Meet the Author

Robert J. Sadowski |

Senior Economic Analyst

Robert J. Sadowski

Bob Sadowski is a senior economic analyst in the Research Department of the Federal Reserve Bank of Cleveland. His work focuses on monetary policy and regional economics.

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Meet the Author

Margaret Jacobson |

Senior Research Analyst

Margaret Jacobson

Margaret Jacobson is a senior research analyst in the Research Department of the Federal Reserve Bank of Cleveland. Her primary interests are macroeconomics, monetary policy, banking, and financial crises.

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08.04.11

Economic Trends

The Fourth District: The Next Big Energy Producer?

Robert J. Sadowski and Margaret Jacobson

When asked about domestic oil and natural gas production and where most of it occurs, people will likely reply: the region surrounding the Gulf of Mexico. This response is correct. In fact, over the past decade, two-thirds of active drilling rigs in the United States were found in the states of Texas, Louisiana, and Oklahoma, Texas being the front-runner by a wide margin.

Historically, states in the Fourth District have also played an important role in oil and natural gas production. Crawford County, in the northwest corner of Pennsylvania, was the birthplace of the modern oil industry in 1859, and the surrounding region remained a major producer for the next 80 years. As the twentieth century dawned, Ohio was considered the “Middle East” of the oil- and gas-producing world. At its peak in 1896, Ohio produced 24 million barrels of oil, or 39 percent of the U.S. output during that year. To put these numbers into some perspective, the United States currently (2010) consumes 19.1 million barrels per day of refined petroleum product, according to the U.S. Energy Information Administration (EIA).

The Fourth District is now positioned to make a comeback as a major domestic energy producer due to exploration and production in the Marcellus and Utica shales. The Marcellus shale is a rock formation that underlies much of Pennsylvania and West Virginia and portions of New York and Ohio at a depth of 3,000 to 7,000 feet. Pennsylvania State University geoscientist Dr. Terry Engelder estimates that there are between 360 trillion and 450 trillion cubic feet of recoverable gas in the Marcellus shale, enough to supply all of the U.S.’s natural gas needs for almost 20 years at the current rate of usage. Likewise, the energy consulting firm, INTEK, Inc., came up with a similar figure when it was hired by the EIA to provide estimates of undeveloped technically recoverable shale gas (natural gas that is trapped within shale formations) in the lower 48 states. The firm estimated the potential output of the Marcellus shale to be 410.7 trillion cubic feet, making it the largest shale gas play in the United States. The next largest are Haynesville at 74.7 trillion cubic feet and the Barnett at 43.4 trillion cubic feet. Haynesville is located in northwest Louisiana and east Texas, while the Barnett is found around Fort Worth, Texas. Not only is the Marcellus big, but shale gas is expected to constitute 45 percent of the total U.S. natural gas supply by 2035, up from 14 percent in 2009, according to EIA estimates (Annual Energy Outlook, 2011).

At this time, a substantial share of the Marcellus drilling and production is concentrated in the state of Pennsylvania, mainly the southwest corner and the north central region. Additional activity is found along the central to western regions of West Virginia. Activity in Ohio is limited due to the thinning out of the Marcellus as it enters the state. As of June 2011, there were only 30 Marcellus producing wells in Ohio. Shale gas production has increased exponentially in Pennsylvania during the past few years, with output in 2010 estimated at 327 billion cubic feet. While that may seem like a sizeable amount, it is a tiny share of the total natural gas consumed in the United States on an annual basis. In fact, 327 billion cubic feet accounts for only 6.5 percent of residential usage during 2010. Nonetheless, the rate of growth in the extraction of gas from the Marcellus closely tracks early production results from the Barnett shale, which started in the late 1990s and by 2010 approached 2 trillion cubic feet.

Geologists have known about the existence of shale gas for decades. However, the technology to extract natural gas on a large scale from shale rock located a mile or more below the surface, and at an economically viable cost, has only been in existence for the past dozen years. The base technology, hydraulic fracturing or “fracking,” has been in use since the 1940s. It involves the injection of a mixture of water, sand, and chemicals under high pressure into a well. The refinement of this technology augmented by the use of extended reach (horizontal) drilling gave impetus to the shale gas industry boom. Horizontal drilling is attractive because the production factor is 15 to 20 times that of a conventional vertical well, although the initial cost may be three times greater. During 2010, horizontal drilling was used in just over half of the Marcellus production wells in Pennsylvania. Yet those wells accounted for almost 90 percent of the gas produced. Oil is also extracted from Marcellus shale. However, the amount on a yearly basis is minimal, typically no more than a half-million barrels from all the producing wells in Pennsylvania and West Virginia combined.

Utica shale is a rock formation generally located a few thousand feet below the Marcellus. It is concentrated in New York, Ohio, Pennsylvania, and West Virginia, although Utica extends into four adjacent states. It also lies beneath parts of Lake Erie, Lake Ontario, and Ontario. Geologists believe that Utica shale has the potential to become an enormous natural gas and oil resource. However, because of differences in mineralogy between the Marcellus and Utica shales, hydraulic fracturing methods used in the Marcellus might not produce as much fracturing in the Utica, and more research is needed to significantly improve the fracturing rate.

Eastern Ohio is currently the center of Utica activity in the Fourth District, primarily because the shale is less than a mile below the surface. Also, the productive portion of the Marcellus extends for only a relatively short distance into the state, making Utica a more attractive play. Data provided by the Ohio Department of Natural Resources indicate that 43 permits for Utica drilling have been issued, almost all within the past 12 months. As of June 2011, 16 wells have been drilled and four have been fractured. No production data are available.

Investment in exploration and production of the Marcellus shale continues to grow. A study conducted by Pennsylvania State University researchers shows that investment spending by the private sector in Marcellus exploration and production in the state of Pennsylvania grew from an estimated $3.2 billion in 2008 to over $11 billion during 2011. Data made available by the Bureau of Labor Statistics provides insight into the direct employment impact. Between 2001 and 2010, employment in the oil and gas industry across Ohio, Pennsylvania, and West Virginia rose by almost 68 percent. Growth in Pennsylvania was the highest, with payrolls rising by about 10,000, or 166 percent. Half of this growth was realized between 2009 and 2010, with an estimated employment rise in the oil and gas industry of just over 5,000 workers. During that same 12-month period, the net growth in total employment across Pennsylvania was 2,300 workers.

A possible impediment to continuing investment in the shale gas industry is the concern about contamination of drinking water from chemicals used in the fracking process. The state assembly in New York passed a bill in June 2011 that creates a one-year moratorium on hydraulic fracturing, both vertical and horizontal, across the state because of environmental concerns. This is the second consecutive year that a moratorium has been in place. Pennsylvania and Wyoming already require drilling companies to publicly disclose the chemicals they use and how they dispose of them. Texas recently passed a similar law. As investment in shale gas continues to grow, so does a regulatory environment that balances the concerns of residents living near drilling sites with the need for energy production.