Businesses Benefit from Shale Boom

By on July 21, 2014
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From Columbus CEO

It may seem like a stretch to say Honda is part of Ohio’s shale-gas boom.

But a close look shows that the automaker is using the steady supply and low price of natural gas to improve its bottom line at plants in Marysville and East Liberty.

Similar stories are taking place across the state, in places and at companies that may seem far removed from the drilling, refining and delivery of oil and gas.

“There is no question that the benefits of shale go far beyond the energy industry,” says Jack Partridge, president of Columbia Gas of Ohio.

The state average gas price has fallen for five years in a row, dropping last year to 45 percent less than it was in 2008, according to the Energy Information Administration.

The price cut is a simple matter of supply and demand. Supply is way up, thanks to a flood of gas from domestic shale formations, and demand has been slow to recover from the economic downturn.

In addition, the price of natural gas is a key variable in the wholesale price of electricity. Electricity prices have fallen in recent years across most of Ohio, although not nearly as much as gas prices.

The drop in gas and electricity prices is the double benefit of shale gas, according to Matt Brakey, president of the energy consultant Brakey Energy in the Cleveland area.

He is helping clients find ways to burn more gas and shift away from using electricity. This includes about 150 McDonald’s stores that are switching to gas-powered fryers.

“Certainly any new store being built, I can’t think of any example where they are not putting in natural-gas fryers,” he says. “We’re seeing extremely compelling payback, well under two years, from switching to natural gas.”

Honda uses gas to heat its Ohio plants and in some of its manufacturing processes. The automaker has made its gas use more efficient at the same time that prices have dropped, leading to a notable reduction in costs, says spokesman Ron Lietzke.

“It’s been a period of relatively low prices for a while,” he says.

In the last 10 years, Honda has reduced annual gas use by 16 percent at Ohio plants. It has done this with a series of efficiency projects, including improvements to the system it uses to paint new Accords, CR-Vs and other models.

But the price of gas is not Honda’s main concern when buying the commodity. The company is much more focused on maintaining a reliable supply, using short-term and long-term purchases.

“If we don’t get the gas to our plants, then we have to stop producing cars,” Lietzke says.

Being close to shale gas is helping to provide a greater degree of reliability, says Mike Anderson, director of supply development for NiSource, the parent company of Columbia Gas.

“Now, with the shale resources, there isn’t as much of a concentration in the Gulf of Mexico,” he says. “And, with the Marcellus and Utica, they’re right next to us.”

That means a hurricane in the gulf will not affect Ohio’s gas supply as much as hurricanes Katrina and Rita did in 2005, he says.

Proximity to gas is also good for pricing, with lower transportation costs.

“Because the gas is so close to us, the delivered cost is providing an incremental benefit,” says Sam Randazzo, an attorney who specializes in energy issues for McNees Wallace & Nurick LLC in Columbus.

“The shale resource has given us a much better opportunity in a global economy,” he says.

When talking about how shale gas has changed Ohio’s energy landscape, Columbia’s Partridge likes to list the companies that are hooking up to the fuel for the first time.

This includes Austin Powder Co., a manufacturer of explosives, which made the switch to gas as part of an expansion of its plant near Wellston in southeastern Ohio. The location had previously relied on fuel oil for heat.

“In the last couple of years with gas prices declining, and with a significant expansion in mind at the plant, we says, ‘We need to have a more reliable and cost-effective fuel source,’” says Jim Boldt, the company’s vice president and chief financial officer.

800px-RC_drill_rigHe estimates that the fuel savings from the project is more than $250,000 per year. With that level of payback, the project will pay for itself in less than four years.

Energy companies have long known that there was oil and gas in shale, a layer of rock deep beneath the earth’s surface. It was only in the last two decades that businesses have found ways to extract the resources at a profit, starting in Texas.

In the last 10 years, the shale boom arrived in Pennsylvania with the development of the Marcellus shale. That was followed in the last few years with similar activity in Ohio’s Utica, a formation that is deeper and more oil-rich than the Marcellus.

Last year, Ohio regulators approved more than 550 drilling permits in the Utica, which was more than the prior three years combined.

In the fourth quarter last year, energy companies produced 43.1 billion cubic feet of gas and 1.4 million barrels of oil from shale formations, according to the Ohio Department of Natural Resources. The results were up 28 percent and 8 percent, respectively, from the same quarter a year earlier.

Demand for gas is growing along with the supply. Utilities are burning more gas to produce electricity, and businesses are finding ways to use gas in place of electricity for heating and other key functions.

As analysts watch the growth in demand, they wonder when this will outstrip supply. In other words, when will prices begin to rise?

There have been signs of increasing volatility. In February, unusually cold temperatures contributed to a brief price spike. Since then, they have been hovering in a range that is slightly higher than a year earlier.

For energy professionals, this presents a quandary. They know that prices are low by almost any standard, but their customers can only see that prices are higher than last year.

“What commodity could you say is lower today than it was five years ago? Very few,” says Caroline Cieminski, president of Asset Energy LLC in the Cincinnati area, a company that helps businesses manage their energy costs.

Looking ahead, almost nobody is predicting the types of price spikes that happened in 2008.

“I think we’re in a period, as least in the moderate term, of relatively stable pricing,” says NiSource’s Anderson.

Ohio businesses stand to gain from just about any scenario. As prices increase, there will be added incentive for energy companies to develop the Utica, which means more drilling and spending.

If prices are slow to rise, then the beneficiaries will be anyone who pays a gas bill.