Shale Magazine, December 2012 by Crain's Cleveland Business

mIDStreAm InFrAStrUCtUre—tHe InDUStry’S toP PrIorIty In 2013

here comes the...

UTICA!

Eastern Ohio gets a gusher of development activity

Waste Water?

will recycling eﬀorts slake drillers insatiable thirst?

regulator recruitment

ohio begins its search for well inspectors to keep up with drilling www.SHALEmagazine.com

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Fight for Rights The end -game for mineral rights leasing? Lead Advertiser

December 2012

letter from the editor

An earth-shattering boom No matter what you think of fracking, the fact that shale gas is moving billions of dollars in Ohio is not up for debate. A single company, Chesapeake Energy, has spent more than a billion dollars on mineral rights in Ohio. There’s close to a billion dollars being invested in Youngstown steel mills and processors alone. On top of all that, there’s well over a billion dollars in announced midstream spending, not including the $3 billion to $4 billion expected to be spent on a “cracker” by Shell in Pennsylvania to process Marcellus and Utica gas. And that doesn’t begin to tell the whole story. The impact of shale gas is not merely impressive; it’s mind-boggling. More importantly, to a journalist at least, it’s amazingly interesting. You see, when you write about business for a living, you can get through quite a few dinners and parties without anyone asking much about what you do. But let some friends or uncles find out you write about “shale gas,” and suddenly everyone wants to sit next to you at Thanksgiving. “Is it really as big as they say?” “How does it work?” “What do you know about mineral rights?” “Is this why our cousins in Canfield all drive new trucks?” “Should I be learning about this stuff?” (Yes.) To a journalist, questions like those are proof that you are on to a great topic. More than a year ago, we began to see this emerging industry affecting the other businesses we were already writing about at Crain’s Cleveland Business. Manufacturers were making parts for gas processing plants or natural gas vehicles. Lawyers were chasing clients with mineral rights issues. Banks and investment firms were fawning over the newly rich folks out in the country. Truckers were trucking, motels were filling, restaurants were serving — heck, even steelworkers suddenly were in high demand. So when someone asks why we started a publication called Shale, I tend to think, “How could we not?” Who wouldn’t want to tell the stories of how the biggest thing since the automobile is affecting our state, its residents and the economy that supports us all? We are not going to pretend to be experts on every aspect of this stuff right off the bat — but we’ve found some very good experts to help us, and we’ll find more. I hope you’ll join us, because yes, it really is as big as they say.

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

AD SALES MANAGER nicole Mastrangelo

MARKETING DIRECTOR lori yannucci grim

CONTRIBUTING WRITERS Chris Cortelesse

Doug livingston

Tim Francisco

glenn Morrical

Chrissy Kadleck

Jim rike

alyssa lenhoff

Carter Strang

CONTRIBUTING PHOTOGRAPHERS Stephen herron

CONTRIBUTING GRAPHIC DESIGNER Kristen Wilson

SENIOR ACCOUNT EXECUTIVE adam Mandell

ACCOUNT EXECUTIVES 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

Dan Shingler editor 216-771-5290

them at customerservice@crainscleveland.com. 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 06 What’s next Nearly every community in Eastern Ohio is getting a boost from shale gas

08 A Long-term relationship Midstream developers have big plans for their Utica investments

10 Coming to terms Rachel Hanni and her family got the lease of their lives

12 2012: The year of the lease The whirlwind is gone, but the dust hasn’t settled for mineral rights leasing

16 Water recycling The cure for drillers’ drinking problem?

26 Eyes of the state Ohio begins its quest to hire inspectors to keep up with the pace of drilling

MoneY MAtterS

WAtchInG the pLAY

14 Chasing shaleionaires

30 Go east young man

Suddenly, rural landowners are wealth managers’ best friends

15 fifth Third banking on shale Bank hopes to grow by snagging Texas oil lenders

SUppLY chAIn 18 Cashing in on stashing waste Driller Dave Hill finds new profits in the injection well business

20 Parker Hannifin finds big growth in oil and gas

Cleveland-based industrial giant targets the shale gas market

Nebraskan Scotty Clark finds work and a new home on Ohio’s Utica

32 So far, so good It’s too early to say for sure, but the Utica’s early drilling results look promising

35 In shale gas, the

numbers are rigged Want to know how many wells will be drilled in an area? Count the rigs!

39 Terms of enrichment Words to know if you want to talk shale like a roughneck

28 New market for an old-line manufacturer

Philpott Rubber finds a partner to go after drillers’ business

Photo courtesy of Chesapeake Energy

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What’s

Brookfield Youngstown Canton

Carrolton

NEXT? By Tim francisco

East Liverpool

Massilon

Zanesville

Get ready — Eastern Ohio will spend 2013 engulfed in a massive build-out to support a shale gas industry that many folks hope will forever change its economic landscape. From the development of midstream infrastructure like gas pipelines and processing plants, to the construction of giant steel mills, manufacturing plants and oilﬁeld service operations to keep drillers supplied, nearly every town in the region is boasting of new investments. At the epicenter of much of this activity is Youngstown, the site of V&M Star’s highly publicized $700 million investment in a new steel mill and related processing facilities – and that’s not the whole story there, just the biggest so far.

Marietta

Brookfield: TMK-IPSCO / $10 million / 50-120 jobs / Oilfield services facility

Canton: Chesapeake’s headquarters in Louisville (just east of Canton)

Carrolton: Current capital of drilling in Ohio. Approximately 150 drilling permits issued for the county since the beginning of 2011

East Liverpool: U.S. Silica / Sand transport facility

Marietta: Marietta College, enrollment in petroleum engineering rises from 250 to 400 students in 2012

Massilon: Baker-Hughes / 700 jobs / Oilfield services

Youngstown: Exterran / $13 million plant / 100 jobs / Oil and gas drilling services :: v&M Star / $700 million / 350+ jobs / Steel mill

Zanesville: Halliburton / $35 million to $50 million (estimated) / 300+ jobs / Transportation hub

attractive to these companies,” Mr. DeHoff said. Mr. DeHoff said Stark County’s residential rental market is also getting a boost from oilfield workers moving in, while shale gas company executives are purchasing homes in the area. In Louisville, just east of Canton, Chesapeake is building its new Ohio field headquarters on a 291-acre site at the Beck Industrial Park. In October, Keith Fuller, senior director of government affairs for Chesapeake, told Louisville City Council that the site likely will include a five-story administration building, a second building for Chesapeake Oilfield Services Co., and a vehicle storage and maintenance facility. Steve Paquette, chief executive officer for the Stark Development Board, said the Chesapeake project, as well as the construction of Baker-Hughes’ headquarters in Massillon, are the biggest developments slated for Stark County in 2013. Houston-based Baker-Hughes Inc., a $19.8 billion oilfield services Stark’s reality company, plans to build Canton’s been a regional facility in the Ohio home of Massillon that will Chesapeake Energy employ 700 to service so far, and the Hall shale gas exploration of Fame city will still companies in the Utica be close to the Utica’s and Marcellus plays. biggest driller when Baker-Hughes’ plan Chesapeake moves for the Massillon site to new digs in nearby includes a bulk cement Louisville in 2013. plant, a wireline But as the selfoperation to provide proclaimed “Utica drillers with down-hole Capital,” Canton is tools and controls, truck hoping for an influx bays and possibly a plant of new companies to make specialized in 2013, especially mud for drillers, said oilfield servicers spokeswoman Pam drawn there to serve Easton. The company Chesapeake and other plans to complete the drillers, says David project by late 2013. Kaminski, director of A lone, old pumpjack guards the site of Chesapeake’s planned Ohio headquarters. All told, about $40 energy and public affairs million will be spent to for the Canton Regional construct the Chesapeake and Baker-Hughes facilities, said Mr. Chamber of Commerce. Paquette, who added that after studying the industry for more than Canton City Council, he noted, has approved incentives to help two years, he still can’t fully predict its impact on the region. bring a $5 million, 24,000-square-foot General Electric oil and gas “I don’t think we can even imagine what it will do for us,” Mr. facility to the city’s Mills Business Park Paquette said. GE is a major provider of oilfield equipment and services and is

Houston-based Exterran, which in 2011 reported selling $1.2 billion worth of gas processing and handling equipment, says it will soon begin hiring about 100 people to staff a 65,000-square-foot manufacturing plant in Youngstown. The company’s head of global manufacturing, Sean Clawges, says he’ll be moving back from Texas to oversee the start-up. He’ll probably fit right in, too, being a native of nearby Warren. Mr. Clawges predicts the Exterran facility will double in size in the coming years and do business with other local companies, from steelmakers to office cleaners along the way. “We are currently in the process of setting up partnerships with local companies for these services and commodities,” said Mr. Clawges at a recent shale gas event, noting that he was happy to come home, especially with the new regional investments in tow.

expected to initially employ about 30 people to serve Utica drillers. At least one other oilfield service company is also considering a facility in the park, according to Mr. Kaminski. “These are examples of the activity we anticipate,” Mr. Kaminski said. “Other opportunities are in the works and some will come to bear fruit.” Bob DeHoff, chairman of development for North Canton-based DeHoff Realtors, the developers of the 140-acre Mills Park, says four companies, all related to shale servicing, are expected to inhabit the park by the end of 2013. His company has also leased about 50,000 square feet of space this year to smaller companies related to shale gas, such as engineering firms, he said. “We’re finding that Canton seems to be the first large metropolitan area on Interstate 77 (in terms of proximity to drilling) and this is

A strong midstream current Some of the biggest investments announced for the Utica region so far don’t involve steel mills, service companies or even drillers’ headquarters. A handful of companies have already announced hundreds of millions of dollars worth of midstream development, which includes the pipelines, processing facilities and other infrastructure drillers will need to get their gas to market. While plants and factories are site-specific, much of the midstream development will be scattered across the region, but equally important to the shale industry’s success. NiSource Midstream Services of Texas has teamed up with Houston-based Hilcorp Energy, one of the nation’s largest privately held exploration companies, to invest $300 million in Utica continued on page 41

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A LONG-TERM RELATIONSHIP

Midstream developers say they’ll double down on early investments By Dan Shingler

The love affair between Ohio and midstream developers building pipelines, processing facilities and other shale gas infrastructure is not just a quick fling. It’s the early stage of a long-term, committed relationship. Just ask the executives of some of the companies wooing landowners for the rights of way they need for laying pipelines and building gas-processing plants. The hundreds of millions of dollars they’ve already committed to Utica midstream projects is just the start. As the play proceeds, they expect those investments ultimately will reach into the billions of dollars. “It’s a $300 million initial spend — the key is initial,” said NiSource Midstream and Minerals Group chief operating officer Joe Blount, speaking of his company’s Utica investment this year in the pipelines, processing facilities and other infrastructure, most of it in Northeast Ohio. Mr. Blount reckons that’s just the beginning of a long buy-in. As NiSource’s partner, Texas-based Hilcorp Energy, and other drillers produce more gas, NiSource will need to spend more to keep up. “We expect a spend level over the next couple of years of more than $1 billion and probably $1.5 billion if you look out seven or eight years, based on the geology,” Mr. Blount said. NiSource is not an anomaly, either. If an area is worth an initial investment of hundreds of millions, it’s largely because the company making that investment thinks production will grow there, requiring bigger investments later. “The Utica is one of the best, if not the best, prospective plays in all of North America,” says Frank Tsuru, president and CEO of Houston-based M3 Midstream. His company has announced $900 million of Utica development via a joint venture among M3, Chesapeake Energy and Enervest Energy. That investment will get them about 75 miles of pipeline, facilities for processing gas and separating liquids from what is produced, 870,000 barrels of storage capacity, a truck-loading complex, and a few gathering lines. It won’t be enough, Mr. Tsuru knows already. The processing facilities will need to be doubled or even tripled in size when drilling is ramped up, he said. “The midstream development goes hand in glove with the well development,” Mr. Tsuru said. “When a new (drilling) pad is put in, gathering companies or producers need to build pipe to us. And then as more production comes on, we have to build more processing and fractionating facilities to process that production.” With prices for dry gas low, drillers are chasing the Utica shale’s wet gas, which contains valuable liquids like ethane and butane — and that’s just fine by the midstream companies, because wet gas requires more processing and therefore produces more revenue for them. Midstream companies expect drilling to advance rapidly in the Utica, beginning in 2013, and to continue to grow for the foreseeable future. “These drillers are drilling very quickly,” Mr. Tsuru said. “There are hundreds of new permits to drill wells . . . So, there’s going to be a lot more than that (initial investment) in total.” M3’s development work is progressing well and Mr. Tsuru said his company already has most of the rights of way it needs for its pipeline project. But plenty more infrastructure development will need to be done by his firm and others.n

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COMING TO TERMS

Rachel Hanni and her family got the lease of their lives

Story and Photo By Chris Cotelesse

It’s a humble home, a small, white-washed brick Cape Cod built during the Great Depression in Coitsville — about eight miles northeast of Youngstown. The area is full of farms and wooded hills for miles in every direction. And like much of eastern Ohio, which sits atop the vaunted Utica Shale, the land is holding a potential fortune in natural gas, oil and other valuable liquids. Don Hanni Jr., the late local attorney and longtime chairman of the Mahoning County Democratic Party, bought the house with about 100 acres in 1989, hoping the land eventually would be developed for commerce. “He said, ‘Money can lose its value, but land will always have value,’” said Rachel Hanni, a middle school teacher at St. Joseph the Provider in Youngstown and Don’s granddaughter. Perhaps Mr. Hanni envisioned a packed restaurant or a car dealership surrounded by other bustling businesses. Whatever his aspirations for the surface, he couldn’t have known that the shale about a mile below would net his heirs more than $1 million — with the possibility of even more in the future — all without them even having to sell the land. Don Hanni Jr. bought upward of 500 acres in his lifetime. To minimize probate taxes and avoid a family feud, he divided the land among his children and grandchildren less than two months before he died in July 2008. The Hanni family since has collectively leased

the mineral rights to more than 300 acres of their inheritance. The rest is idle for now, but probably will be leased in the future. The largest share of Don’s land, the 100 acres on John White Road in Coitsville, was signed over to Rachel, her father, Don Hanni III, and her brother, Don Hanni IV.

