal services or otherwise take a cut from member’s bonus or royalty payments. Instead, members simply pay $60 to join and then receive access to information shared within the group.

They also get what the group hopes will be additional bargaining power and higher prices by working in numbers, Mr. Dolezal said. And why not — it’s cheaper for a driller to work directly with a large group continued on page 34

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Casing breach?

Who’s told?

By Dan McGraw

I

n late August of last year, Consol Energy was issued a permit to drill at a well pad in Jackson Township, which is in the western part of Mahoning County not far from Meander Creek Reservoir. The well pad was about 300 feet from a small creek that flowed into the reservoir, which provides drinking water for Youngstown and Akron.

When drilling started on the well in September of 2012, the well casing was cemented according to regulations. But in early October, when the casing was tested with pressurized water (without any chemicals), crews found that cracks had developed.

According to the Ohio Department of Natural Resources: “After pumping approximately 5 to 6 barrels of water, with a pressure reading still at 0 psi, the 20-inch casing failed, causing a vertical split in this casing approximately 4 feet long from ground level down.”

Consol reported the small split to ODNR, and then proceeded to recast the cement casing where needed. The job was completed by the end of December of 2012, and each of the fixes done

by Consol was witnessed and inspected by ODNR. The well has been declared fit to be fully operational, though it is waiting for pipelines to begin production.

The crack in the casing was discovered by Consol, it was found before any fracking fluid was put in the well, the company reported the incident to ODNR, and the well has been brought up to specifications. What has caused some controversy in some quarters was whether ODNR should have informed local officials of the well casing breach.

Changes in state law passed last year in Senate Bill 315 do not require ODNR to notify local officials of all well inspection issues. “If there was an emergency at the well site, appropriate local officials would have been notified,” the ODNR told antidrilling activists in Mahoning Valley when they asked why the public was not notified of the casing crack.

That answer didn’t satisfy some.

“This was in a watershed that provides drinking water to hundreds of thousands of people, and we think that the state should have made this information public to local officials when it first happened,” says Susie Beiersdorfer, a member of FrackFree Mahoning Valley and a geology professor at Youngstown State University. “I don’t even know if the ODNR knows how to define continued on page 19

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17

Supply Chain

A match made in heaven Fuel cells need natural gas to operate and natural gas needs a new market -- can they make it work?

By Dan Shingler

I

t’s almost never a good idea to fix up your friends.

But wouldn’t the fuel cell and shale gas industries make a cute couple?

You might be thinking: “No way. She’s all ‘drill baby drill’ and he’s all ‘let’s be green’ — that’ll never work. They’ll kill each other.”

When you think about it, though, it kinda makes sense.

There’s no doubt natural gas has been pretty lonely lately. OK, she’s actually been desperately seeking a new market for years now. Uncle T. Boone has been taking her to every event in town trying to find someone who will take her home in his car.

Guess what fuel cells run on? Yep, natural gas — methane. They take methane, do some internal chemical tricks and turn it into electricity, which just sits there in the cell until someone uses it.

If you’re like us, you thought fuel cells were hydrogen, like the ones they talk about on cable news.

There are those, too, but the solid-oxide, stationary fuel cells that turn out large amounts of electricity run on plain ol’ natural gas.

Wait, it gets better: the latter fuel cells are made right here in Ohio. Plenty of companies sell parts and components for them, and others such as LG Fuel Cell Systems in North Canton make entire cells.

That company makes a one-kilowatt generator that is smaller than most backyard barbecue grills, and it’s shrinking all the time, says LG vice president Rodger McKain.

Mr. McKain shows off a model in green — the military is a big market for fuel cell makers — with two connections: one where gas goes in, another where water comes out. On top are regular electrical outlets. They are one kilowatt, in part because that’s about how much energy a home uses, but they’re also scalable, he said.

“You can run it right inside your house,” Mr. McKain said. And the water that comes out? “You can drink that if you want to,” he added.

Hmmm . . . fast reliable power that can be set up easily, indoors or out, providing as much electricity as is needed so long as there is natural gas available.

Sound like the kind of gal for anyone you know?n

A row of stationary fuel cells quietly makes electricity outside Constellation Place in Los Angeles.

18

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Casing Breach / from page17

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ing the testing, the top joint of the well casing failed and the situation was immediately remediated per the directive of the ODNR,” says Consol Energy spokeswoman Lynn Seay. “The ODNR was satisfied with this remediation step and did not require any further testing. There were no environmental impacts related to this event, which occurred at the ground surface. There have been no other occurrences at our site on Blott Road.”

As far as the view of public officials in the area around the well, there is a differing opinion about when the ODNR should notify the public about drilling missteps.

Ohio State Rep. Bob Hagan (D-Youngstown) says the ODNR’s policy of only reporting drilling issues involving “what they perceive as health and safety issues” is not good government, “because public officials are elected by the people and they can get the information out to the people and keep the public informed.”

But Jackson Township Trustee Olin Harkleroad says he is fine with ODNR not notifying township officials. Harkleroad says township officials went on a tour of the well site last November, and they were told about the well casing issue by Consol Energy officials.

“If there was no problem with public safety or water contamination, why would you need to contact us?” he asks.

For Rep. Hagan, elected officials should be notified. “[The ODNR] is using the excuse that putting out too much information would be too much of a bother to elected officials,” Rep. Hagan says. “But it is not a bother to me and my constituents. Just put the information out. It’s about being open and it’s about good government.” n

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what an emergency is.”

Mark Bruce, an ODNR spokesperson, says an “emergency is when there are health and safety issues and a discharge of water into a watershed system. In this case, none of those occurred, so we did not feel we had to notify the public officials.”

FrackFree Mahoning Valley found a report of the incident on the ODNR’s website, and then pushed for the Mahoning County Commissioners to have a meeting, which was held in mid-March.

How the ODNR handled the meeting and the questions from about 30 attending citizens can be seen as questionable public relations. The ODNR decided that questions had to be submitted in writing, and that no answers would be given at the meeting and would instead be posted on the ODNR’s website 10 days later. The Youngstown Vindicator wrote that the report on the well casing by an ODNR regional supervisor at the meeting “became what at times was a perplexing presentation on the science and dynamics of well construction.”

But ODNR’s Mr. Bruce said the Consol Energy well “was a good example of why the well management rules were rewritten. There was no emergency and there was no contaminated water spilled because the hydraulic fracturing hadn’t taken place yet. And from the time we knew about the casing breach, we made sure all the remedies were made.”

