January 2012

The Natural Gas Bonanza

Marcellus Shale Gas in neighboring region delivers economic benefits plus environtmental advantages and concerns.

By Anthony Birritteri

It’s easy to sound optimistic these days when talking about natural gas prices. For many consumers, businesses included, the cost of this abundant energy supply – thanks to gas found deep within the 95,000-square-mile Marcellus Shale region – has decreased by more than 30 percent in a three-year period. Admittedly, the past recession has also played a role in decreased prices due to lack of demand, but experts say there is a more than a 100-year supply of Marcellus Shale gas that will keep prices stable. And New Jersey is basically next door to this underground stockpile which stretches across New York, Pennsylvania, West Virginia, Ohio and Maryland.

Edward Graham, president of Folsom-based South Jersey Industries, an energy services holding company and parent company of South Jersey Gas (SJG), says the close “abundant supply of natural gas will keep energy costs down while leveling the playing field for manufacturers and other large energy users that seek a cleaner, more efficient and less-costly fuel source. These benefits have a real and positive impact on our state’s economic situation.”

Continued Price Reductions

Natural gas price decreases have been “dramatic,” Graham says. “Spot market prices back in 2008 were $10 per MMBTU (one million British thermal units or 100-therm). Today, that price is $4 per MMBTU.” In 2011, SJG’s 349,000 residential, commercial and industrial customers saw their total natural gas bills decrease by 9.4 percent. In 2010, the reduction was 10.6 percent.

“We are looking at natural gas prices in the $3 to $4 range for years to come,” adds Tony Robinson, director of basic gas supply service at Newark-based Public Service Electric & Gas, which serves some 1.8 million gas customers in the state.

Since January of 2009, PSE&G natural gas customers have saved 32 percent in gas costs, for a typical user savings of $500 annually. Robinson notes that all gas utilities do not profit from the sale of natural gas. “It’s a pass-through cost. We don’t make money on providing the commodity to customers. So when we buy less expensive gas, we can lower prices to the customer,” he explains.

Kathy Ellis, chief operating officer of Wall-based New Jersey Resources, the parent company of New Jersey Natural Gas, credits the New Jersey Board of Public Utilities (BPU) for “decoupling” or breaking the link between natural gas sales profits and customer usage. “Utilities used to increase revenues by pushing more gas through the pipeline. With decoupling, you break that tie to really push conservation.”

Though they are not profiting from the amount of gas consumers use, utilities are earning revenues from the number of consumers converting to natural gas from other energy sources such as oil, electricity and propane. Historically, one-third of New Jersey Natural Gas’ new customers each year were people converting from other energy sources. Today, Ellis says, the rate is 50 percent. New construction makes up the other half of new business. Asked if there’s been a growth in new commercial business given the sluggish economy, Ellis says NJNG’s service territory, which includes Monmouth, Ocean, Middlesex, Burlington and parts of Morris counties, has been doing well. In fiscal year 2010, the utility added 6,189 new customers.

NJNG’s customers have seen their rates drop by 27 percent from October 2008 to October 2011. In mid-November, the company announced it would credit $71.2 million back to residential and small commercial sales customers for gas usage between December 1, 2011 and January 31, 2012, for an average customer savings of 32 percent over the two-month period. In total, NJNG has 486,000 customers in its service area.

How much does it cost to convert to natural gas? According to SJI’s Graham, the typical price for a home is between $4,000 and $5,000. For a small business, depending on how fuel intensive it is, the conversion cost is more in the $10,000-range.

Infrastructure Improvements

Going hand-in-hand with new customers and the delivery of natural gas are the millions of dollars of infrastructure improvements utilities are currently undertaking. As SJI’s Graham explains, “There is more supply identified (because of the Marcellus Shale gas) than the capacity to move it.” He says a number of large interstate pipeline projects will be undertaken over the next few years that will further expand supply in New Jersey. For example, The Williams’ Transco pipeline, a 10,500-mile pipeline system that extends from South Texas to New York City, has plans in place to improve its infrastructure.

In New Jersey, SJG has been accelerating its Capital Investment Recovery Tracker program since 2009 to help stimulate the state’s economy. In that time, the company has invested more than $120 million in incremental improvements to its natural gas system. “We had been spending $50 million a year on infrastructure,” says Graham. “We are now spending more than $100 million.”

With that expenditure, the utility is creating jobs (estimated in the hundreds), directly within SJG and at various contractor companies.

Continuing its Accelerated Infrastructure Program (AIP), developed in conjunction with the BPU, NJNG has spent some $131 million to date on various projects to strengthen its 6,900-mile pipeline system by adding redundancy measures and replacing old cast iron and bare steel pipes. The company estimates that its program will create more than 722 direct and indirect jobs, $38 million in income and $54.3 million in gross revenues for the state.