Coming to terms The heirs’ land broker negotiated terms that will pay royalties equal to 20% of the value of the gas sold from their land — about the most any land owners in the Utica have received in a lease deal. On top of that, the three received a signing bonus of $573,088, nearly $5,800 an acre — also a big payment relative to most Utica deals. As is the case with many newly enriched families in the Utica, the money has made a big difference in the Hannis’ lives. Rachel and her brother each took $100,000 off the top to pay off student loan debt and continue their educations. The trio then equally divided the rest after giving Leila Hanni, their mother (and Don’s ex-wife) about $13,000. Many landowners who have signed lease deals in Ohio did so only after land agents arrived at their doorsteps, often with an offer in hand. Some held out long after their neighbors had signed leases, hoping for a better deal. Rachel Hanni did neither — alert to what was happening in the shale play all around her, she began pursuing

continued on page 34

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2012:

THE YEAR

OF THE LEASE

the whirlwind is gone, but the dust hasn’t settled

By alyssa Lenhoff In terms of affecting the residents of eastern Ohio, no aspect of the shale gas boom has had a greater impact so far than the leasing of mineral rights, which has turned run-down farms into cash cows and brought unanticipated wealth to thousands of landowners. “I heard Carroll County just got its first Bentley,” a participant at an October shale gas conference was overheard saying, illustrating the point with humor and awe. Regardless of whether or not grinning landowners are cruising Carrollton in $200,000 cars, or how many new farm equipment dealerships open in Ohio, it’s clear that big lease bonus payments have changed the economics of Eastern Ohio — and the way the mineral rights game is played there. Just ask Brad Hillyer, an attorney working out of New Philadelphia and Uhrichsville who represents both land owners and oil and gas producers across much of the Utica play. Back in 1974, Mr. Hillyer was a high school student working part time as a land man, offering bonus payments of a whopping $100 and royalties equal to 12.5% of the production proceeds to anyone willing to lease their mineral rights to oil and gas companies. Folks either signed or they didn’t, for the most part, and few bargained hard for more money or better terms.

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“At that time, people were thrilled to be in a well and were happy to sign,” Mr. Hillyer said. Today, most everyone with a mailbox knows that mineral rights are worth thousands of dollars an acre, and that the terms are negotiable and worth fighting over. How much are they worth? That depends where you live and, if drilling for shale gas is already going on nearby, on the results of those neighboring wells. It might also depend on how much others in the area have been able to negotiate for their leases, which can help set local prices, not to mention landowners’ expectations.

PriCeS aLL oVer the maP Carroll and Columbiana counties have been the hot spots. There, a lease for mineral rights can fetch around $5,200 an acre, and royalties of 18% to 20%, Mr. Hillyer says. Surrounded by proven reserves, the town of Carrollton has become the epicenter of drilling so far, with more drilling activity taking place in Carroll County than any other part of the state. Next on the pay scale in terms of leasing are probably Guernsey County, where bonus payments recently have notched between $4,500 and $5,000 an acre, and Harrison County, where bonuses have also been around $4,500 an acre, Mr. Hillyer said. No surprise there — Guernsey County

wells early this year proved to be big producers of both sweet crude and natural gas liquids, the two things drillers coveted most when natural gas prices fell below $3 per mcf. And by fall, Harrison County’s wells were vying amongst each other to be the biggest producers in the Utica. Further away from the best wells and most activity so far, landowners in Tuscarawas County still have been able to get about $3,000 per acre, and those in Coshocton County can count on about $2,000, Mr. Hillyer said. Those are more speculative areas for drillers, but they know the Utica is there and are willing to gamble — just with fewer chips.

BULK SaLeS Leasing activity has slowed, but it’s not over yet, nor are prices set in stone. Millions of dollars, if not billions, still will change hands, say energy companies and their representatives. Steve Stengell formed Kentucky-based Encore Energy in 2011, primarily to deal in Utica mineral rights leases. He spends much of his time representing drillers that have produced vertical wells in Ohio for years or even decades — but who don’t have the equipment, know-how or inclination to get into more sophisticated, highvolume, slick-water drilling and hydraulic fracturing.

continued on page 36

CHASING SHALEIONAIRES

Suddenly, rural landowners are wealth managers’ best friends By CHRISSy KADLECK After years of cultivating crops, writing off tax losses and living modest, grounded lives, landowners in eastern Ohio are rural kings sitting upon riches beyond their wildest agricultural dreams. That makes these newly minted “shaleionaires” the most sought-after clients of money managers, bankers and financial planners around the Buckeye State. From free seminars to word-of-mouth referrals to partnering with local advisers, wealth managers are eager to sign these landowners and help protect, invest and grow their riches from the shale oil and gas play. It’s quite the turn of the tables for folks who largely have been off the financial radar most of their lives. And signing on the dotted line? Well, that’s not a move many rural and conservative landowners are quick to make. “The thing that we are really struggling with is convincing (a landowner) that we are more valuable than H&R Block, where they’ve gone to get their taxes done for years,” said Daniel Riemenschneider, accountant and tax partner with Bruner-Cox LLP, who works out of the firm’s Akron office and has developed

a practice with oil and gas landowners. “They are skeptical of flashy guys coming into town looking to help them. Their mindset is the flashy guys are looking to help themselves.” Factor in that some landowners previously have been turned down for loans by the same large banks now courting them, and it makes for the occasional uncomfortable exchange during a seminar, says Mr. Riemenschneider. In the last 18 months, he’s attracted close to a dozen new clients from seminar presentations; one client, from Belmont County, received a whopping $3.8 million lease bonus check. “At one meeting, one of the residents said to a bank, ‘I came to you looking for a farm loan and you told me ‘no.’ Why would I ever do business with you?’ That’s the kind of stark reality that the banks are all running into … that they have told these people ‘no’ at one point in time,” he said. Trust trumps everything when it comes to financial relationships, especially in small communities. So it’s not surprising that the

continued on page 40

While the energy debate continues, we’ll keep powering America. 14

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Fifth Third banking on shale growth By Dan Shingler Banks see more in the nationâ&#x20AC;&#x2122;s shale boom than the opportunity to manage wealth for newly wealthy landowners. Some also see a chance to do more of what banks are supposed to be best at â&#x20AC;&#x201D; lending money. Thatâ&#x20AC;&#x2122;s what led Cincinnati-based Fifth Third Bank to raid a competitor in Houston and hire a group of bankers who have specialized in providing financing to drillers and others with capital-intensive needs related to gas and oil production. The bank thinks its new Energy Group could lend as much as $2 billion over the next two years. â&#x20AC;&#x153;It goes all the way from upstream exploration, production and finance, through midstream distribution and to downstream refining and chemical production,â&#x20AC;? said Steve Capouch, chief credit officer for Fifth Thirdâ&#x20AC;&#x2122;s Capital Markets group. In late September, Fifth Third hired five Houston bankers who specialize in

working with the oil and gas industry. The group, headed by 24-year industry veteran Richard Butler, along with Fifth Third banker Kevin Lavender, will engage in everything from providing reserve-based lending and commodity hedges for energy companies to acquisition financing for drillers and midstream companies looking to buy out their peers. The strategy already seems to be paying off, according to Mr. Capouch, who said that in their first month the new group brought in five deals, each for financing of between $40 million and $70 million. The bank will partner with other lenders and syndicate most deals of that size, Mr. Capouch said, but Fifth Third believes there is plenty of business to share as a lead underwriter. With about $117 billion in total assets, Fifth Third already has about $2 billion in loans to customers in the oil and gas arena. Thatâ&#x20AC;&#x2122;s a sizeable sum, but Fifth Third

thinks the oil and gas industry can be a prime source of new asset growth. â&#x20AC;&#x153;Fifth Third is looking to be a meaningful player in this space â&#x20AC;&#x201D; weâ&#x20AC;&#x2122;re not going to just dabble in it,â&#x20AC;? said Mr. Lavender, head of sales for the Energy Group. That will probably also entail hiring more people for the group, which in addition to Mr. Lavender includes two lenders, two underwriters, two engineers and its own senior credit officer. Fifth Third has only said publicly that its new hires were previously with a â&#x20AC;&#x153;British bank,â&#x20AC;? but some quick Internet searching shows that its new hires came from the Royal Bank of Scotland, where Mr. Butler was a senior vice president in Houston. The group will be housed in Houston, where it already had clients, but new hires could result in other offices being opened, possibly near or in the Utica Shale region, which is also closer to Fifth Thirdâ&#x20AC;&#x2122;s Ohio headquarters. n

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WATER

RECYCLING: THE CURE FOR DRILLERS’ DRINKING PROBLEM? By Doug Livingston

on Castle eases his semi-truck into reverse and backs up to a line of yellow tanks. For the first time in 26 years as a truck driver, Mr. Castle is hauling oilfield wastewater, commonly known as brine or flowback. Working for Pelton Trucking of Monroeton, Pa., he started hauling the fluid almost a year ago, in January — around the same time Chesapeake Energy opened the first brine recycling facility in Carroll County, Ohio, which is his drop-off point. As Mr. Castle hooks an electrical ground wire to the framework surrounding the recycling facility, a pump kicks on in the tanker truck and pushes the brine into one of four yellow storage tanks, where the fluid will be tested, sampled and homogenized before treatment begins. His truck, like most that make the trip to the facility, averages 100 barrels, or 4,200 gallons, per load. This load is the last of the flowback from a hydraulically fractured well 20 miles south in Harrison County. It’s the saltwater and chemicals that come back to the surface soon after a hydraulically fractured well is brought into production, when pressures underground are still high. continued on page 38

Why water is worrisome: By 2015, state officials expect to see about 2,250 shale gas and oil wells drilled in Ohio. At an average of about 4.5 million gallons of water required to frack each well with current methods, that level of production will require the use of almost 10 billion gallons of fresh water — most of which will be lost forever if recycling efforts in the Utica are not sustained and expanded.

Ca$hing in on stashing waste Driller Dave Hill finds new profits in the injection well business

By Dan Shingler

For more than 30 years, Dave Hill has made his living taking things out of the ground. Today, though, he might be making nearly as much money putting stuff into it. The longtime Ohio oil and gas driller has struck gold in the injection well business. Mr. Hill has been eager and willing to show off his two injection wells near Cambridge, Ohio, to local media — not to brag but to illustrate their relatively small footprint and to explain why they are deemed safe. The installation doesn’t look like a whole heck of a lot — some 20 water storage tanks next to a small terminal building that houses a couple of small offices and a garage-like room equipped with two big pumps. But, as a conversation with Mr. Hill quickly shows, looks can be deceiving when it comes to the real size of the operation’s infrastructure and the strength of its business. Those pumps cost more than $200,000 apiece, he says, and beneath them the pipes for the injection wells run 9,000 feet below the surface. There, they discharge water and chemicals, from drillers that rely on Mr. Hill to dispose of flowback from their newly fracked wells into ancient dolomite rock.