“If the well could not have been fixed properly, then we would have shut down the well,” Mr. Bruce says. “In the end, the process worked well for all concerned.”

Consol Energy also thinks the process worked quite well. “Dur-

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19

Money Matters Ohio’s CAT tax applies to gas money

I

s sitting on your porch sipping lemonade a taxable activity? It might be, if someone is sucking natural gas or other valuable stuff from beneath your property and paying you for it.

Ohio’s infamous commercial activity tax, better known by the pet name CAT, applies to the sale of gas, oil, liquids, or for that matter, coal or water, just as it does to anything else. And “sale,” in this case, includes the payment of royalties by an energy company to the landowner from which it has leased mineral rights.

On the bright side, the tax is fairly small, 0.26%, and even that only kicks in after $1 milPrengler lion in royalties, says Hannah Prengler, a tax accountant and partner with the Cleveland office of Grant Thornton.

If sales are under $1 million, the tax is a flat $150, Ms. Prengler said. At and beyond the trigger point, the tax is 0.26%, which amounts to $2,600 on every $1 million in royalties.

But not just royalties — bonus payments also count, as do revenues from any other “commercial activity,” such as dairy or corn farming, for instance. So if sales from those activities combined with oil and gas royalty and bonus payments add up to $1 million or more, the CAT is out of

the bag, so to speak.

While the amounts of money might seem small, the real risk is probably overlooking the tax. Do that and the CAT likely will come back to bite, and that could mean penalties, more paperwork, dealing with government tax officials, accountants … your basic trip to the fiscal dentist. n - Dan Shingler

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API certification is a tough process

W

hat’s long, arduous, more complex and costly than expected, has few immediate benefits, but is still worth doing?

No, it’s not raising children — it’s getting certified as a manufacturer by the American Petroleum Institute to make parts and components for the oil and gas industry, says Thomas Beattie, of Jennison Manufacturing Group in Carnegie, Pa. His experience might be one to watch for manufacturers in Ohio that hope to cash in on their state’s shale boom.

“We started it about a year and a half, almost two years ago now, and we just got the certification in January … and our quality (control) guy was pretty much immersed in it the entire time,” said Mr. Beattie, who markets the company’s services and hopes the API stamp of approval will Beattie help him sell into the oil and gas industry.

Jennison machines parts for oilfield manufacturers such as FMC Technologies, Joy Mining Machinery and Forum Energy Technologies. Like scores of similar companies in the contract machining business, Jennison makes parts to customer specifications using CNC machines and other machine tools.

“If you can make it out of metal or plastic, if you can machine it, we pretty much do it,” he said.

Like many machine shops, Jennison already had ISO 9000 certification, but getting the API certification turned out to be a longer process and took more time than expected. Not only did the company need to prepare itself so that all its documentation and quality-control procedures were up to API snuff, it had to wait weeks, sometimes months, for an API auditor to check it out.

There are simply not enough auditors to go around and the waiting periods to see one were long, Mr. Beattie said.

“It’s about 44 additional requirements above the ISO certification,” Mr. Beattie said. If there’s a noncompliance issue, he said, “you have to fix it, resubmit it and at the end we had to have another audit done, so it’s very time consuming, there’s no doubt about it.”

Was it worth it?

“I’m getting a lot of people asking that question — ‘Hey, is this helping you?’ It’s not like we got API-certified and now people are beating down our door to do business with us, and I don’t anticipate that to happen,” Mr. Beattie said.

Instead, he said his company sees the process as a long-term investment that could be critical to getting more oil and gas business, especially as drilling continues in western Pennsylvania and eastern Ohio. n - Dan Shingler

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21

Money Matters

Betting on golden geese The Utica is making landowners wealthy -- and some of them want to invest their newfound money in shale. There are more than a few ways to do that, advisers say.

By Dan Shingler

S

uddenly rich landowners are getting a lot of investment advice these days, but it turns out at least some of them want to double down on the very thing that’s made them wealthy in the first place — shale gas.

“We see a lot of landowners who ask ‘How can I invest in shale?’” says Michael Vary Jr., a financial adviser with the Shale Valley Financial Group, which was formed last December by UBS Financial Services in Pepper Pike.

Markee Vary Mr. Vary, along with fellow adviser James Makee Jr., spends a lot of their time these days chasing tractors as they look for and meet with landowners they hope will become wealthmanagement clients. Like most financial advisers, they advise clients to hold diverse investments — and anyone relying on royalty payments already has a big bet on natural gas. But folks still ask how they can invest further in shale gas, Mr. Vary reports.

So, for those hellbent on doing so, Mr. Vary has some methods for investing in upstream, midstream or even downstream industries affected by the shale gas boom.

First, there are equities, and anyone can invest in Chesapeake Energy or other companies that have leased mineral rights in the Utica or any other shale play. But most investors don’t realize there are funds — known as unit investment trusts, or UITs — that invest in multiple energy companies, and some even allow investors to focus on a specific play.

“You can get a Marcellus (fund) or a Bakken, but they’ve not issued a Utica fund yet,” Mr. Vary said, though that could change if the play becomes big enough and there is enough investor interest.

Or, you can invest in a UIT that is more broad, such as a North

American shale gas UIT. They all attempt to reflect the performance of the industry or even a specific shale play, by investing in companies with the most exposure to those areas.

A similar strategy of equity investments also can be used for those interested in midstream operations, but the midstream gas gathering and processing business also offers investors the opportunity to put money into master limited partnerships, or MLPs. MLPs are securities that provide capital for specific midstream projects or companies, and they have some of the tax benefits of a limited partnership. Their income largely is based on the amount of gas that is processed or transported.

“When I think of midstream investments, I generally think of MLPs,” Mr. Vary said.

One chief difference between investing in a driller or a natural gas UIT, and an MLP, is that the MLP is not as affected by the price of gas. While a driller’s profitability is determined by the amount of gas that it finds and the price it is able to get for that gas, midstream companies depend more on volume than on the price of gas. For that reason, MLPs can reflect the success of a given shale play in terms of the amount of gas and other resources it produces, regardless of the price of gas, Mr. Vary said.

Lastly, there are the downstream industries, which include chemical companies, natural gas retailers, companies that make natural gas fuel systems for transportation and just about any other company that sells gas at the retail level or relies on it for feedstocks.

Much like the upstream companies, downstream companies can be invested in individually, or in funds that target certain sectors, Mr. Vary said.