In mid-July, PSEG received BPU approval to make $273 million in additional investments in electric and natural gas infrastructure upgrades through its Gas and Electric Capital Economic Stimulus Infrastructure Investment Program. On the natural gas side, eight projects represent a $78-million investment. Among the projects are the replacement of 47 miles of cast iron and bare steel mains and 4,200 bare steel gas services. According to PSE&G President and COO Ralph LaRossa, the investments will generate more than 450 utility and contractor positions through 2012.

Energy Master Plan

With the state’s new Energy Master Plan (EMP), the use of natural gas will further increase in New Jersey. The plan calls for the creation of 1,500 megawatts of combined heat and power (CHP) projects. Also known as cogeneration, in which a fuel such as natural gas is used to produce electricity, the CHP process uses the heat generated from running the gas powered turbines for thermal energy. One of the benefits of using natural gas in the CHP process is that it is a cleaner burning fossil fuel compared with coal. This endeavor is in line with the EMP’s goal of promoting a diverse portfolio of new, clean in-state generation.

According to Graham, “The EMP, more than ever before, makes natural gas a prominent source, if not the main source, of energy for the state going forward.”

Hydraulic Fracturing

Coupled with the push for natural gas as an environmentally friendly, clean-burning fossil fuel is the current method of obtaining the abundant supply of Marcellus Shale gas - and its environmental concerns. The shale gas is being mined and harvested through a process called hydraulic fracturing (or fracking) which has been used in the US for over 60 years. In this method, combined with horizontal drilling, millions of gallons of water, sand and chemicals are injected into a well at a high pressure. This fractures rock formations and frees hard-to-get natural gas which then travels up the well. The fluid used in the process is 90 percent water, 9.5 percent sand and .5 percent chemicals. (htt).

Both federal and state regulations help to insure that the water is managed properly. Typically the fluid is treated one of three ways: it is reused or recycled, put in permitted underground injection control (UIC) class II wells, or treated at a water treatment facility. New Jersey does not allow for disposal into permitted UIC wells.

Currently there is a policy debate within our state over how to proceed with the potential shale region under the Delaware River Basin and its impact on the river. According to a report by The Delaware River Basin Commission, 36 percent of the Marcellus Shale region underlies the Delaware River Basin. The commission is currently reviewing regulations to insure that there is not an impact upon the water supply and the “frack water must be treated and disposed of properly.”

Recently, the commission postponed a new rule that would have lifted a moratorium and established regulations on new natural gas drilling operations. This was followed by the New Jersey Assembly Environment and Solid Waste Committee voting on a bill that would prohibit New Jersey sewage treatment plants from accepting wastewater from Marcellus Shale drilling operations in Pennsylvania and other states. There is a similar bill pending in the Senate Environment and Energy Committee.

In April of last year, the New Jersey Department of Environmental Protection asked for strict regulations from the DRBC to protect the water supply and the Delaware River Basin.

On the same token, the DEP also recognizes the signifi cant positive impact that the development of the Marcellus Shale gas will have on DRBC states. According to DEP Commissioner Robert Martin, “We recognize the important role that the development of shale gas plays in the energy security of the United States and as a cleaner fuel source than coal or oil.”

Though the Marcellus Shale stops at New Jersey’s western border, actions concerning hydraulic fracking in the state made headlines last year. Gov. Christie vetoed a bill calling for a permanent ban on fracking in late August. Instead, he proposed that the Legislature consider a one-year moratorium.

The New Jersey Business & Industry Association (NJBIA) sees the Marcellus Shale gas as providing economic benefits to the business community, not just in lower gas prices, but in how businesses in the state can support the industry. As an example, Sara Bluhm, vice president for environment, energy and federal affairs at the association, says, “There are many businesses in the state that have the expertise and wastewater treatment facilities to clean the water used in the fracturing process on a daily basis. We don’t want to limit their ability to do that.

“Overall, we don’t want to limit the state from a technology development standpoint and miss potential economic opportunities. Looking at energy as a growth sector for our economy, technology related to shale gas can be something our universities can be researching or something in which our businesses can be investing,” she says.

According to NJR’s Ellis, “The shale gas has huge economic stimulus power, and attached to that is the fact that it’s great for the environment in that it replaces dirtier fossil fuels. However, there are the questions about procedures that need to be done correctly. From what I read, the producers [of shale gas] understand how important it is for them to get it right. That is the way it has to be done.”

Vincent Schweikert, Vice President & Publisher
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Anthony Birritteri, Editor-in-Chief
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a.birritteri@njbmagazine.com

George Saliba, Managing Editor
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Lisa Fragati-Criscuolo, Advertising Manager
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Gloria Owens, Account Executive
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Doug Prefach, Account Executive
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