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Mr. Hill figures it cost him about $3.5 million to drill the two wells, plus more for the pumps and other systems. But business is good — the wells already have taken in about 1.2 million barrels of flowback from drillers, Mr. Hill said. He charges between $2 and $4 per barrel to take the stuff, depending upon whether it’s production water from an existing well (which is easier on his pumps) or less salty water from a horizontal frack job. With large-scale recycling still only in the planning stages, drillers have little recourse but to dispose of flowback from hydraulic fracturing operations into what are classified as “Class II” injection wells, like Mr. Hill’s. Prices are up — and Mr. Hill himself recalls when he could offload his own flowback for $1.25 per a gallon, 10 years ago. That’s the main reason he got into this business, to take care of flowback from his own oil and gas wells. When he drilled the first of his two injection wells in 2007, he wasn’t thinking of shale gas. All he really wanted was to free up trucks that were then hauling waste water from vertical wells being drilled by his company and other local drillers.

“Then the shale boom came,” he says. By mid-2011, he was taking water like a foundering ship — frack water from Pennsylvania initially, and then from Ohio. Each state today accounts for about half of his daily capacity of 2,000 barrels of water per well, as his pumps run around the clock. The trucks show up pretty much non-stop from 6 a.m. until 8 p.m. each day, he said, and holding tanks allow him to take water faster than he can pump it. The business is still competitive, though, with many other Ohio injection wells also available to drillers and more possibly on the way. “If it weren’t, I would have raised my prices a long time ago,” quips Mr. Hill.

Dave Hill surveys his water storage tanks.

Mr. Hill also runs a third injection well in Belmont County. First and foremost, though, he still considers himself an oil and gas driller, he says. No one ever talks about the injection well business “getting into their blood,” after all. He’s even made the investment to move from vertical drilling — where he’s used hydraulic fracturing to stimulate his wells — into horizontal drilling and fracking with larger volumes of water. As of this fall, he had three wells drilled, two already stimulated, but he had yet to pop one open to get gas or oil. Like many of Ohio’s country drillers, Mr. Hill is not one to tout the revenues of his latest find. “Looks promising,” is about all he’ll say of his new horizontal gas and oil wells. He talks about his injection well business because he knows that industry is important to the development of oil and gas throughout Appalachia, he says, and he wants to see the region pull together to support oil and gas development. But while he may still be more excited about the prospect of pulling resources out of the ground than he is about handling the industry’s waste – Mr. Hill’s story makes the injection well business look nearly as lucrative as the oil and gas business. Is he still even making more money from oil and gas extraction than from his injection wells? He has to stop and think. “I probably am,” he says, offering only a smile when it is suggested that his tone lacks conviction. n

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Parker Hannifin finds

big growth in oil and gas From seals for wells to bending tubes for rig builders, the Cleveland-based industrial giant sets its sights on shale By Dan Shingler With annual sales of $13 billion and workers in 48 countries, Parker Hannifin Corp. has its hands in a lot of different markets and industries — and one eye on the U.S. shale gas industry. Since 2011, the Cleveland-based industrial technology giant has been chasing the growing domestic gas drilling market with its Complete Piping Solutions business. The group is devoted to providing drillers and gas handlers with new ways to manipulate and connect vital pipes for wells and pipelines. Since 2009, Parker’s also been making special seals used in shale wells. The Complete Piping Solutions unit provides services tailored to difficult engineering situations, such as the ability to custombend massive, 10-inch diameter steel pipe for rig builders. It also has created its own sort of industrial quick-connect product, known as Parflange. The device enables pipe and tubing to be connected without welding, making it better suited than traditional welded pipe segments in certain environments or when getting skilled welders and their equipment to an area is a problem. The product is seven years old and serves markets varying from shipbuilding to general industry. But the shale gas business has become Parker’s biggest customer for the no-weld connections, said Rick Carnes, sales manager for the products in Houston. Doug Gilbert, his counterpart in Columbus, says the same applies in his region. “(Shale gas) is one of the markets that’s really bought in to it and utilizes it, because it’s all about speed lately,” Mr. Gilbert said. Parker is working with builders to create rigs that are able to produce more pressure for drillers while weighing less and being easier to move. The company doesn’t divulge its sales in this area, but they’re growing fast, Mr. Gilbert said. “We’ve seen a boom associated with that, simply because of the sheer demand from everyone racing to drill for as much natural gas as possible,” he said. Parker’s engineers spend a considerable amount of time on site with rig builders, but the actual construction of its systems mostly takes place in Houston. That’s true even of rigs that are built for the Utica and Marcellus plays, at least for now. “We fabricate the pipes and make everything in our shop and send out a kit that can be assembled in a matter of days, as opposed to weeks,” Mr. Carnes said. Would the company, or its rig-building customers, like to be

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Parker Hannifin application engineering manager Mason Morehead inspects a packer element at the company's TechSeal Division.

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closer to the shale plays that use the rigs? Who wouldn’t, Mr. Gilbert said — and Parker could expand with new fabrication facilities. “We currently have our Houston location set up to support this region. But as this (industry) grows, we anticipate more regional sites,” he said. “The Midwest is a natural location as we progress in this business.”

We’ve seen a boom associated with that, simply because of the sheer demand from everyone racing to drill for as much natural gas as possible.

”

Meanwhile, in South Carolina, Parker is producing special seals designed for oil and gas use. They range from extruded pieces that cost just a few dollars to highly engineered combinations of materials and mechanics costing thousands. Again, for these products, hydraulic fracturing is the fastestgrowing market. Due to its size, Parker has a level of sophistication few Ohio manufacturers can match — with economists, consultants, forecasters and others helping it determine which markets to target with new products. But it hasn’t taken a crystal ball for many manufacturers to realize there is a growing opportunity in supplying various segments of the oil and gas industry, said Ryan Augsburger, a spokesman for the Ohio Manufacturers’ Association in Columbus. In Ohio, the effects of shale on the state’s manufacturing base are broad and deep — even though the Utica play is in its infancy. “There’s all sorts of manufacturers seeing a boom right now,” Mr. Augsburger said, “from the steel makers who are producing premium steel pipe to chemical fracking fluid manufacturers to firms that machine drill bits that go down deep in the earth to engines that power the drilling rigs and pumps and compressors that compress and transport the gas and gas liquids.” n

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TAPPING INTO OPPORTUNITY Benesch Shale Oil & Gas Industry Team: Singular resources for a multifaceted opportunity Helping our clients navigate the complexities and exploit the potential of shale oil and gas exploration and drilling, including: Cleveland Columbus Indianapolis

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MY BENESCH MY TEAM

The potential is unprecedented. The oil and gas boom brought about by the Utica Shale deposits hasn’t been seen in this part of the U.S. in decades. • Today there are fewer than 50 wells in production; more than 2,000 wells are projected by 2014 • Almost 4 million acres in Ohio have been leased or acquired • In addition to the trillions of cubic feet of natural gas, billions of barrels of oil and natural gas liquids • The Ohio Shale Coalition study projects that the annual economic impact from the production of oil and gas from shale will grow to $9.6 billion by 2014 and the industry will support nearly 66,000 jobs

How will you tap the opportunity?

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legal opinion

Federal Suit Could Impact Utica Drilling By Glenn Morrical & Carter Strang

A lawsuit working its way through federal court in Cleveland alleges that oil and gas drilling in Ohio is “abnormally dangerous” and that the operator of a well should pay for any damage caused by chemicals that escape the well — even if the operator met all applicable standards of care. If the plaintiffs succeed on this theory, landowners will be able to pursue operators of oil and gas wells for injuries associated with drilling activities — regardless of how careful drillers were when

constructing the well or whether they adhered to state regulations. That could dampen enthusiasm for Utica Shale drilling in Ohio. The defendant, Landmark 4 LLC, with offices in Hartville, operates two horizontal oil and gas wells in Medina County. The plaintiffs, William and Stephanie Boggs, live about 2,500 feet from the wells. According to their complaint, the drilling, construction and operation of the wells resulted in “pollutants and industrial and/or residual waste” being discharged into the ground or waters near the Boggs’ home — all of which they would have to prove in court to win. The complaint asks not only for damages, but also that the wells be shut down and a court-supervised “medical monitoring program” be set up. The plaintiffs claim Landmark was negligent in failing to use sufficient cement in constructing the wells and in how it trained and supervised its employees. Claiming negligence in drilling and operating a gas well is not new in Ohio. Recovering for negligence, however, requires proof that the operator failed to exercise “reasonable care.” In this case, however, the plaintiffs go further and claim that the well operator engaged in “abnormally dangerous” activities simply by drilling such a well — and should be held liable even if it took every reasonable precaution to prevent the harm. This theory is known as “strict liability” under Ohio law. However, we know of no Ohio case applying it to oil and gas drilling. So this case — coming at the dawn of Ohio’s Utica Shale boom — may prove pivotal. Whether an activity is “abnormally dangerous” is a matter of law, so it is up to a judge, not a jury, to make that decision. Will the

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federal judge hearing the case conclude that oil and gas drilling is abnormally dangerous under Ohio law, thus making Ohio well operators liable even when they do everything reasonably within their control to prevent harm? The judge might consider other Ohio cases where “abnormally dangerous” activities were alleged, such as damage resulting from blasting, electrical lines, etc. Other federal courts have listed six specific factors to consider when deciding whether an activity is “abnormally dangerous” under Ohio law. They are: a high degree of risk of some harm to others; the likelihood that the harm will be great; the inability to eliminate the risk by exercising reasonable care; the extent to which the activity is not a matter of common usage; the inappropriateness of the activity to the place where it took place; and the extent to which the value of the activity to the community is outweighed by its dangerous attributes. If the judge considers cases from other states that address this issue, he will find those states are split. Texas and Oklahoma hold that oil and gas drilling is not abnormally dangerous, while Kansas and California maintain that it is. In two cases pending in Pennsylvania, the judges haven’t yet decided whether strict liability applies, but in preliminary rulings they acknowledge their decision should turn on the six factors listed above. In applying these factors, a key part of the analysis is likely to focus on whether the risk of serious harm can be eliminated with reasonable care. This is where opinions differ. Anti-drilling activists contend that no amount of care can make hydraulic fracturing safe, while industry supporters assert that en-

vironmental harms result solely from the failure to follow industry standards. For example, an investigation by the Ohio Department of Natural Resources (“ODNR”) into a widely publicized 2008 home explosion in Bainbridge concluded that the explosion was the result of substandard work by drillers. Since that time, the ODNR has adopted strong new rules on well construction requirements. There have been more than 260,000 oil and gas wells drilled in Ohio since the 1800s and the use of hydraulic fracturing here dates back to the 1950s. The industry maintains that techniques used in drilling horizontal wells merely extend established methods. In considering factors such as the appropriateness of drilling to the place and benefit to the community, it seems clear that the Ohio General Assembly and the ODNR have concluded that drilling in the Utica Shale provides benefits well beyond its risks. Recent legislation gives the ODNR more authority to apply special conditions to horizontal drilling, and re-emphasizes its sole authoriy to regulate the activity. This illustrates that at least two of the three branches of Ohio government believe that horizontal drilling should go forward within safety standards established by the regulators. In our view, operators should be responsible only for harms caused by their failure to exercise reasonable care — not for activities they undertake with the utmost care in accordance with the law and industry standards. To apply strict liability against well operators would create a strong disincentive to develop the tremendous resource presented by the Utica Shale. We shall see if the judge agrees.n

Glenn Morrical and Carter Stang are partners at the Cleveland law firm Tucker Ellis LLP

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Eyes of the State

Ohio’s next challenge might be finding enough inspectors to keep up with drilling activity by Dan Shingler No one knows exactly how many shale gas wells will be drilled in Ohio in 2013, but most experts agree on one thing: it will likely be more than the state can inspect with its current roster of inspectors. That’s why the state is making a hard push to hire and train more inspectors to keep the expected rush of new drillings up to code. The Ohio Department of Natural Resources is the state agency charged with regulating oil and gas drilling in the state, and within it the Oil and Gas division handles inspections. It had 41 inspectors going into the fourth quarter of this year, up from 30 at the end of 2011, said ODNR spokeswoman Heidi Hetzel-Evans.