There’s almost an unlimited number of ways to invest in the future of shale gas, including by building restaurants and hotels in drilling areas, as some private investors are doing, Mr. Vary said.

Just remember to diversify, he advises, because there are plenty of other investment opportunities aside from shale gas that most landowners should consider. n

UIT rates of return: PLAY BY PLAY Marcellus Shale 4 Fund Inception 1/13/12

Bakken Shale 6 Fund Inception 6/6/ 12

YTD

Since Inception

3 Month

6 Month

16.64%

15.0%

6.42%

18.36%

7.56%

9.42%

-2.75%

9.18%

• Rates or return do not include effects of transactional sales charges Source: First Trust/FTPortfolios.com First Trust Portfolios LP - Info as of May 13, 2013

22

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Watching the play

Moving forward

Chesapeake Energy has raised some eyebrows with its announced intention to sell much of its Utica mineral rights, but the company says it’s committed to the play and is completing its new Ohio headquarters east of Canton. SHALE magazine found workers busy erecting the building’s steel in May.

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23

Watching the play

Compressor stations: The industry needs them to move gas and drill profitably, but they’ll likely come with issues that some residents don’t like if not sited and managed properly.

By Dan McGraw

I

n the national debate over shale gas drilling, most of the arguments have focused on the drilling itself.

However, the next phase of the industry’s development in Ohio and other new drilling areas also may involve a contentious issue: compressor stations.

Compressor stations are needed to pressurize gas enough that it will move through pipelines. Usually, the stations are built on the pipeline routes at intervals of between 10 and 40 miles, depending upon factors such as elevation and pipeline diameter.

They are above ground, usually sitting on about an acre of property, and run on diesel fuel.

Compressor stations are not new and always have been a big part of moving and processing natural gas, which until recently involved mostly getting gas ready and shipped to homes and industry. Now, however, thanks to the huge jump in shale drilling, more pipelines are needed than before. They not only carry gas to end users, but also to processing plants, chemical manufacturers, fertilizer makers and a host of other midstream and downstream industries.

This means many property owners, from farmers to small-town dwellers, will be living near a complex that has diesel engines running 24 hours a day.

“Compressor stations and pipelines are emerging as a very important aspect to all of the shale drilling going on, and they are critical to getting the gas from the rig to the fractionation plants,” says Jeff Daniels, director of Ohio State University’s Subsurface Energy Resource Center.

“What is happening now is the midstream is driving the upstream of natural gas shale development, especially here in

the Utica Shale in Ohio,” Mr. Daniels says.

“The processing plants have to be fed. And we are looking at a substantial infrastructure development in Ohio that is going to be a huge part of the state’s economy for years to come.”

“Compressor stations and pipelines are emerging as a very important aspect to all of the shale drilling going on, and they are critical to getting the gas from the rig to the

”

fractionation plants.

Who’s in charge?

As with so many aspects of the drilling industry, different state and federal agencies have authority over permitting and regulating compressor stations. There is even some debate over whether local governments might have more say on where pipelines and compressor stations can be located in their communities.

Federal energy policy traditionally has classified oil and gas pipelines as public infrastructure, like roads and electric utility lines, and eminent domain can be used to acquire or access property for pipelines and compressor station sites. Where it gets a little tricky in Ohio and in other states is

the differing agencies that get involved in the permitting and planning process.

The Ohio Department of Natural Resources regulates and permits “gathering lines,” which basically run from the wellhead to the processing plants. The Ohio Power Siting Board regulates “intrastate” lines not part of the gathering process, usually smaller lines that might link different plants located within Ohio.

The Federal Energy Regulatory Commission (FERC) regulates “interstate” pipelines, which are usually those that are part of the overall national energy delivery system. The inspection and oversight of the interstate lines in Ohio is done by the Public Utilities Commission of Ohio.

Meanwhile, the U.S. Department of Transportation writes the safety requirements that pipelines and compressor stations must follow, while the Ohio Environmental Protection Agency is responsible for the impact the facilities have on air and water quality and other environmental issues.

For most federally regulated public infrastructure projects, local governments have little sway over eminent domain issues. However, the Ohio Power Siting Board does say on its website that “compressor stations may fall under the jurisdiction of certified local building departments, where applicable.”

Feisty communities Matt Warnock, an attorney with Bricker & Eckler in Columbus, says the regulating agency overlap “does get a little murky at times, especially when talking about new compressor stations.”

“The courts have almost always ruled for the energy companies when private property owners oppose eminent domain, but I continued on page 34

24

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Seeking Help/ from page 13

Ryan Mastowski

Others are moving here from out of state, but becoming full-fledged Ohioans, such as southwest Pennsylvania native Ryan Mastowski. He seized an opportunity to relocate to Rettew’s office in North Canton and to help train and develop local staff for its sister company, Rettew Flowback Inc. (RFI), which manages the water treatment needs of shale oil and gas exploration.

“After discussing the opportunity with my wife -- fiancée at the time -- we agreed to move to the Wadsworth area to start our new lives together,” he said. “The opportunities in the Utica Play and the ability to help train local staff are what made me want to head back to Ohio.”

Mr. Mastowski, 28, is the site manager for RFI’s water treatment division in Ohio.

“To operate our treatment unit, we hired 16 local employees – 30 percent of whom were returning military veterans – who were trained by our staff who cut their teeth in the Marcellus, bringing our collective experience to Ohio while still growing a local workforce,” he said. “As our business in the Utica continues to grow, our local staff has been promoted from within to reduce our out-of-state workers in Ohio and further develop our business.”

When Mr. Mastowski first came to the area, he was commuting and staying in hotels, he said.

“In 2012, we found a local property owner in the area of our job site and rented a great house from him in Carrollton for several of our staff to use for the project,” he said.

Then he and his wife started looking for a place to live and decided they want to be closer to Cleveland and narrowed the search to the Akron area.

The pair settled on the Wadsworth area and decided to build their first home together with Ryan Homes. Their home was completed in August and the couple moved in that month.

“My wife is not working in the industry, but she was quickly able to find a job in the community. The area has all of the amenities you could ever need, while still retaining the small, local businesses that we like to shop at,” he said.

“While leaving your home is never easy, the communities we live and work in have been wonderful and we continue to explore the area and find new local attractions to visit.”

Waterjet Cutting Specialists

Matt Hammer

When Matt Hammer entered the environmental consulting field in 1999, he just missed the industry heyday when jobs were easy to get .

“The job market was pretty limited for someone in my role,”said Mr. Hammer, now senior project manager at Hull & Associates, Inc. in Bedford, Ohio.

That all changed in 2011, he said. There was a buzz about the Marcellus shale activity in Pennsylvania and the promise of what could be unearthed from Ohio’s Utica shale.

Suddenly he had three job offers to work in this new shale industry. In January 2012, he joined Rettew’s Canton office and in September, he was recruited to join the team at Hull & Associates.

“Since I’m a native Ohioan and I grew up in Akron, what was exciting to me was that there was this whole new industry here and all this new investment, economic benefit and money, not a reallocation, but new money coming to Ohio,” said Mr. Hammer, 38.

“The fact that geology was driving the bus – and I’m a geologist – I personally have never seen anything like it in my arena and in what I do in Ohio. That’s why I wanted to be a part of it if I could.”

And he was able to realize these new opportunities without uprooting his young family which includes two sets of twins, 6-yearold boys and 2-year-old girls.

He says work in the shale industry is fast-paced and rewarding.

“It’s value-added and a part of the process of bringing something to market. It feels like you are producing and not taking away from the economy,” he said. “Decisions are made quickly in the shale gas world. You have to be able to be confident and secure in your opinions. You feel more like a consultant than just filling out forms.

In the environmental world, you check a lot of boxes.”

The new jobs coming to Ohio have positively impacted the opportunities for environmental consultants in and out of the industry, he said.

“For someone with my background in this arena, the job market is a lot better because of shale gas, whether you are doing shale gas or not, because it’s pulling people into shale gas which then leaves openings in other areas in environmental and solid waste,” Mr. Hammer said. “For the folks in the early to mid-stage of their career, we can probably ride this out. This is our boom.” n

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25

No room for compromises A driller and evironmentalist find they have little in common and even less they can agree on when it comes to shale gas.

By Dan Shingler

I

f you want to know how far apart environmentalists and drillers are on the subject of fracking, Chris Faulkner and Michael Brune would be more than happy to tell you.

Mr. Faulkner, CEO of Dallas-based Breitling Oil and Gas, and Mr. Brune, executive director of the Sierra Club, got together for a series of interFaulkner views in early May, including one with SHALE Magazine.

It was not a love fest.

While generally respectful, the two men could not be further apart on even the most basic elements of energy policy — and they echo much of what we hear regularly from members of their respective camps both in Ohio and around the country.

Global warming?

“I believe climate change is caused by natural sources and that man contributes very little to climate change,” says Mr. Faulkner.

“That’s like saying that leprechauns rule the world . . . climate change is here,” blasts back Mr. Brune.

Renewable energy?

A “pipe dream” that wastes millions of dollars in the United States, where it will never supply even 10% of the nation’s energy needs, according to Mr. Faulkner.

No way, Mr. Brune counters: Renewable energy already is proving successful in places such as Germany and California, and only will get better, more efficient and able to meet more of our needs as we continue to develop it.

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Faulkner says we aren’t doing it fast enough, given how much money we spend abroad on oil, while Mr. Brune says we are drilling at a rapid pace toward inevitable accidents and disasters.

In about a 40-minute conversation, only two concrete ideas met with the approval of both men. They both think Brune that, if fracking is going to take place, drillers should need to disclose the chemicals they use in the process.

And they both believe the United States needs to abandon coal because it’s too dirty and there are better alternatives. Just don’t ask about the alternatives, because all agreement ends there.

Nonetheless, the two have done dozens of interviews together. On May 1, by noon when they spoke to SHALE, they’d already been on the phone with 20 local newspapers and radio stations around the country, with more interviews planned.

Why? They each want to draw more attention to fracking, because they think the public will side with them, if people research the matter and read the facts. They disagree, of course, on which facts should be considered.

There is one last thing they agree on: They both think environmentalists have gotten the upper hand on the oil and gas industry, by getting ahead of it and framing the conversation about fracking as a risky activity.

Which it is, or isn’t, depending upon whether Mr. Brune or Mr. Faulkner is talking. n

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Mineral rights cases lie ahead

By Jeff Ubersax

T

he boom in shale gas drilling has led to an enormous increase in the value of mineral rights where shale gas and oil are present. When mineral rights go from worthless toward priceless, they are suddenly worth fighting over.

That is why we’re seeing more lawsuits that involve Ohio’s Dormant Mineral Act. The act basically says “use it or lose it” if you own a severed mineral interest. An owner who does nothing with his interest for 20 years is deemed JEFF UBERSAX to have “abandoned” the interest, and the owner of the surface land gets it back. But if there has been any “savings event” — which could include any of a list of specified activities, from simply filing a statement of claim to obtaining a drilling permit to actual production — the interest is not abandoned. If the minerals are the “subject of a title transaction,” that also is a savings event.

The statute was enacted in 1989 and amended in 2006 with major changes. For example, the original version did not require the surface owner to take action, or even to notify the mineral rights owner, if he intended to claim that the rights were abandoned. Under the law’s newer version, surface owners must first notify the mineral owners that they intend to declare the mineral rights abandoned, and then file an affidavit to support their claim.

The 2006 act also armed mineral rights owners with a whole new means of contesting claims of abandonment by filing, after the surface owner’s notice, either a claim to preserve their interest, or an affidavit identifying a savings event that took place in the last 20 years.

But important questions remain over how to interpret the act in specific situations — and even over which version of the act applies. The answers are going to come from hard fights in a legal arena in which there is so far very little case law, but increasingly large amounts of money at stake. Several new issues have already

been brought up by surface owners, and others can be expected to arise.

For example, can a claim of abandonment still be made under the 1989 act? The original act became effective March 22, 1989, with a three-year grace period. Let’s assume that there was no savings event during the period March 1972 to March 1992, or any subsequent 20-year period before the act was amended in 2006. What if, now that new drilling techniques have emerged, the mineral rights owner wants to develop a gas well? Can the surface owner claim that under the 1989 act, the oil and gas already reverted to him automatically?

“When mineral rights go from worthless toward priceless, they are suddenly worth fighting over.

”

Or must he follow the notice and affidavit procedures of the amended act?

Today, in Ohio, that could be a billiondollar question, and the courts have not clearly answered it. There are recent unreported common pleas decisions going both ways.

Other key questions involve “title transactions” as savings events. Has the mineral interest been the “subject of a title transaction” if there is a recorded oil and gas lease? Surface owners say no; the lease is just a license and does not affect title. Mineral owners say yes; the lease conveys an estate in the oil and gas. One court agreed with the mineral owners in a March decision.