But by the spring, ONDR hopes to field about 80 full-time inspectors, as well as perhaps 10 other field staff members to support them, Ms. Evans said. The state’s trying to bring them into service in batches of eight to 12 and then have them begin by working with experienced inspectors, she said. They’ll all work out of five field offices (they don’t do much drilling in Columbus) and some will specialize on injection well inspections, as four do currently, according to Ms. Evans. Inspectors might play a key role in the state’s image going forward when it comes to shale gas and oil drilling. Government officials, from the governor to Ms. Evans herself, have often boasted lately that Ohio has

some of the most stringent regulations in the nation when it comes to drilling – but the toughest regulations anywhere aren’t much good without inspectors to enforce them. The role of inspectors is already being watched and there’s already contention over how well Ohio has conducted oil and gas well inspections generally. In September, the anti-fracking environmental group Earthworks issued a report that compared inspection rates in Ohio to those in some other gas-producing states. It took Ohio to task for the infrequency with which it found wells in the state were inspected, as well as enforcement actions the group claim are “inadequate to deter violators” of state regulations.

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“They are stretched, obviously, very thin,” said Kari Matsko, a Lake County resident who founded the People’s Oil and Gas Collaborative-Ohio and works with Earthworks on anti-drilling issues. According to Earthworks data, 91% of Ohio’s 64,378 active gas wells, most of them conventional vertical wells, were not inspected in 2010, the last year for which data was available. That’s the same inspection rate as in Pennsylvania, the group found — but it also found that both states are not inspecting wells nearly so often as oil and gas-producing states like Texas, New Mexico or Colorado. Only 57% of the active wells in Texas went uninspected in 2010, compared to 61% in New Mexico and 63% in Colorado, Earthworks found. That report brought cries of foul from both state and industry officials. Tom Stewart, executive vice president of the Ohio Oil and Gas Association, said Earthworks did not take into account the age or activity of the wells in question, some of which are years or decades old and produce little or no gas and oil at this point. State inspectors are on site when they need to be, Mr. Stewart said – including at

several critical stages of each new well’s drilling and completion, which includes the pouring of cement casings and for the actual hydraulic fracturing of the shale. ODNR’s Ms. Evans said the report also did not take into consideration the state’s recent efforts to hire more inspectors, or new state regulations that require inspections at critical points in a well’s lifecycle. Earthworks attorney Bruce Baizel – who, incidentally sits on the board of the State Review of Oil and Natural Gas Environmental Regulations chaired by Mr. Stewart – said his group only compared similar data between states and did not set out to make any one state look bad. “The data is what it is. I’m sorry they don’t like it,” Mr. Baizel said. Ms. Evans said the that critical wells all are inspected. “We have a 100% inspection rate for Ohio’s Class II injection wells and we currently have a 100% inspection rate on all shale wells,” Ms. Evans said. ODNR expects drilling to peak in 2014 or 2015 and wants to be ready, Ms.Evans said, which means finding new inspectors. It’s looking for applicants, preferably with

industry experience working in oil and gas drilling, or a background in geology. It’s not that difficult to train a new inspector, said Louisiana petroleum engineer Jim Rike, who’s been training them along with other oil and gas workers and engineers since the 1970s. About a month of intensive classroom training and another month of field work with an experienced mentor can produce a quality inspector, he said. “The inspectors don’t really have to be high-powered scientists,” Mr. Rike said, “they just need to understand the practical side of the engineering, not the technical side. The state will have competition in hiring the though. The same folks who make good inspectors often are the same ones that make good employees for oil and gas drillers. ODNR is probably already facing that challenge to some degree. “With the appearance of some of the larger oil companies, there’s certainly more competition for these applicants,” Ms. Evans said. Get used to that warns Mr. Rike – and then be prepared to have inspectors hired away by those same energy companies. n

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NEW MARKET

for an old-line manufacturer Philpott Rubber finds a partner to go after drillers’ business By Caitlin Cook Shortly after helping found Corrpro Companies Inc. in Medina, Mike Baach was transferred to Texas in 1979. He was assigned to an office just outside of Houston, where he learned the energy business and its players on Corrpro’s behalf. Little did he know then that the experience would be a big asset more than 30 years later, right back where he started. Corrpro’s forte was and still is preventing corrosion in underground pipelines. Mr. Baach moved back to Ohio in 1986 to assist the company in going public, and stuck with the company for nearly 20 more years, learning along the way as Corrpro became a world leader in preventing not only pipelines, but refineries, storage facilities and other important infrastructure from succumbing to deterioration. He retired from Corrpro in 2005 and a year later Mr. Baach took his now-valuable experience to Philpott Rubber, where he became CEO in 2009.

A brave new market Oil and gas had not been a major growth market for Brunswick-

based Philpott. For 123 years, it had been molding parts and supplies from rubber, plastic and specialty polymers, largely for industrial customers. Its products were things like conveyor belts and seals used in foundries or other heavy industries. It even made seals for toilets. Like just about any mid-sized manufacturer in Ohio, Philpott always was on the lookout for new business — but new foundries and other big industrial prospects haven’t been exactly popping up like daisies on the Ohio landscape in recent years. Fortunately, Mr. Baach’s familiarity with the energy sector from his days with Corrpro is helping Philpott Energy exploit opportunities in the Marcellus and Utica shales of Ohio and Pennsylvania. “Energy hasn’t been a huge driver of industrial business for a while and when this started over with the Marcellus Shale activities, finds and developments, it came to mind to us that we better find a way to participate in this,” Mr. Baach said. The company’s products already were performing well in the harsh environment of foundries, tire factories and other heavy industries, so Mr. Baach believed Philpott could make products tough enough to work on a drilling rig. Philpott’s strategic plan called for entry into the energy market with new products, focused on the shale gas basins in West Virginia, Ohio, Pennsylvania and New York. The company already made gaskets and other related items for the oil and gas industry, but Mr. Baach wanted Philpott to become a solutions provider rather than simply a generic parts provider. In an eight-month period between 2010 and 2011, Philpott executives started looking toward the energy industry and their customers in it to determine where companies were experiencing problems. The idea was to develop both products and services to meet the customer’s challenges or find a third party addressing customer needs, such as a supplier or oil field service provider, and work with them. Philpott learned, among other things, that a single fluid combining the properties of a lubricant and a viscosifier — in other words, one with the right amount of both thick and slippery properties — would help during the well completion process.

Philpott vice president and general manager Russ Schabel (left) and company president and CEO Mke Baach are banking on a new joint venture to help them sell into the Shale gas market.

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A parnter for the dance During their research, Philpott execs discovered CoilChem, a New Castle, Okla.-based company founded in 2009. CoilChem’s product is polymer-based and provided a natural alignment with Philpott’s expertise and strategies — and most importantly, an answer to the needs of their new customers drilling for shale gas. “When we found this product, rather than reinventing the wheel, we said, ‘we’re very good at bringing science and technology to our customers whether we develop it or someone else does,” Mr. Baach said. In his own 30 years in the energy industry, CoilChem CEO Jerry Noles said he saw a disconnect between the oilfield service industry that was using drilling chemicals and the chemical companies that manufactured them. “They really didn’t understand the intricacies associated with the problems one another faced,” Mr. Noles said. “So the chemicals being used were not tailored to each individual application.” Drillers experimented and improvised. In many cases, chemicals were adapted from one area of the oil and gas industry and used for a broad range of other applications. Because of this, Noles said much of the success of the chemicals used in drilling, as well as the success of the rigs that used them, was hit and miss. CoilChem developed specific formulas for specific drilling applications and also set out to minimize the amount of chemicals needed for the drilling and completion of each well. It also made them biodegradable. CoilChem has four products that are injected into drilling wells during the completion phase to help reduce pipe-on-pipe friction and pump pressure, while creating varying viscosity levels. Philpott is its partner and sells and services the products for drillers and their suppliers in the Utica and Marcellus.

We Speak Your Language. At Jones Day, providing creative and comprehensive legal solutions for Shale-related matters is our language. We advise a wide spectrum of clients—E&P companies, pipeline and distribution companies, gathering and processing entities, energy marketers, project developers, and lenders—on upstream, midstream, and downstream oil and gas and petrochemical projects. Our Energy Practice lawyers offer services along the entire energy supply chain, including M&A, joint ventures, financing, project development, environmental, dispute resolution, and regulatory proceedings. For a law firm fluent in the language of the Shale, speak with Jones Day.

Symbiosis Both companies say they are benefiting from the partnership and sales are growing. “We expect our sales in their area to continue to grow as (they have) over the last several years. This is in large part due to the basin-specific focus provided by Philpott,” Mr. Noles said. Customers select which polymer-based fluid is best for their operation and Philpott provides a “Chemtrack” unit, or a flat bed, loaded with barrels of ChoilChem’s chemicals. Each unit is equipped with a computer-like programmable logic controller that allows for precise control of when and how quickly the chemicals are released. The private company does not disclose its net income, but Mr. Baach will say this: It’s doubled its revenues since 2009 and should book about $25 million in sales this year. Not coincidentally, perhaps, 2009 was the same year Mr. Baach brought his oil and gas experience to the helm and also just about time that drilling began heating up in Pennsylvania. The company’s new Energy division, formed in 2011 to focus on the shale gas industry, already represents about 13% of Philpott’s total business. Mr. Baach is glad to be back in the oil and gas business. “The opportunities out there are huge,” he said. n

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Go eASt yoUnG mAn Nebraskan Scotty Clark ﬁnds work and a new home on Ohio’s Utica

Scotty Clark has the direct, sincere smile of a Westerner, but these days he’s smiling because of what he’s found in eastern Ohio — a promising new career. His is the face of a new Ohio work force that is eager to literally carry the water for the region’s shale gas industry. The native Nebraskan came to Ohio this year by way of Pennsylvania, where in 2011 he’d gone looking for work as a truck driver after hearing of that state’s shale boom. He found it driving for Williamsport, Pa.-based Energy Construction Management, or ECM. He followed that company to Guernsey County, Ohio, when it opened an office in Cambridge this year. In July, he moved up from truck driver to field supervisor. What’s it take to succeed? In his case, Mr. Clark says he brought a high school diploma, four years of Navy experience, three generations of family long-haul trucking experience and a knack for hard

work and keeping things running on time. He uses all of it — a lot. “I show up at 6 in the morning and I don’t usually get back to my hotel until around 10 at night,” he said. Instead of driving one truck, Mr. Clark now is responsible for a fleet of about 15 — with more on order. Sometimes, all are running at once, 24 hours a day and seven days a week — especially when a driller served by ECM is getting ready to stimulate a well with millions of gallons of water and needs it fast. For now, he might look like just another out-of-stater who has come to Ohio to reap its newly accessible natural resources, but he’ll soon be a state resident, along with his wife, Jenelle, and their two children. She’s finishing up school in Pittsburgh, and in the spring the family plans to move to Eastern Ohio, Mr. Clark said. Ohio might get a booster in the process. Mr. Clark said it makes him happy to think that he’s helping to fuel the economy in a part of the world even a man from Nebraska knows has been through tough times. Aside from the wells themselves, his company buys Kenworth tractors made in Chillicothe and the water tanks for them are made and installed in Akron, he said. “It puts a smile on my face, because I know that this whole area’s been hurting,” Mr. Clark said. His own company is a direct participant in making things better, he figures. “We just got two new guys who are starting Monday. And we’re looking to hire more.” n

Tuesday, february 5, 2013 Executive Caterers at Landerhaven

Ohio’s Shale Boom: Getting it Right A half-day forum for business and civic leaders to learn from industry experts about the challenges and opportunities of shale drilling.

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experts outlook

SO FAR, SO GOOD

It’s too early to say, but the Utica’s early results look promising

By Andrew Thomas and Bob Chase People, including the persistent editor of this publication, ask us: Is the Utica proving to be all that it has been cracked up to be? The honest answer, in these early days, is that we don’t yet know. Anyone who tells you they do know is either a gambler, a fool, or has some geologic data or well results that they aren’t sharing. But, so far, one thing is abundantly clear — the deep horizontal Utica wells that have been drilled are far more productive than the thousands of vertical wells drilled in Ohio since the late 1940’s when we first started employing hydraulic fracturing. And some early Utica well results suggest production may be very profitable, notwithstanding the high cost of drilling and completing horizontal wells. Let’s start with a couple of numbers worth remembering: one barrel (bbl) of oil and 50 thousand cubic feet (mcf) of gas. Those numbers represent the average daily production for one of Ohio’s old vertical wells. Now let’s see how some of these new Shale wells compare. In March 2012, the Ohio Department of Natural Resources, for purposes of severance tax reporting, published the production records for five Utica wells, all operated by Chesapeake. The five wells all produced in paying quantities, with one well – the Buell No. 8H - producing 7.7 million cubic feet (mmcf) of gas per day — volumes one might expect from a good conventional Gulf Coast gas well. Oil, on the other hand, was produced at a rate of only about 68 bbls/day from that well — less than has been hoped for or projected

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for a typical Utica well, but still a great deal more than the average vertical well of yesteryear. In August, Chesapeake provided further insight into its production when it released selected production records in its quarterly report.

“

All of these wells, even the ones drillers found disappointing, would have been among the best producing wells in the state’s history until a year or so ago.

”

In that report, Chesapeake indicated it had shifted its focus to “liquids-rich” plays in response to low gas prices. It set forth that it had drilled 87 wells into the Utica, 28 of which had been completed. Their overall average daily production per well: 205 bbls of oil, 150 bbls of natural gas liquids and 3.8 million cubic feet (mmcf) of gas. This plainly is not remotely like the oil and gas province we have seen for the past 100 years in Ohio. In April, Anadarko announced it had completed three wells in the Utica, including the Brookfield A-3H well in Noble County, which produced a total of 9,500 bbls of oil and 12 mmcf of gas in its first 20 days production, for an average daily production of 475 bbls of oil and 600 mcf

of gas. The Spencer A-1H well and the Spencer A-5H wells produced 20,000 bbls of light gravity oil and 37 mmcf of gas in less than two months. No decline data was reported. Gulfport has publicly reported production from two wells. The first well, in Harrison County, was reported in its August 7 earnings statement to be 432 bbls/day of condensate, 110 bbls/day of natural gas liquids and 17 mmcf/day of natural gas. In early October, Gulfport reported that another well, the Shugert 1-1H, has had even more impressive early production numbers: its flow tests peaked at 20 mmcf/day, with 144 bbls/day of condensate, and 2002 bbls/day of natural gas liquids. Again, no information has been since released regarding decline rates, and with no long-term production records available, it is impossible to say how productive these wells will be. But the early flow rates certainly suggest that even with aggressive decline these wells will be a commercial success at today’s prices. EV Energy Partners reported that their Frank Well in Stark County’s Marlborough Township produced 515 bbls of oil and moderate gas over a time period that was not reported. Little insight can be gleaned from this report. Finally, Devon Energy drilled and completed one well each in Medina and Ashland County. No production numbers have been released from those wells, but Devon’s spokesperson was quoted as stating that the results “were not encouraging.” However those wells were well to the west of the area generally believed to be the “sweet spot” for Utica production,

“

One thing is abundantly clear — the deep horizontal Utica wells that have been drilled are far more productive than the thousands of vertical wells drilled in Ohio since the late 1940’s...

”

and likely were intended by Devon to test the western limits for commercial quantities of crude oil. All of these wells, even the ones drillers found disappointing, would have been among the best producing wells in the state’s history until a year or so ago. It’s clear that horizontal drilling and completing — or “fracking” if you’d prefer — has changed the game when it comes to drilling for oil and gas in Ohio. So, why won’t we just come out and call the Utica a success? Because horizontal drilling and completing shale wells is very expensive – up to $10 million per well. So even though the discovery of hydrocarbons is all but assured with each shale well, commercial success is not. Commercial success depends upon the volume and rate of hydrocarbons produced, as well as the nature of the production. And, of course, it depends greatly upon the price received for hydrocarbons produced. In the oil and gas business, success is a very relative term. There are still important factors to be considered, including some big unknowns. The most important is: how long will these wells produce at these volumes? None of the reporting companies have disclosed their decline rates, and since shale gas wells usually produce their best volumes in their initial stages of production, decline rates will be critical to evaluating the success of the play. Also, because the state does not require drillers to disclose such information, we don’t have much data on the natural gas liquids that may be separated from the Utica natural gas. With low gas prices, drillers need these liquids to justify continued investment. Accordingly, more insight as to the nature of the production will be critical to evaluating the near-term success of the Utica. But to answer our editor’s persistent question: yes, we do think production numbers look promising so far. They certainly are eclipsing by a wide margin any thing we have experienced with traditional oil and gas drilling in Ohio, and at least some of the early flow rates suggest that, barring decline rates more aggressive than for other shale formations, the Utica will be of considerable interest to the oil and gas producing companies for a long time. Expectations for the Utica are very high, and meeting them will require good results from multiple wells, together with hydrocarbon prices that will support continued development. So we’ll hold off on projecting the long-term success of the play for now. In the meantime, we are enjoying with everyone else the fun of each new public announcement with tantalizing flow rates. And we will await anxiously the next production severance tax reporting period in March of 2013. n

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Coming to Terms / from page 10 the deal herself in the summer of 2011. As a teacher at a Catholic school, Rachel said she’s “paid in prayer.” “I definitely think that’s panned out,” she said, chuckling. Like many young people her age, Rachel’s credit had suffered the pangs of youth, but it’s safe to say she’s paid up now. “It doesn’t necessarily boost your credit score from that awful credit card that you got your first year of college for that darn T-shirt,” she said. She is rebuilding her credit thanks to some keystrokes made more than a year ago, when the schoolteacher did her own homework on shale gas and the leasing that goes with it. She began her research by reading blogs and visiting online forums, but information was hard to come by. “A lot of (land)owners don’t want to put their stuff out,” she said. “They don’t want somebody else getting more (for their mineral rights) than they did.” She contacted gas companies. They weren’t quick to respond, but her father said she inherited a tenacious streak from her grandfather. “People often recognized that she was a chip off the old block,” Don III said. “She is the granddaughter of Don Hanni.”

Groomed by grandpa Don Hanni Jr. earned a reputation for being hard-nosed. “Talk to anybody and mention my father,” Don III said. “If they’re from Youngstown, they’ll know.”

Rachel looked up to her grandfather so much that she wanted to follow in his footsteps to make him proud. He, in turn, groomed her for a life of law and politics. “My grandpa, one of his last Christmas cards said, ‘Hurry up and get done with college so you can go to law school and practice with me,’” she said. She earned a bachelor’s degree in political science from Youngstown State University and then applied to law school. She was president of the Mahoning County Young Democrats from 2010 to 2012. But Rachel deviates from the standard party-line on some issues. “You can be a Democrat, and a ‘drill, baby, driller,’” she maintains. She’s weighed the potential consequences to the environment against the monetary benefits to the Mahoning Valley. “Let’s look at ways to do this safely, because we need it for our economy,” she concluded. But she wasn’t always so certain. Her father said he and his two children were initially too concerned for the environment to consider leasing, but Rachel’s research convinced them it could be done safely with the right regulations in place. “The future will tell us if I’m right or not,” Don III said. The decision to lease her mineral rights wasn’t a political one. In fact, other than serving on the Youngstown school board, her political aspirations have taken a backseat since she began teaching in 2010. “I get frustrated with the sameness of (politics). It’s the same people, the same issues that never really get resolved,” she said.

Keeping her day job HOW CAN SOMEONE HAVE ALL YOUR ANSWERS BEFORE THEY ASK ANY QUESTIONS? Clairvoyance isn’t one of our skills. But curiosity is. It’s what leads us to listen to you. To think about what you’re telling us. And then ask thoughtful questions. It’s the only way to crack the puzzle. Because the answers don’t just jump out. You have to dig. Subordinated debentures, equity infusions and other solutions are all well and good, but when is the right time to use them? And why? Shouldn’t your bank want to find out? We do. Learn more at 53.com/BusinessIdeas We’re Fifth Third Bank.

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In her teaching job, she said the kids are sometimes “attitudey,” but the end result is more rewarding than spending years supporting a congressional bill that may bring change in a decade or - worse -- may not even pass at all. “You start the year and (the students) can’t multiply or divide, and they end the year doing really amazing things — you see the results,” she said. “It means more on a smaller level.” Not even a financial windfall could make her give it up — though it does make it easier to survive on what had been a salary of prayers. Though she has taken a few extra vacations this year and is planning a few more for the near future, Rachel is being conservative with her money. She leaves the shale gas money in a separate account and, except for the purchase of a 2008 Volkswagen Beetle and a few other relatively small purchases, has kept from spending it. “There’s not a steady flow of it yet, and you never know if it’s ever going to come back in. You’re kind of afraid to really make any really big jumps like quit your job,” she said. Overall, the world still looks the same to her. She has less reason to worry about the future or paying bills. But ultimately, she said, all people have one never-ending purpose. “It’s not how much money we make. It’s what makes us happy.” n

In shale gas drilling, the numbers are rigged If you want to know how many wells are being drilled in a play, a state or even a smaller geographic area, just count the rigs and multiply by 10. Why? Because the number of wells completed is directly linked to the number of rigs available to drill them and ten is about how many wells the average well can drill in the Utica per year, says Chesapeake Energy. The numberâ&#x20AC;&#x2122;s not absolute, of course â&#x20AC;&#x201D; some will drill fewer, some more, depending on the conditions in which they operate â&#x20AC;&#x201D; but 10 is a pretty steadfast average, according to Chesapeake. Whatâ&#x20AC;&#x2122;s that mean for Ohio? Probably that weâ&#x20AC;&#x2122;ll see, at most, about 400 new wells drilled next year, unless rig counts here grow faster than expected. Chesapeake, for example, will go into 2013 with fewer than 20 rigs in the Utica and has said it will ramp that number up to about 22 rigs throughout the year. Other estimates, for all drillers combined, put the number of rigs operating in Ohio at about 40 by the end of 2013. There were 27 rigs operating in Ohio in early November, according to oilfield service giant Baker Hughes, which tracks rigs nationally. Projections do not call for Ohio to have 40 rigs in place for the entire year, so there may be fewer than 400 wells being drilled in the Ohio Utica in 2013. Energy companies, however, say thatâ&#x20AC;&#x2122;s not a cause for concern and that the rig count in the Utica will grow rapidly after more gathering lines, pipelines and processing plants are built in the region to take drillersâ&#x20AC;&#x2122; gas, oil and other liquids to their end markets. n

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2012: year of the Lease / from page 12

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He is marketing leases for 175,000 acres in Ohio on behalf of such drillers, he said. Those drillers never touched the oil and gas in the Utica, so their mineral rights are still worth plenty to others who can get those resources. Companies that paid $5, $10 or $20 an acre for rights years ago are selling them today for thousands, Mr. Stengell said. Parts of southern Ohio still are up for grabs and that there’s a lot of money to be made selling mineral rights in counties such as Morgan, Athens and Washington, where landowners could get around $3,000 per acre, according to Mr. Stengell. But prices going forward are likely to be as fluid as oil itself, say those dealing in mineral rights. For example, rights in Ashland and Medina counties have probably dropped in value this year, as wells there have produced disappointing results thus far. Other areas might have better luck and folks are rooting hard for their local driller’s success. Randy Wolfe, whose company, R. Wolfe Oil & Gas, drilled a well in Athens County this fall, said he knows the results from his well may help determine what people are paid for their mineral rights and how much drilling is actually done in the surrounding area. He said initial results from his well look good but perhaps not as good as someone like Mr. Stengell might hope. Bonus payments of $3,000 sound a little on the high side to Mr. Wolfe. Of course, Mr. Stengell is a seller, while drillers like Mr. Wolfe are buyers. Still, Mr. Wolfe is not unhappy with his results. “It looks more promising than what we thought,” Mr. Wolfe said, explaining that earlier predictions about Athens County underestimated the amount of gas and oil there.