What about a sale of the surface where the deed does not convey any minerals, but mentions the original mineral reservation?

When that happens, is the mineral interest the “subject of” the title transaction?

Courts have split on this question, in de-

cisions that came out last October and as recently as March 20, 2013.

Yet another key issue is how the 2006 procedures work.

Assume that the surface owner serves a notice under the amended act, and there has been no savings event in the preceding 20 years. Can the mineral owner still preserve this interest by filing a claim?

Surface owners have argued that under the amended act, the mineral interest “shall be deemed abandoned” if no savings event has occurred “the twenty years immediately preceding the date on which notice is served;” if a claim to preserve a mineral interest is not filed within the 20 years before the notice, it is too late, they say, and a finding of abandonment is mandatory.

But the amended act gives the mineral rights owner 60 days — after receiving notice — to file not just evidence of a previous savings event, but a new “claim to preserve the mineral interest.” Why would the legislature specifically provide for filing a claim after the notice, if the claim would have no effect? Its intent seems to have been to give mineral owners a last chance to hold on to their interest.

We will see all of these questions and many others answered more than once in cases to come.

For landowners and the holders of mineral rights, it is now crucial to review all documents of record concerning any shale property, determine the status of the mineral rights under applicable law, and file whatever notices, claims or affidavits are required to gain or retain ownership of these valuable minerals. n Jeff Ubersax is a business and tort litigation partner in Jones Day’s Cleveland office. He represents mineral rights owners in a variety of shale-related disputes, including suits by surface owners to enjoin the removal of natural gas by horizontal drilling and “fracking.”

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Frack or Fiction/ from page 7

The executive’s request for anonymity is not surprising. It’s not just bad luck to talk ill of drilling prospects in the oil and gas industry. It can be costly, too.

Such talk can depress the value of mineral rights, and if those rights aren’t owned by one company, they are likely owned by one of its big customers. It’s like a multibillion-dollar poker game, and everyone with money in the pot is eager for more players, more drillers and more pipeline developers.

Misguided thinking But there are also observers who say the people who think the Utica is a bust are missing the point. The play’s recent bad press has been centered around its poor oil production, but oil was not the Utica’s major attraction from the start. “Wet” gas that contains not just methane, but ethane and other valuable liquids, has been the major lure for drillers.

Oil, if it was found and successfully extracted, would be a bonus.

Some analysts also took issue with the supposed disappointment that Ohio might not contain the $500 billion of oil that they say only the uninformed really were expecting. That half-trilliondollar figure comes from a 2011 presentation made by the Ohio Department of Natural Resources, but it was given with several caveats that since have been ignored.

The $500 billion figure was used as the upper end of a wide range of estimates of the play’s total resources, said one local analyst who asked to remain anonymous. It was never an estimate of what drillers would produce, but a “what if,” recalls Allen Brooks, a longtime industry analyst and consultant in Houston and author

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of the popular industry blog “Musings from the Oil Patch.”

“I thought he did a good job of presenting how the number could be very disappointing or very prolific,” Mr. Brooks said of the 2011 presentation by former ODNR geologist Larry Wickstrom. “But the real message was: ‘Hey guys, we’ve got a couple of years before we know which end of that spectrum we’re going to be on.’”

It’s all in the pipeline But perhaps the biggest reason many experts say they still have faith in the Utica play is the amount of midstream development planned for Ohio. Midstream companies already have begun to spend what they say will be billions of dollars on pipelines to gather and transport gas, as well as on processing facilities used to separate wet-gas components and make methane more compatible for pipeline transport.

Until that midstream infrastructure is in place, the Utica will not develop and the data that comes out of it will be suspect, says Tom Stewart, executive vice president of the Ohio Oil & Gas Association.

“I’m going to look at (well results) with a somewhat jaundiced eye. I imagine some of these great wells are being restricted,” Mr. Stewart said, explaining that unless drillers can separate valuable liquids from their gas, there is little reason for them to begin production.

Mr. Stewart said the very liquids that have drawn drillers to the Utica are a liability without processing infrastructure, because drillers must pay to transport their gas to distant places, or process it on site at high cost.

MarkWest Energy Partners’ processing plant near Cadiz, Ohio was well under way as construction continued in May. “People misunderstand what it’s all about,” Mr. Stewart said.

“If you’re going to produce wells with extremely high flows under high pressure — which is a characteristic of a resource shale play — you have to have infrastructure in place that can gather the gas and have it enter the interstate pipeline grid.”

That infrastructure is coming, as companies such as Oklahomabased Access Midstream Partners and Dallas-based Caiman Energy continue to expand and explain their plans for the play.

At April conferences in Canton and Pittsburgh, the Utica’s major midstream developers made it clear that they are in close contact with drillers and are expecting massive amounts of natural gas and other hydrocarbons to fill their pipelines and keep their processing facilities busy. Because they partner with drillers and work with them on long-term contracts, midstream developers have an excellent view of the play not afforded most other observers.

“You don’t see many pipelines that are built and then abandoned in a few years,” said Mr. Brooks, the blogger. “When people do that (build pipelines), they’re confident that the resources are there and they’re betting the play will be productive.”

Degrees of happiness But a Utica play that is focused solely on natural gas, wet or dry, still might be a smaller development than one with oil, too, even some optimistic drillers say.

“The core is smaller than I think was anticipated and that the hype would have hoped it would have been,” said Randy Albert, chief operating officer of Consol Energy’s gas division, which has about 200,000 acres in the Utica that it’s developing with Hess Energy.

But hate the hype, not the play, says Mr. Albert — there was just too much hype about the Utica to begin with, as there often is with a newly discovered shale play.

“There was a lot of hype surrounding the Utica early on, that Ohio was going to be maybe the next Saudi Arabia,” Mr. Albert said. “I don’t think it’s going to be this huge overarching biggest play in America that it may have been touted as, but the core of it is going to be very prolific. If you’re a landowner and you have acreage in the productive core, you’re going to be very happy. If you get away from that core in either direction, you’re going to be less happy.”

But Consol is so far very happy with what it’s seeing from its wells, said Mr. Albert and Consol Energy’s general manager for its Utica operations, Harry Schurr III. The company has drilled wells in a 12-county area, and thinks it understands the play well.

It’s moving forward with its plans to drill, focusing on the areas it knows are in the core and especially those that are near new pipelines to take away their gas.

Like many others, Consol’s executives preach patience. The early days of a new shale play are often fogged, but things will clear soon, said Mr. Schurr.