Winding down Sometimes, waiting to sign a lease results in a higher price. Sometimes it doesn’t. In Mahoning County, Youngstown State Professor Jeanne Carchedi initially was part of a group of landowners that was negotiating together. Unhappy with the process, she broke away from the group, which eventually reached a deal for $5,000 an acre early this year. When Ms. Carchedi signed in the fall, however, the price had fallen to $4,000 an acre, she said. By September, the flood of leasing activity set off by Chesapeake Energy’s $1.3 billion lease buying spree had slowed. Bill Williams, a Canton attorney who has represented more than 3,000 landowners as well as a handful of producers, said he is still fielding calls every day from landowners interested in leasing their land. But Mr. Williams said much of the leasing has ended. “Except in one or two counties, leasing is pretty much over,” he said. “Portage, Stark, Trumbull, Mahoning, Columbiana, Carroll, Jefferson, Harrison, the eastern half of Guernsey, the good parts of Belmont and Noble are 95-plus percent leased. Unless a well hits big elsewhere, there will be not as much leasing occurring,” Mr. Williams added. Mr. Williams predicts additional leasing will occur mostly just to fill in small gaps in drilling units. Mr. Hillyer, however, said he was still seeing leasing activity in Muskingum, Coshocton, Holmes and Wayne counties, and that future demand in those areas will be determined by well results. Now, though, mostly what he hears about are right-of-way leases for pipelines, which are being sought everywhere. Those are not nearly as lucrative as mineral rights leases, and also tend to present greater issues to landowners in terms of using the property afterward, Mr. Hillyer said. n

Enrollment Gusher In Washington County, Ohio, Marietta College received more than 400 applicants for its Petroleum Engineering program this year, up from roughly 250 last year, said Robert Chase, professor of petroleum engineering. The school accepted 90 of those students, he said. Those that finish and get their degrees might not have any trouble finding work, either. Chase notes that projections from The Society of Petroleum Engineers show that in the next 10 years, 50% of current petroleum engineers will retire and he predicts the demand for engineers will further increase, along with the nation’s appetite for its newly accessible natural gas and oil. The Marietta program boasts a nearly 100% job placement record, and Chase said average starting salaries range from $95,000 to $102,000, with signing bonuses of $15,000 to $25,000. n

UTICA vs. MARCELLUS Oh, Ohio’s got gas all right — just not as much as Pennsylvania, perhaps. That’s because the Utica shale that lies beneath the eastern half of Ohio — the driving force behind the state’s drilling boom — probably has less than half as much gas as the famous Marcellus shale that’s been driving the industry’s growth in Pennsylvania. The U.S. Geological Survey completed its first assessment of the Utica’s potential in October and pegged the amount of “technically recoverable” natural gas in the Utica at 38 trillion cubic feet. That’s a lot of gas, no doubt, but not nearly as much as the 84 trillion cubic feet the USGS estimates can be taken out of the Marcellus. (Coincidentally, 84 trillion cubic feet is the same amount of gas that the USGS estimates can be extracted from the Greater Green River Basin shale in southwest Wyoming.) The Marcellus also has more liquids — the stuff often found with gas, such as butane and propane, which are sometimes worth more than the gas itself. The USGS pegs the Marcellus’ recoverable natural gas liquids at about 3.4 billion barrels, compared to 208 million barrels for the Utica. Ohioans can take heart though. For one thing, drillers themselves are more optimistic in terms of the Utica’s liquids — which is a big factor in the industry’s embrace of Ohio’s shale in 2012, when dry gas prices plummeted. n

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Chill, Baby, Chill!

Ah, winter in Ohio — snow, ice, bitter cold temperatures and an end to the construction season. Unless you’re constructing shale wells. Winter won’t faze drillers in Ohio one bit, said Ohio Oil and Gas Association executive vice president Tom Stewart. In fact, Mr. Stewart told Shale, many drillers actually prefer to drill when things are frozen. There’s less mud and mess to deal with, it’s easier to move equipment over wet ground and, let’s face it, if you can drill through a mile or more of solid rock, a little frozen topsoil isn’t going to slow you down much. “When I was drilling, I used to love the depths of winter — everything is hard and frozen,” Mr. Stewart said. n

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Water Recycling / from page 17 remains to be seen – especially while drilling activity is fairly slow and water is cheap and abundant. They have options after all — injection wells are vying to take that same water. Chesapeake’s recycling operator Rettew Flowback estimates its cost to recycle at less than $2 per barrel, about what some injection wells charge to take brine. But the costs associated with trucking the brine to and from the recycling facility make reuse less economical – and just like injection wells, recyclers will want to make a profit. A thirst for solutions “It would be less expensive for us While probably only 200 or so wells to send produced water to approved will be completed in Ohio this year, underground injection wells,” Mr. So far this year in Ohio, ODNR expects the number of Ohio Kenworthy said in an email. “However, Chesapeake has taken more than shale gas wells to reach 2,250 by the we feel it is our responsibility to make end of 2015. At a rough average of 4.5 428,000 barrels of produced every effort to minimize impact to our million gallons of water required for surroundings, and in that regard, the water to its recycling facility in each well, it will take nearly 10 billion Aqua Renew program was developed.” Carroll County while disposing of gallons of water, or a Meander Reservoir, But Chesapeake has not yet said to complete that many wells — and approximately 10,000 barrels of whether it will build an expanded thousands more are expected to follow in permanent recycling facility to handle produced water in Ohio Class II later years. its future needs. Other drillers also are disposal wells. Unless things change, most of that unsure whether and when such an effort water will have nowhere to go except will be warranted in the Utica. into injection wells, which will pump it Oklahoma-based Devon Energy is as far as two miles underground, where accustomed to operating in dry climates industry geologists say it will stay forever. where water issues are important and water is expensive or hard That’s why Chesapeake’s recycling plant is important as a to get. It’s been recycling water for its drilling operations in north possible model that the industry can use and build upon when Texas since 2004, but it has no current plans to develop a recycling drilling picks up. program in Ohio. “If we get to the stage where we’re drilling a couple thousand “It’s too early at this point for us to invest in a recycling program wells a year, there will be a huge effort to recycle, not only because because the volumes of water that we’re using are very low and, of it does (mitigate) freshwater usage and disposal, but it saves the course, the amount of flowback we get from our fractures is really industry money,” said Tom Tomastik, a geologist with the Ohio too small to justify any kind of a recycling program,” said Devon Department of Natural Resources. spokesman Chip Minty. The recycling system takes 150 barrels of Chesapeake flowback Chesapeake, by far the Utica’s biggest driller, might also be its from drill sites per day, filters it and ships the water back out to best hope for championing the cause of recycling, if it doesn’t turn other Chesapeake sites to be mixed with freshwater, chemicals and out to be the play’s biggest recycler itself. sand so it can be used again. The mix is then blasted a mile below “Our recycling program in the Utica is in its early stages, but our the surface at pressures high enough to shatter shale formations, goal over time is to use as much recycled water as possible,” Mr. releasing the natural gas, oil and the wet gases that drillers seek. Kenworthy said. So far, this one facility has been big enough to take in nearly all of The injection well industry is betting that recycling won’t keep Chesapeake’s flowback. up. In 2006, there were six injection wells constructed in Ohio, According to water usage records on fracfocus.org, Chesapeake followed by 11 in 2010 and then 26 in 2011. Earthquakes attributed used 226.5 million gallons of water to fracture 61 Ohio wells to an injection well near Youngstown stopped new permits at the through the first nine months of 2012. While 18.4 million gallons end of that year, and the state has new rules in place for injection flowed back to the surface, 91.8% of the total water remains in the wells. There were 33 pending permit applications for new injection gas and oil wells or is accounted for in reuse. wells at the start of November, ODNR reported. That 18.4 million gallons – about 438,000 barrels – is the water “ODNR has not approved a permit since late 2011. Now that the Chesapeake must recycle or dispose of, and in Ohio to date, it’s new injection well rules have been established, the division will been able to recycle nearly all of it. begin moving forward with new approvals in the near future,” said “So far this year in Ohio, Chesapeake has taken more than 428,000 department spokeswoman Heidi Hetzel-Evans. barrels of produced water to its recycling facility in Carroll County After Ms. Hetzel-Evans said that in early November, ODNR while disposing of approximately 10,000 barrels of produced on Nov. 13 approved four new injection well applications and said water in Ohio Class II disposal wells,” company spokesman Pete more than 20 others were being considered. Kenworthy said in September. Injection wells, rather than recycling, might remain drillers’ first choice for disposing of their brine, at least until drilling increases. A question of costs That’s because, officials say, when drilling activity is high, water is But whether drillers will remain committed to recycling here harder to get and recycled more often. n In the first nine months of this year, Mr. Castle and up to 50 other truckers worked daily to haul nearly 18 million gallons of brine to be recycled as part of Chesapeake’s Aqua Renew program, most of it from Chesapeake’s gas wells in Ohio. If predictions are correct, they have a lot of work ahead of them; the only question is where they’ll be taking all that brine.

“

”

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Terms of

Enrichment A few terms anyone following the shale gas industry should know: Fracking — A drilling technique, also known as hydraulic fracturing. The process involves pumping water, chemicals and sand into a shale formation at high pressure so that the rock fractures, creating fissures that are held open by the sand. It is through these fissures that the gas and oil flows into the well bore and up to the surface. Proppant — Small grains of material, usually sand, that are combined with water and chemicals to complete a frack job. The grains work their way into cracks in the shale during a fracking operation and then hold those cracks open once pressure is reduced so that oil and gas can continue to flow from the shale into the well bore.

API — The American Petroleum Institute, an industry trade group that sets standards and policies, and lobbies on behalf of member companies involved in the oil and gas industry. The organization also sets specifications and conducts audits of the industry’s supply chain to ensure that its standards are met.

Injection well — A well used to dispose of hazardous waste, including the water and chemicals used in the shale gas industry for hydraulic fracturing. Seismologists believe some injection wells can trigger earthquakes if they are located along existing fault lines. Well casing — Steel tubing, surrounded by cement, which prevents liquids and gases passing through the well bore from entering drinking water aquifers or otherwise escaping on their way to the surface. Bonus payment — The up-front money that energy companies usually pay a landowner in order to acquire a lease of oil and gas rights.

Royalty — Money that landowners receive once oil and gas is being produced on their property. Generally, the landowners receive a percentage of the revenue from oil and gas extracted from their property. In the Utica, royalties of 20% have not been uncommon. Wet gas — Natural gas (methane) that also includes liquids such as ethane, butane and other substances that are often used to make plastics or specialty chemicals. Wet gas can be and often is found in the same place as crude oil. Dry gas — Methane gas that does not include significant amounts of oil or other valuable liquids. Flaring — The practice of burning natural gas at the wellhead , especially when it cannot be moved into a pipeline. This sometimes takes place when drillers are seeking oil or other valuable liquids from the same well. Considered wasteful by many, the practice is banned in some states. n

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Chasing ShailEionaires / from page 14 financial professionals that shale landowners find most trustworthy are neighbors and people who shop at the same grocery store or grab coffee at the same diner.

CENTERS OF INFLUENCE Community banks, such as Canfield-based Farmers National Bank, North Canton’s Premier Bank & Trust, and even large institutions with local operations, such as Key Bank, have a distinct edge over banks without an established presence in the area. In the Mahoning Valley, Farmers has relationships and deposit accounts with about 650 landowners from Mahoning, Trumbull and Columbiana counties. Kevin Helmick, executive vice president of retail and wealth management at Farmers, attributes the bank’s success to its 125-year presence in the community and the creation of a Shale Resource Team in late 2010. That team brought together the bank’s key wealth advisers, lenders and insurance professionals to become subject matter experts in the shale play. “This has been such an emotional thing for folks and a time of real disbelief for most of them,” Mr. Helmick said. “When our clients got their lease payments and actually received the checks, we encouraged them to invest the money short term to take a pause and take a breather,” he said. “We take a team approach to help them understand what they’re about to face in terms of taxes and financial planning.” Without question, landowners are a very close-knit group of individuals, said Lucia M. Pileggi, senior vice president and Eastern Ohio market manager for Key Private Bank. “(Where) we felt we would have the most impact is really with those individuals who are already in our market,” Ms. Pileggi said. “For example, in our Eastern Ohio market — where there is a lot of the shale play going on — we have 42 branches.” Key steered away from the general seminar approach and favored gatherings and efforts targeted at those clients who owned more than 80 acres of land. In addition, Ms. Pileggi said the bank markets itself through gatekeepers with influence in the community and with landowners — advisors such as attorneys and accountants. The strategy of Premier Bank & Trust, which has offices in Belmont and Stark counties, is also largely referral based, relying on accountants, attorneys and landowners who refer other landowners to the two-year-old institution. “We are positioned well, between the Utica and Marcellus, to get us in front of some really nice prospective clients,” said Denise M. Penz, chief operating officer and wealth manager at Premier Bank, which is managing the funds of 20 to 30 landowners. “Fortunately, we have had a lot of opportunity where we have helped one landowner as part of a group and then been introduced to the majority of the group,” she said. “One of the groups that we have talked with that is all in -- if the contract they have negotiated comes to fruition -- is about $20 million amongst about 100 landowners.” Most of these landowners haven’t had a need to work with financial advisors in the past, but now, with their new wealth, need to do more money and estate management. “There is a lot of excitement for them that this is happening. But with that comes a lot of responsibility, especially from a financial

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standpoint,” she said. It’s a whole new set of problems for people who have wished for money all these years, Ms. Penz said. “Now they have it and they are like, ‘Wow, this is a lot more thinking than I expected to have to do.’”

A TAXING BLOW The biggest financial shock landowners face — after they negotiate the dollars and cents of their mineral rights lease — is the amount of taxes they have to pay. “If it’s over $380,000, you are going to pay taxes at the top rate, 35% for federal tax. Throw on a 6% state rate and you’re looking at a 41% tax rate,” Mr. Riemenschneider said. “When you tell somebody who has a $1 million lease bonus that they’ve got to send a $410,000 check to the government, they are always shocked by it. The comment that you get back is ‘We didn’t think rich people had to pay taxes,’ because that’s what they hear on TV.” Many of these landowners have been in situations with struggling farms and agricultural businesses for years and haven’t had to pay taxes, Ms. Penz said. “One of their first questions is, ‘How can I avoid paying tax?’ It scares them.” There are ways for landowners to avoid paying more tax than necessary. For instance, Mr. Riemenschneider advises his clients that they can save considerable money if they sell the property — but that’s not always a popular option. “Well, to sell the property, you have to get off the property and typically they don’t want to move,” he said. “They are perfectly happy where they are.”

“

When you tell somebody who has a $1 million lease bonus that they’ve got to send a $410,000 check to the government, they are always shocked by it.

Setting some aside

”

Many landowners are aging, Ms. Penz said, and after a life of farming, don’t feel they need the wealth personally, but they want to provide for their family through succession planning, estate planning and creating trusts to preserve the money for future generations. “Family is everything to them, so it’s something where they are looking to preserve that for the future,” Ms. Pileggi said. “They want to make sure that they have something to pass on and that they have a legacy.” Another financial concern for landowners is the ability to continue to operate their farm. “So many of them want to still work,” Ms. Penz said. “The drive is to find out what their ultimate goal is. . . . Not today, not a year from now, but ultimately, what do you want for yourself and your family long term?” n

WHAT’s NEXT / from page 7 midstream development through a joint venture named Pennant Midstream LLC. Pennant will construct 50 miles of 20-inch pipeline in Northeast Ohio and western Pennsylvania. Pennant’s also said it will build a cryogenic natural gas processing plant somewhere in Ohio. John Bonn, president of NiSource Midstream, said the project will send gas to other transportation lines and processing facilities. In another joint effort, Houston-based development company M3 Midstream has teamed with Chesapeake and Enervest Energy and announced it will begin building $900 million worth of pipelines and processing facilities, beginning in early 2013.

Thrilled to be drilled Of course, it’s the actual drilling for gas, oil and other valuable liquids that will ultimately drive all of the activity in and around the Utica region. And it’s that activity that many rural areas and smaller communities are counting on to boost their economies. So far, researchers at Cleveland State University are sticking by predictions they made earlier this year, which call for drilling to amp up to a pace of 1,000 wells per year by the end of 2013. In Muskingum County, officials are grateful for the activity they are seeing from drilling in surrounding counties, but they’re still not sure what’s in store for their own communities. “I don’t have the answer. I wish I did,” said Mike Jacoby, executive director of the Zanesville-Muskingum Port Authority. “If you look at our activity in the county, three wells have been permitted. One has been drilled and no results are available for what was found in that well,” he said in October. But Muskingum County’s future as an oilfield service center seems certain. Construction began there in April 2011 on Halliburton’s Ohio headquarters near Zanesville, expected to be built in stages at a cost of between $25 million and $49 million. Houston-based Halliburton has hired about 100 Ohioans so far with 200 more expected to be added, Mr. Jacoby said. “It could be more positive if we see more drilling. But really, we’re coming out ahead because of what’s happening in neighboring counties,” Mr. Jacoby said. He’s referring to places such as Carroll County, north of Muskingum County. Carroll County was the hot spot for drilling in 2012. Amy Rutledge is predicting and hoping for more of the same in 2013. Ms. Rutledge, president of the Carroll County Chamber of Commerce and Visitors and Convention Bureau, said she thinks the coming year will bring more traffic, more drilling and more prosperity for her county, which as of late this fall was home to 10 of the state’s 19 producing wells. Ms. Rutledge said she believes that more local people will soon be hired to work in the booming gas and oil well industry in Carroll County. The unemployment rate in Carroll County in late summer 2012 was at 7%, about half of what it was a year earlier. Atwood Lake Lodge, which closed in October 2010, reopened this October. Carroll County’s only hotel, the Days Inn of Carrollton has been at near capacity for months. “As a county, I wouldn’t say that we’re packed to the gills yet. But we hope to be soon,” Ms. Rutledge said. n

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The world is watching!

mercredi 10 octobre 2012

LE FIGARO

2 recto ve rs o

Well, France is, at least. Paris-based Le Figaro, the largest and oldest national newspaper in France, sent reporter Maurin Picard to Ohio to cover the Utica shale gas boom in October. Lucky Mr. Picard got to fly over east ern Ohio at the peak of some epic fall colors, but what he was looking for was shale gas activity, he said. He found it, with wells aplenty at various stages of development. As it stands, fracking is banned outright in France, but drillers hope to convince the nation to change its mind. As for Mr. Picard, he said he had no problem convincing editors to let him do the story, which ended up with a prestigious full-page Âť placement on page 2 as the dayâ&#x20AC;&#x2122;s top feature story. But itâ&#x20AC;&#x2122;s little wonder the French are interested in the Utica â&#x20AC;&#x201D; French Energy company Total has a $2.3 billion stake in Chesapeake Energyâ&#x20AC;&#x2122;s Utica assets and Franceâ&#x20AC;&#x2122;s Vallourec Group is building a $700 million steel mill in Youngstown through its V&M Maurin Picard of Paris-based Le Figaro, Franceâ&#x20AC;&#x2122;s largest newspaper. Star subsidiary. n De larges saignĂŠes vĂŠgĂŠtales abritent des tronĂ§ons de pipeline provenan des puits dâ&#x20AC;&#x2122;exploita t tion des de gaz de schiste, dans lâ&#x20AC;&#x2122;Ohio. gisements MAURIN PICARD

croĂŽt lâ&#x20AC;&#x2122;excitati on des sondeurs encore Ă dire si le pĂŠtrole de . Personne ne se risque flots durant schiste pourrait des couler Ă dans six mois. annĂŠes, ou si le soufflĂŠ retombera Des indices, cependant, ne pas. Survolan t Tippecan trompent son, Ralph Randolph oe, dans le comtĂŠ de Harrivient de repĂŠrer cours de dĂŠvelopp sur un site en ans la lueur blĂŞme ement trois core vides. ÂŤ du petit Elles nâ&#x20AC;&#x2122;ĂŠtaient gigantesques cuves enmatin, timide soleil pas suis passĂŠ ici, dâ&#x20AC;&#x2122;automne dĂŠvoile un sâ&#x20AC;&#x2122;ĂŠtonne-t-il. lĂ la derniĂ¨re fois que je tons rouge et les Sâ&#x20AC;&#x2122;ils ont construit ves, croyez-m or oi, câ&#x20AC;&#x2122;est que le du comtĂŠ de des collines boisĂŠes site est promette ces cuDe partout affluent Tuscarawas, ur. Âť largement assoupi. encore les grands noms Chesapeake, du ÂŤ Big Oil Âť Aux comman premier entrĂŠ des de son petit : Exxon, Shell, en jeu, a ĂŠtĂŠ monomo BP et mĂŞme le rejoint par teur franĂ§ais Total. town, le mĂŠtallurg virage sur lâ&#x20AC;&#x2122;aile, immaculĂŠ, Ralph Randolph Piper Ă&#x20AC; Younsgiste franĂ§ais une usine de rĂŞts multicolo pointant lâ&#x20AC;&#x2122;horizon du doigt part en Vallourec construit tubes en acier res qui semblent et les foalimenter les sans soudure, lâ&#x20AC;&#x2122;est, câ&#x20AC;&#x2122;est le comtĂŠ de Carroll, sâ&#x20AC;&#x2122;ĂŠtendre Ă lâ&#x20AC;&#x2122;infini. ÂŤ Ă&#x20AC; futurs pipelines destinĂŠs la rĂŠgion. neur de New qui bientĂ´t couvrironĂ Montant de Philadelphia, explique cet entrepret lâ&#x20AC;&#x2122;investissement 650 millions pilote Ă ses heures. paisible en apparenc de dollars, et initial : Câ&#x20AC;&#x2122;est 350 emplois ce que Ă§a cache. e, mais vous allez vite Ă la clĂŠ. comprendre Âť Comme Le jackpot des frondaisons de lâ&#x20AC;&#x2122;Ohio, pays par enchantement, les fermier s cans, rĂŠvĂ¨lent Toutes les ÂŤ des amish et majors Âť ont des leur signĂŠ un nombre le sol : une myriadesecret, invisible ou presque Mohisionnant de concessio impresdepuis de chantiers ns relatives gards, de larges tation avec les fermiers locaux. aux droits dâ&#x20AC;&#x2122;exploisaignĂŠes vĂŠgĂŠtalesdissimulĂŠs aux realignements la discrĂŠtion Mais ceux-ci abritant de sages . Au de cultivent enfouis. En cettetronĂ§ons de pipeline en Patriot Road, nord-est du bourg de Carrollto passe dâ&#x20AC;&#x2122;ĂŞtre une route mal splendide fin n, sur est de lâ&#x20AC;&#x2122;Ohio quelle ont surgi carrossĂŠe le dâ&#x20AC;&#x2122;ĂŠtĂŠ indien, vit long des sor, matĂŠriali Ă lâ&#x20AC;&#x2122;heure dâ&#x20AC;&#x2122;une fĂŠbrile chassele nordgent et les portes puits de schiste, les mines de lasĂŠe par une noria sâ&#x20AC;&#x2122;allonau trĂŠde grues, dâ&#x20AC;&#x2122;ouvrier malgrĂŠ les signesclaquent Ă la moindre incessante de sollicitation, camions, s et dâ&#x20AC;&#x2122;ingĂŠnie extĂŠrieurs de nouveau Graal ÂŤ Laissez-m urs, tous en richesse ĂŠvidents. oi tranquille, ĂŠnergĂŠtique je nâ&#x20AC;&#x2122;ai rien : les gisement quĂŞte du schiste, dĂŠnomm sâ&#x20AC;&#x2122;emporte Tom Ă vous s de Herbert, dire Âť, gaz de un prospĂ¨re sur huit Ă&#x2030;tats, ĂŠs Marcellus et Utica, qui chĂŠ dans son retraitĂŠ retranimmense propriĂŠtĂŠ sâ&#x20AC;&#x2122;ĂŠtendent du Tennesse e Ă New York par lâ&#x20AC;&#x2122;Ohio. nes. Un peu perchĂŠe sur les plus loin, Dawn en passant collide Devine, SituĂŠ Ă 7 800 famille qui vient pieds (2 300 juste de ranger une jeune mĂ¨re ĂŠtait encore entrouvre la m) de profonde son luxueux totalement inaccessi porte ur, Utica 4Ă&#x2014;4, de technologie mais botte carrĂŠmende sa demeure repeinte ble il y a peu, perfectionnĂŠe de frais, faute t en touche lorsque profondeurs. tion porte sur pour forer Ă la conversaEt puis la rĂŠvolutio les droits dâ&#x20AC;&#x2122;exploit de telles lieu. Une techniqu comprendre, n ation. ÂŤ explique Brad e rĂŠvolutionnairedu fracking a eu Hillyer, un avocatIl faut les de la roche par rure de lutteur, de fracturation injection dâ&#x20AC;&#x2122;eau, spĂŠcialiste des Ă la carchimique Ă haute res et dont le de sable et de cabinet dâ&#x20AC;&#x2122;Uhrich nĂŠgociations pĂŠtroliĂ¨mĂŠlange la roche argileusepression, permettant dâ&#x20AC;&#x2122;extrair depuis deux sville ne dĂŠsempli ans. Les gens t pas e de du coin dans ses anfractuo les gouttelettes de gaz vienne fouiller dans leurs affaires.nâ&#x20AC;&#x2122;aiment pas quâ&#x20AC;&#x2122;on retenues sitĂŠs. leurs voisins Un trĂŠsor : Ils redoutent apprennent le les quantitĂŠs que montant de leurs contribuĂŠ durant combien se libĂŠrĂŠes montent-ils gains. Âť Ă&#x20AC; la dĂŠcennie ĂŠcoulĂŠe ont largement au juste ? ÂŤ 75 % le prix de 5200 Ă 5700 Ă faire Il faut compter du gaz pour dollars lâ&#x20AC;&#x2122;acre les foyers amĂŠricainchuter de quâ&#x20AC;&#x2122;il augment prĂŠcise (0,4 ait s, tandis chĂ¨que Hillyer. Un de mes clients ha) pour cinq ans, tains gisement de 65 % en France. En a reĂ§u un premier de 157 000 dollars outre, cers sont riches et je nâ&#x20AC;&#x2122;ai rien en condensa des issus du en dessous de vu passer depuis ts (des liquigaz) 90 000 dollars. pour la fabricatio - que la Chine importe Âť Le jackpot, le avidement brut non corrosifn du plastique -, ainsi que lĂ . Il est dans vrai, pour les propriĂŠtaires, les royalties, du pĂŠtrole nâ&#x20AC;&#x2122;est pas (ÂŤ sweet crude câ&#x20AC;&#x2122;est-Ă -dire qualitĂŠ. Câ&#x20AC;&#x2122;est du propriĂŠta oil Âť) dâ&#x20AC;&#x2122;excelle le dividende ire indexĂŠ sur ce pĂŠtrole de nte schiste, localisĂŠ la valeur de ment dans le lorsque le puits la productio principalegisement Utica tournera Ă plein donne, au point venir millionna en Ohio, qui rĂŠgime. De quoi n a changĂŠ la ire dĂ¨s la premiĂ¨re dâ&#x20AC;&#x2122;inciter les ÂŤ depuits de Pennsylv tion. ÂŤ Les royalties majors Âť Ă fermer annĂŠe leurs ĂŠtaient dâ&#x20AC;&#x2122;environ dâ&#x20AC;&#x2122;exploitadans le ÂŤ Buckeye anie pour dĂŠplacer leurs 2010, prĂŠcise 12,5 % avant James Pham, moyens un avocat de double : il permet State Âť voisin. Car son lâ&#x20AC;&#x2122;enthousiasme avantage est Californie Ă contagieux, Ă la fois dâ&#x20AC;&#x2122;enraye arrivĂŠ depuis du gaz, en ralentissa peine. On en r la chute du huit mois Ă est dĂŠsormai prix s Ă 20 %, et et de mieux miser nt artificiellement la dĂŠbut. Âť ce nâ&#x20AC;&#x2122;est quâ&#x20AC;&#x2122;un production, sur lâ&#x20AC;&#x2122;indĂŠmo dable or noir. Le phĂŠnomĂ¨ VoilĂ commen ne, t les campagn ampleur spectacu enclenchĂŠ en juillet 2010, par la crise de la mĂŠtallurgie, es de lâ&#x20AC;&#x2122;Ohio, frappĂŠes a pris laire. Des 129 jour, 27 sont le et du crĂŠdit de forages recensĂŠs une opĂŠrationnels. immobilier en lâ&#x20AC;&#x2122;industrie automobiĂ ce Les autres ne sites explorato dain Ă rĂŞver 2008, se prennent sont dâ&#x20AC;&#x2122;une folle prospĂŠrit ires, souformer en gruyĂ¨re mais ils sont dĂŠjĂ en train que des dâ&#x20AC;&#x2122;argent versĂŠes ĂŠ. ÂŤ Les montagn de par Chesapea transles forĂŞts de es aux propriĂŠta ke et les autres lâ&#x20AC;&#x2122;Ohio, Ă mesure ires foreurs que lâ&#x20AC;&#x2122;ĂŠconomie locale sont en train de doper littĂŠralement Âť, se rĂŠjouit Brad Hillyer. BRAD HILLYER, DES NĂ&#x2030;GOCIA AVOCAT SPĂ&#x2030;CIALISTE TIONS PĂ&#x2030;TROLI Ă&#x2C6;RES