“That competitiveness that goes on in the early parts, the exploratory parts of the play as it’s evolving, is also what makes it difficult for the play to be defined better,” Mr. Schurr said.

“After the land grab and people have all their poker chips and are trying to make their hands, now they have to start trading information and that’s when the whole play will really be better understood. You have a better free flow of data because there’s no real competitive first-mover advantage.” n

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Chill baby Chill/ from page 8 Mr. Thomas might in fact be speaking conservatively. Chart already has pulled this trick, nearly doubling its sales from $555 million in 2010 to more than $1 billion in 2012.

The more natural gas is brought up from the ground, the more it’s moved through pipelines, processed into chemical ingredients and compressed into a liquid fuel. And Chart sells more equipment.

“Our air-cooled heat exchangers are used on compression equipment for boosting gas pressure at the wellhead and around processing plants to get it up to pipeline pressure,” Mr. Thomas said. “Then, our brazed aluminum heat exchangers are used at processing plants for pulling off ethane and at fractionating plants.”

Natural gas is not Chart’s only market; the company makes equipment to handle and process other industrial gases. But shortly after becoming CEO 10 years ago, Mr. Thomas said he began focusing the company more on equipment used with natural gas.

That was when natural gas was already being eyed as a cleaner fuel then coal, but before fracking dramatically increased access to gas trapped in shale formations.

Since about 2008, though, it has been apparent that natural gas was going to be a bigger phenomenon affecting Chart, as well as the entire energy market, than even Mr. Thomas envisioned.

That’s been going on as one shale play after another has been discovered and drilled across the United States, Mr. Thomas said.

Today, he’s eying proposed projects such as Gulf Coast liquification plants and Shell’s proposed $3 billion ethane cracker in western Pennsylvania.

“For the last three years, gas processing plants and fractionation plants were one of our larger markets in the U.S.,” Mr. Thomas predicted. “Over the next couple of years I would anticipate that LNG liquifiers and ethylene and propylene plants would be among our largest markets.”

Driving markets abroad There are other markets too.

Internationally, Chart sells into the liquid natural gas, or LNG, industry, which produces highly compressed natural gas used

A pipeline to profits Chart’s riding the wave like gas through a pipeline.

As soon as gas is pulled from the ground, it needs to be compressed so that it will have enough pressure to move through pipelines. So Liquified and compressed natural gas are both used as motor fuels with Chart’s equipment.

Chart sells to pipeline operators and midstream companies. principally as a transportation fuel. Countries such as China are Gas also needs to be compressed and cooled to be moved ahead of the United States in terms of adopting LNG as fuel. through processing plants and for its valuable liquid ingredients In late April, Mr. Thomas had just returned from China with to be separated out, so Chart sells to major energy companies as a new $45 million contract with PetroChina, which uses Chart well as other big companies that process petrochemicals. equipment to process, store and distribute LNG. It’s the second “If you produce ethylene from ethane or propylene from protime the company has won a big contract with the Chinese compane, then it utilizes our heat exchangers and cold boxes in those pany’s gas group this year – Chart won another $40 million conprocesses,” Mr. Thomas said. tract with PetroChina in February.

As drilling and production increased, so did demand for Closer to home, more LNG opportunities are coming, Mr. Chart’s equipment. When the new sources of gas prompted the Thomas said. There are already efforts under way to produce construction of additional processing plants — a condition that is LNG so the United States can export natural gas to other nations, ongoing — Chart saw still more demand.

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and Chart likely would make equipment used in those multibillion-dollar facilities, he said.

Meanwhile, the company is working with transportation industries to help them use LNG as a fuel for trucks and railroad engines. That’s a major reason Mr. Thomas said he thinks the company is not yet done with its rapid growth.

“We haven’t come close to the potential,” he said. “As an example, there will be probably 5,000 new LNG vehicles this year on the road and 10,000 natural gas vehicles in total (in the United States). Next year, we will probably be close to double that number and it will go up in multiples each year after that, not just doubling but three to five to 10 times.”

Getting noticed The company’s success has caught the attention of investors.

A share of Chart could be had for less than $10 in early 2009.

But in May, that same share cost nearly $80, thanks to a rapid run-up in its price driven largely by sales related to natural gas.

Minneapolis-based Lake Street Capital initiated its analyst coverage of Chart in January, noting “We believe Chart Industries is in a strong position to capture growth from a global secular shift toward natural gas as an energy source. The early stages of this shift (global LNG export facilities, expanding LNG use in China) have helped Chart’s backlog triple since 2010. Looking forward, we see several new multi-billion dollar market opportunities developing that should drive a long tail of growth for the company.”

A casual observer of Chart’s income statements might think the company has been swept up in a whirlwind of new sales that it could never expected, and that Chart would constantly be playing catch-up with both its production and its earnings estimates.

But it’s not really that way, Mr. Thomas said. Natural gas projects very often are large and involve months or years of planning — not to mention how long it takes an entire industry like trucking or railroads to make a fundamental change.

“It doesn’t happen that fast, that you think of it in quarterly or monthly earnings revisions,” Mr. Thomas said. “The cycle for these projects, from the time you win the order until you deliver the equipment is typically over a year and some of these are developing markets.”

For instance, before trucks can convert to LNG, they need distribution and fuel stations in place. So Chart might spend a few years selling equipment used by fueling stations before trucks themselves are outfitted with Chart’s fuel storage tanks.

Sometimes, the company helps with the development, because Mr. Thomas is convinced the long-term payoff will be worth the wait, especially if Chart can dominate a market in the process.

That’s the tactic the company is taking today with railroads.

“We’re involved in several demonstration trials that will take 18 months to pay off, but we fully anticipate the railroads will convert to LNG,” Mr. Thomas said.

In the meantime, he said, there are still plenty of pipelines and processing plants left to supply. n

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Carrolton / from page 11 gas and oil below these residents, but it’s Carroll County’s sales tax numbers have begin until production ramps up and roytheir duty to manage it now that it’s been increased dramatically: the sales tax col- alty checks start coming in, say both landfound, they say. They just hope they reap lected in the county increased by $648,000 owners and energy companies. From that from 2011 to 2012, as receipts rose from point on, the price of natural gas will play the benefits too.

The leasing activity is pretty much fin- $1.93 million to $2.6 million over those a big role in how much money pours into ished, but the next phases — well drilling, two years. The gain could be even bigger Carrollton and other drilling hot spots.