MAURIN PICARD

ENVOYĂ&#x2030; SPĂ&#x2030;CIAL Ă&#x20AC; CARROLLTON ET YOUNGST OWN (OHIO)

Aux Ă&#x2030;tats-Uni Changement s, de de route, par-delĂ dĂŠcor et dâ&#x20AC;&#x2122;ambiance. des trĂŠsors de les vallons, Youngsto Ă&#x20AC; une heure voir avec son wn fait peine gaz centre-ville sinistrĂŠ Ă donnĂŠes, tristes et ses bĂ˘tisses et de pĂŠtrole Câ&#x20AC;&#x2122;est pourtant vestiges dâ&#x20AC;&#x2122;un passĂŠ industrie abanont ĂŠtĂŠ lĂ ses. La bourgade que Vallourec vient de poser l rĂŠvolu. a perdu deux ses rĂŠvĂŠlĂŠs grĂ˘ce trente ans, tiers de sa populatiovalipassant n en ÂŤ Lâ&#x20AC;&#x2122;exode continue de 168 000 Ă 66 000 habitants. marone, truculent Âť, soupire le maire, Charles Ă la technique septuagĂŠnaire SamFormica dâ&#x20AC;&#x2122;un autre Ă˘ge. Youngstodans son bureau en de fracturation wn explique-t-il : la faillite menacea deux gros enhydraulique denuis,5 000 ĂŠdifices abandonn et lâ&#x20AC;&#x2122;insalubritĂŠ ĂŠs va sâ&#x20AC;&#x2122;aggrava des roches. Asse nt. Onze tremble z pour ments de terre Alors Sammaro en 2011 bouleverser la ne a eu une idĂŠe ploitation de : cĂŠder les droits donne 180 acres (72 dâ&#x20AC;&#x2122;exha) de terre la ville pour financer ĂŠnergĂŠtique et en bordure de les travaux de quoi sâ&#x20AC;&#x2122;en priver, pousser les revendiq puisque chacun dĂŠmolition. Pourpeut lĂŠgitimem uer sa part locaux Ă louer ent de lâ&#x20AC;&#x2122;Ohio lui-mĂŞm du gĂ˘teau de schiste leurs terres, ploitation et que lâ&#x20AC;&#x2122;Ă&#x2030;tat e sâ&#x20AC;&#x2122;apprĂŞte Ă cĂŠder les droits de ses parcs et en dĂŠpit des incon dâ&#x20AC;&#x2122;exforĂŞts, aprĂ¨s ce sens en juin une loi passĂŠe 2011 ? Les bĂŠnĂŠfices nues plus fervent feraient rĂŠflĂŠchiren des ÂŤ anti-frac le environnemen king Âť, comme Sammarone, ceux les appelle tales. environnementale qui objectent aux consĂŠque s mal cernĂŠes nces fracturat

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Les gens du nâ&#x20AC;&#x2122;aiment pas coin quâ&#x20AC;&#x2122;on vienne fouil dans leurs affailer res. Ils redouten que leurs vois t ins apprennent le montant de leurs gain s

de la techniqu ion hydrauliq e de duit notre dĂŠpendan ue : ÂŤ Cela crĂŠe des emplois, ce au pĂŠtrole fardeau fiscal ĂŠtranger et soulagerĂŠdes le dent de lâ&#x20AC;&#x2122;Ohio villes Âť, relĂ¨ve Jerry James, prĂŠsi200 000 emplois Oil and Gas Association. Au total, pourraient ĂŞtre king en Ohio dâ&#x20AC;&#x2122;ici Ă 2015, selon crĂŠĂŠs grĂ˘ce au fracoptimistes, et les estimatio gĂŠnĂŠrer 22 milliards ns les plus nus. Le chĂ´mage de dollars de , quant reveĂ lui, quatre ans, contre est tombĂŠ Ă 7,2 % en 7,8 % pour le lâ&#x20AC;&#x2122;intervalle, les Ă&#x2030;tats-Unis sont reste du pays. Dans lions de barils passĂŠs de 5 Ă 6,2 milbruts de pĂŠtrole duisant leur dĂŠpendan produits par jour, rĂŠce ĂŠnergĂŠtique Or, Ă Youngsto de 42 %. depuis que onze wn, le fracking a mauvaise tremblements presse, lâ&#x20AC;&#x2122;ĂŠchelle de Richter, de terre, classĂŠs 4 sur ont ĂŠbranlĂŠ la annĂŠe 2011. Un ville pour la puits de D & seule ne. Sammaro L Energy en est Ă lâ&#x20AC;&#x2122;origine, nier sĂŠisme le dont la maison a tremblĂŠ lors du der31 dĂŠcembre, a dĂŠcouvert teur avait que lâ&#x20AC;&#x2122;opĂŠraviolĂŠ toutes les existantes, en forant en deĂ§Ă rĂ¨gles dâ&#x20AC;&#x2122;exploitation et en laissant de 9 000 pieds sâ&#x20AC;&#x2122;infiltrer lâ&#x20AC;&#x2122;eau (2 700 m) sa propre femme contaminĂŠe. SommĂŠ par de ÂŤ rĂŠgler le pour toutes Âť, problĂ¨me une il a exigĂŠ et obtenu bonne fois production un moratoir de ce site, mais concitoyens espĂ¨re convaince de la partagĂŠs que le fracking pourraitre ses sauver Youngsto wn de la ruine. bien Ă&#x20AC; lâ&#x20AC;&#x2122;heure oĂš lâ&#x20AC;&#x2122;Ohio hume dâ&#x20AC;&#x2122;un nouvel fĂŠbrilement les prĂŠmices Ă˘ge seront pas lourddâ&#x20AC;&#x2122;or, les opposants au fracking face Ă la ruĂŠe ne schiste. ÂŤ Je sur les gisement pĂ¨voudrais bien s de rĂŠcupĂŠrer ma teau, confesse part du gĂ˘Ralph Randolph son Piper sur , tandis quâ&#x20AC;&#x2122;il le tarmac de parque lâ&#x20AC;&#x2122;aĂŠrodrome delphia. Je possĂ¨de de New ferson. Malheure ces 180 acres dans le comtĂŠ Philausement, jâ&#x20AC;&#x2122;avais de Jef2010 pourâ&#x20AC;Ś signĂŠ juste 100 Ce sera dur de dollars lâ&#x20AC;&#x2122;acre de droits dâ&#x20AC;&#x2122;exploitaavant renĂŠgocier. Mais trole, je pourrai sâ&#x20AC;&#x2122;ils y trouvent tion. rĂŠclamer mes voisins ont signĂŠ 12,5 %. Et tant du pĂŠpis si mes depuis pour 20 mon sort ! Âť %. Je me contenter â&#x2013; ai de

What the frack is that?

A rotary cone bit used by drillers. Photo by Stephen Herron

www.SHALEmagazine.com

Thatâ&#x20AC;&#x2122;s the tool that makes this whole shale gas thing possible â&#x20AC;&#x201D; as well as most other oil and gas drilling. Itâ&#x20AC;&#x2122;s a drillerâ&#x20AC;&#x2122;s bit, shown in its holder, with another bit exposed on the left. Thatâ&#x20AC;&#x2122;s a big bit, too, the type that drillers use to drill the vertical portion of the wellbore, before using smaller bits to make the long horizontal run that gives horizontal drilling its name. Specifically, itâ&#x20AC;&#x2122;s a â&#x20AC;&#x153;rotary cone rock bit,â&#x20AC;? and during drilling, the entire bit turns, while the wheels of teeth also turn on their own axis, making it possible to penetrate hard rock. The rock it has to chew through often varies in hardness, so such a bit might last through as few as 30 feet or as many as 8,000 feet of drilling. Engineers say it probably will take between four and 15 bits to drill the average shale well, depending on what sort of rock is encountered between the surface and the shale some 8,000 or so feet down. And hereâ&#x20AC;&#x2122;s a fun fact â&#x20AC;&#x201D; the rotary cone bitâ&#x20AC;&#x2122;s design was patented in 1909 by Howard Hughes Sr., who used it to drill for oil and build his familyâ&#x20AC;&#x2122;s fortune. n

How will local industry changes affect your business? Let's make a plan for growth. As a business owner or manager, you know that a strong plan is important for any successful venture. That’s why FirstMerit Bank takes an active interest in helping you plan for the changes ahead as the shale industry expands in our community. Whether your business is directly or indirectly involved, our team of professionals offers financial advice, products, and a full range of comprehensive services. Together, we’ll create a plan for what’s next on the horizon.

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TO L E A R N MOR E, C O N T A C T :

Eric Dellapina at 330-498-1532 or eric.dellapina@ firstmerit.com.

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