There are some in Carroll County who building pipelines, compressor stations, this year. In February 2012, the county colprocessing plants and more — are just lected $176,000 in sales tax; in February think the payoff certain residents will get is not worth the change that everyone agrees starting. There will be billions of dollars 2013, it collected $252,000.

Recently, some have said they are seeing will happen. invested in eastern Ohio over the next few Riding along the curving two-lane roads years, and everyone agrees that this sleepy economic activity flatten out a bit around county of rolling hills and dairy farmers Carrollton, but most folks think that is only — with only an occasional truck from the will be quite different when all is said and a short phase and that the boom will again drilling companies passing by — Paul pick up pace once the midstream infra- Feezel and Al Kemerer of the Carroll Condone. cerned Citizens group point out Carroll County has about 200 every rig pad, water storage pond permitted shale wells, almost and tree cut down for pipelines. three times as many as any other Mr. Feezel, 52, is a business Ohio county, but only about 20 consultant who bought land with have been drilled and only about his wife in Carroll County to get half of those are producing. The away from the city and have a nice wait, of course, is for midstream place to retire. Mr. Kemerer, 76, infrastructure to be built in and was born and raised in Carrollton around the county, and that takes and has worked in his own busitime. ness as a mechanical engineer.

Cardinal Gas Services is buildBoth think that Carroll Couning more than 200 miles of pipety is not going to crumble so much line at a cost of about $1 billion, from the rigs themselves, but from which will help move gas from all the pipelines and engines from local wells. More gathering and compressor stations and the proprocessing lines will certainly be cessing plants that will be inside needed. and just outside the county.

Two cryogenic processing plants “Think of when that processare being built in Kensington ing plant near Scio gets finished,” (Columbiana County) and LeesMr. Feezel says. “They are preville (Carroll County), with andicting that eight, 100-car trains other fractionation plant — which a day will be filling up there — separates and ships all the butane, plus all the trucks transporting all propane, ethane and remaining the ‘tanes. Then think about all dry gas — being constructed near the pipelines that are going to be Scio in Harrison County. moving these dangerous materials Together, the three facilities throughout the county to the other will be able to process about 800 processing plants. They are movmillion cubic feet of gas per day, ing very quickly on what is a very with the Scio plant moving the dangerous industry, and this is all liquids out by rail and truck and for 100 or so jobs.” pipeline. Each of the three plants, He continued, “I don’t think to be operated by M3 Midstream Folks like Jason Shankleton, who opened an equipment rental business near Carrollton in May for the Akron-based that people have thought much Momentum, expect to have about Leppo Group, are fueling the area’s growth. about what we are going to be25 to 30 employees when completcome. We are going to be moving ed in the next 12 months. hundreds of million of cubic feet But economic activity of all sorts is on the rise in Carroll County, due to structure gets put in place and the liquids of fuel through this area every day. We are going to have processing plants running an influx of drillers, pipeline builders and start flowing.

In some ways, midstream money al- 24 hours a day and all the truck traffic that processing plant construction workers.

They buy gas for their trucks at local ready is flowing, with property owners goes with that. The economic impact is gogas stations, food at restaurants and spend getting about $15 a foot for pipeline ease- ing to be worth it for a few, but in the long their nights at local hotels. Because of that, ments. But the real torrent of cash won’t run, the folks here in Carroll County are

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going to be giving up why they live here in the first place.

“We are going to be more like Houston, Texas, and I don’t think many people who live here want that.”

But for many, the influx in drilling and energy processing plants is long overdue.

“We have been the forgotten part of the state for a long time,” says Glenn Enslen, the recently retired director of Carroll County Economic Development. “We’ve always had unemployment at around 15%, and basic things like water, sewer and electric lines haven’t been up to par in many parts of this county. It’s time for us to stand up and take our shot.”

Mr. Enslen also says the economic impact goes beyond the jobs at the processing plants.

“Dairy farmers are getting a break after years of getting practically nothing,” Mr. Enslen says. “A welding company just moved in, the village hardware store just added a new addition, and I noticed the Speedway gas station had five people working the other morning when they used to have two. The point is that we can

manage this and take advantage of it at the same time.”

At Huebner Chevrolet, they are still selling more vehicles than ever before, but things have flattened out a bit.

Josh Cole, sales manager for the dealership, says “the signing bonus days are about over, but I’m sure over time we will see an influx of people living here, but not ruin the nature of what this county is. In many ways, the drilling industry is going to keep the agriculture industry going.”

For Carroll County commissioner Jeff Ohler, now is the time to take a breath and plan for what the future will bring. With the growth comes costs, too. The Carroll County Sheriff’s Office responded to 40,000 calls in the first four months of this year, compared with half that number during the like period in 2012.

“Most of those were traffic incidences, but we do have to find ways to improve our road system and maybe get the drilling operators to drive a little safer,” Mr. Ohler says.

Mr. Ohler said that several hotels have done some preliminary work in deciding

if they want to open in the area; a water treatment plant has been discussed in preliminary phases, as has a power plant run by natural gas and a propane storage and distribution operation that would ship the fuel throughout the country. Many rural residents rely on propane for their fuel.

“We have to be ready to look at this in the long term,” Mr. Ohler says. “When the wells start producing, we are going to have an increase in taxes, and we have to use that for community centers and parks and better services. And no one thinks we will ever become urbanized, but we will have more people and have to manage that.”

Change is inevitable, Mr. Ohler believes, but it can be managed.

“In 10 or 15 years, this is going to be a different place,” he says.

“We didn’t push for all this change,” according to Mr. Ohler. “But it is happening here right now and into the foreseeable future, and we have to be smart about what we do. And I’m very confident we can do that.” n

Cars / from page 15 CNG passenger car, the Civic GX, for North American consumers.

Despite the low and stable price of wholesale natural gas, lack of vehicle models and fueling infrastructure remain key concerns.

In North America, the growing infrastructure is focused on serving fleet customers, which likely will limit growth of passenger cars here, according to Pike Research.

Consumers also have other choices.

“One of the reasons why electric plug-in vehicles have received greater consumer acceptance is ease of refueling,” explains Pike Research analyst Dave Hurst. “They can be plugged in anywhere.

Operating costs are another factor. Natural gas is running at about $2 per GGE at a station, whereas an electric vehicle operates for pennies. It only costs about $3 in electricity to recharge the entire battery.”

“It’s hard to beat electric vehicles for total cost of ownership,” Mr. Hurst said. “But there are cases where natural gas vehicles make more sense, such as taxi fleets. Also, electricity may not be a very good fit with bigger vehicles. Natural gas is a good option for large trucks and the long-haul trucks using liquefied natural gas.

It’s not a competition. There’s room for all of the different vehicle technologies.”

Conversions heat up Indeed, companies in Northeast Ohio see potential new sales coming from the NGV market. SSP Inc. of Twinsburg has created a subsidiary called AFV, which is dedicated to providing an endto-end solution to companies that manufacture and retrofit CNG

vehicles.

“Through joint efforts in upfront design and by using modern production technology, AFV is working with automotive OEMs, major automotive converters and retrofitters, as well as automotive design companies,” said David King, SSP’s chief operating officer.

“We offer complete fuel line systems and essential components as completed assemblies, ready-made to drop in at the production station.”

SSP is optimistic about the outlook for NGVs and the natural gas industry as a whole. Mr. King says both consumers and fleet operators are becoming more sensitive to the environmental impact of the existing fuel technology and the increasing costs of petroleum fuels.

“NGVs are on the verge of dramatic and dynamic growth,” Mr. King said. “Passenger vehicles are coming, but fleets and trucks will be the next three- to five-year growth areas. This is due to the fueling infrastructure, which is growing but still underserviced for consumer needs. Fleets like UPS, city buses, delivery trucks and service trucks typically return to a central service center, where refueling and vehicle service occurs.”

With regard to price, Mr. King said today’s prices for natural gas conversions are a function of low volumes. Prices likely will drop as volumes grow and manufacturing efficiencies begin to have an effect. But, so far, fleet operators are happy with their costs, according to Mr. King.

“Companies that have converted their fleets to natural gas have been pleasantly surprised at how easy and affordable it was,” he said. n

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Hoping in Numbers / from page 16 of landowners than to send landmen across the county to gather them individually.

The group’s members also get some marketing help.

Member-owned land is displayed on maps at the group’s Middlefield headquarters, allowing drillers or other interested parties to quickly get a picture of where and how much acreage is available.

Business, at least on the membership side, is brisk. New landowners show up every week, the three men say. As they spoke on a recent Saturday, a local Amish farmer came in and signed up as a member, putting his 100-acre farm among those listed as available to interested drillers.

So far, there have been no takers though, even as landowner groups to the south have been able to sign lucrative deals to lease their mineral rights. Indeed, Eastern Geauga Landowners concedes

it hasn’t yet received even an offer to lease its members’ acreage.

The group is not worried, though, say its founders. Shale plays take time to develop, and their landowners are not desperate to sign deals right away. The thumper trucks continue to vibrate much of Geauga County in a continual evaluation of its geology and the pipelines that will be needed to carry away gas and oil aren’t even built yet. It’s better to get the right deal later than a bad deal today, they preach. Besides, they say, he who signs last often laughs loudest in the shale gas and oil business.

“The people in North Dakota who got $25,000 an acre (in the Bakken shale play) were not the first people to sign leases,” Mr. Henry said.

Shale drilling will continue in Ohio, said Mr. Dolezal, adding that he’s confident it will come to Geauga County as well.

“I’m not at all concerned,” he said recently about the prospect that the Utica might fizzle, or might not reach his area. “It will come, and we’re not in any hurry.”

If and when it does come, drillers might be glad that the group formed. In some cases, Eastern Geauga Landowners members have enough land to offer entire townships for which drillers can lease mineral rights.

“We’re hoping we can do at least one driller per township,” Mr. Henry said. n

Compressor Station / from page 24 expect more challenges by local governments to establish things like expanding setback rules from occupied homes,” Mr. Warnock predicts.

State law currently does have some setback requirements when the pipelines are classified as being in “urban” areas, but what defines an urban area is quite vague, especially in rural counties.

Judging by what has happened in other places, court cases in Ohio likely will involve air-quality issues associated with compressor stations. A community group in Dish, Texas, has fought compressor stations near its community for about five years, and recent tests sponsored by the group found that benzene, a carcinogen, exceeded the state’s threshold exposure. The state agency that regulates the compressors, however, said the levels measured at the site would not present health problems unless they persisted for decades.

Another community group, in the town of Marysville, Md., has sued in federal court to prevent Dominion Transmission Inc. from building a pipeline and compressor station within the town limits. Their ar-

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gument is that local and state laws regarding air emissions should supersede federal polices.

The Interstate Natural Gas Association of America has countered in court that stopping the project “would mean, in effect, that a single town can veto a $112 million, FERC-approved interstate pipeline project spanning three states” and would set a precedent that local communities across the country could stop any pipelines from being built because a compressor station is being built above ground that they do not want.

States know what’s up Jonathan Airey, an attorney for Vorys, Sater, Seymour & Pease, said Ohio’s 2012 changes to its energy laws under Senate Bill 315 have strengthened state regulatory powers and weakened home rule. The law also added stricter requirements on the construction of pipelines and compressor stations in rural areas, where the previous laws had few requirements.

Some have questioned whether states, rather than the federal government, should have regulatory control over infrastructure

such as compressor stations. Mr. Airey thinks regulatory power should reside with the states. Federal regulators, he says, “are often very slow to respond on many of the issues, and state regulation has proven over time to be far more efficient and more responsive to local citizens’ issues.”

Ohio State’s Mr. Daniels agrees.

“The states know what is going on in the subsurface better than the feds,” he says. “And what is going to be needed now in Ohio, is to get coordination going on the midstream infrastructure. And that includes planning and being open on compressor stations, and to let people know how important this infrastructure is in the larger issues of our statewide economy and national energy policy.”

But no matter who ends up with or keeps regulatory authority, just about everyone agrees on one point: The United States and states such as Ohio, in particular, are about to see a lot more compression stations up and operating. And they’ll likely have to wade through a lot of contentious debates and even lawsuits over where they can be placed and who is in charge of their oversight.n

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DAVID I. MANSBERY President Duck Creek Energy, Inc.

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David considers himself a “serial entrepreneur” and has relied on Benesch for a multitude of business needs. From handling real estate, leasing, litigation and general business matters for Duck Creek Energy to navigating the successful sale of a prior business and its intellectual property to incorporating a new venture, Benesch has the breadth and depth to help David go wherever his ideas take him.

To learn more about our relationship with Duck Creek Energy, visit beneschlaw.com/myteam

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Featured attorneys (left-right): ROBERT A. ZIMMERMAN, LORI H. WELKER, DAVID MANSBERY, JR., DAVID R. MAYO and JOSEPH G. TEGREENE © 2013 Benesch Friedlander Coplan & Aronoff LLP