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— by Julie Sneider, assistant editor
Natural gas exploration across the Marcellus Shale geologic formation in the Northeast has triggered an economic boom in some rust-belt regions that had been mired in recessionary times for decades.
Technological advancements in horizontal drilling and the process known as hydraulic "fracturing" in recent years have helped energy producers tap into the vast amount of natural gas trapped underneath the Marcellus Shale, which stretches from Ohio to West Virginia, and across Pennsylvania and southern New York.
In Pennsylvania alone — where much of the drilling has occurred since 2008 — Marcellus Shale natural gas development generated $11.2 billion in the "regional equivalent of gross domestic product, contributed $1.1 billion in state and local tax revenues, and supported nearly 140,000 jobs" in 2010, according to a July 2011 report by Pennsylvania State University's Department of Energy and Mineral Engineering. The report was prepared for the Marcellus Shale Coalition, an organization that supports gas development in the shale formation.
In terms of production in 2010, the Marcellus averaged 1.3 billion cubic feet equivalents per day of natural gas, including dry natural gas and petroleum liquids, the report states. In addition, Marcellus producers "plan to spend significantly more" on gas exploration and drilling in 2011 and 2012, which will generate more than $12.8 billion in "value added revenue in 2011," with employment in the state expanding to more than 156,000 jobs in 2011 and 180,000 jobs in 2012 to support Marcellus activity, the report estimates.
For the Class I and short-line railroads that operate within Marcellus Shale territory, all that activity has resulted in a spike in demand primarily for "frac" sand, but also pipe, chemicals and other materials needed for the drilling process. As drilling spreads across the formation — at an expected rate of about 43 percent over the next two years — the possibile impact on traffic is significant, railroad officials say.
"We see the potential for strong growth," CSX Corp. spokesman Gary Sease said in an email.
Since 2008, CSX's Marcellus business has doubled; in 2011, the Class I is expected to handle about 13,000 carloads, Sease said. Most of those carloads are filled with sand used in the fracturing process, whereby water, sand and chemicals are pumped into the well bores under high pressure to crack the rock and release the gas deposits.
For Canadian Pacific, Marcellus gas exploration has become part of the Class I's overall strategy for growth in the energy industry, said CP spokesman Mike LoVecchio in an email. Over the past 12 months, CP has moved an additional 3,400 carloads — mostly frac sand — related to Marcellus Shale drilling, he said.
The company is "well positioned to participate" in Marcellus development through access to transload facilities, including those in Taylor, Pa., and Binghamton, N.Y., he said.
"Transload facilities and supporting infrastructure, such as sidings, have been built to meet the demand," said LoVecchio.
The Class I anticipates "volumes to remain constant" until the state of New York allows for hydraulic fracturing, which would provide additional opportunity for CP, LoVecchio said.
"Canadian Pacific's network reaches key energy markets," he said. "CP is also positioned to move inbound material for construction and to aid with the drilling and exploration, such as frac sand. CP is the only North American railway to directly service the Alberta Industrial Heartland, the Bakken formation and the Marcellus Shale."
Meanwhile, Norfolk Southern Railway is registering explosive growth in activity across the region, according to NS. Carloads have risen from 6,000 in 2009 to 24,000 in 2010. By August 2011, the Class I's Marcellus Shale business exceeded 2010 levels by 3,000 carloads, NS officials have said.
"It's a pretty significant jump in volume," says Rob Robinson, NS assistant vice president for commercial development and the railroad's short-line marketing manager. "Who would have thought the railroad industry would participate in anything related to the gas industry? We are developing a market that didn't exist."
The shale business is exciting for short lines, too. In Pennsylvania, NS has partnered with 18 short lines to serve the shale, including Buffalo & Pittsburgh Railroad (BPRR), which has logged a 180 percent increase in carloads of Marcellus Shale-related commodities such as frac sand, liquid gases, pipe and drill cuttings during the past two years, says Michael Miller, chief commercial officer for Genesee & Wyoming Inc. (GWI), which owns the BPRR.
"Over the past two to three years, we have added 14 transload facilities — most of them supporting frac sand," says Miller. "We have an additional five to eight facilities planned for future development, if needed."
BPRR also has upgraded idle yards and idle sidings to accommodate shale traffic. The railroad has analyzed additional track capacity where needed for the transload facilities. In some cases, BPRR partnered with third-party operators to co-develop the transload facilities, bringing in track, ballast and ties. The business expansion also required BPRR to increase its workforce by 10 percent to 15 percent, says Miller.
The short line's geographic location combined with good timing have helped the railroad obtain more business in western Pennsylvania. Gas extracted from the Marcellus Shale is liquids-rich, including by-products such as liquid petroleum gas, butane and propane that provide additional revenue streams for producers. As a result, western Pennsylvania is attracting more attention from producers than areas with dry gas, says Miller.
For BPRR parent GWI, the Marcellus Shale exploration is in the short-line holding company's top three growth markets, Miller says. And since GWI's footprint covers a number of shale formations, "there will be opportunities for us to leverage our experience with the Marcellus Shale and grow that across our franchise," he says.
For some short lines, the shale business has been a lifeline during tough economic times. During the past year, local newspapers in Ohio and West Virginia — where exploration of the Utica Shale formation has begun — and Pennsylvania have been filled with accounts of the drilling's impact on short lines racing to accommodate the energy companies' need for materials. The "Marcellus Drilling News," a website launched by landowner groups, contains daily news reports of the shale activity. And in March, the Philadelphia Inquirer reported the story of Wellsboro & Corning Railroad in Wellsboro, Pa. Cargo traffic for the 35-mile short line "has nearly tripled" during the past two years, according to the newspaper.
Shale fracturing will reshape the nation's energy position globally, and "it's reshaping the small-railroad universe," said American Short Line and Regional Railroad Association (ALSRRA) President Richard Timmons during Progressive Railroading's RailTrends® 2011 conference in New York City on Nov. 1.
The opportunity for railroads is vast. Consider: Freight requirements for Marcellus drilling efforts between 2010 and 2012 are anticipated to include 10 billion tons of frac sand, seven to 12 billion gallons of water, 2.5 billion gallons of brine water discharge, 750,000 tons of well pipe and 250 tons of pipeline, Timmons said.
The Reading, Blue Mountain & Northern Railroad (RBMN) already is experiencing a bump in business thanks to Marcellus activity, which RBMN officials first learned about in spring 2009, said President Wayne Michel in an email.
To ramp up for shale-related business, the eastern Pennsylvania regional gauged customers' interest and needs, then responded by reengineering its 140-year-old Pittston Yard near Scranton, Pa., into a "state of the art" frac-sand transload center for Marcellus Shale business, according to a recent RBMN newsletter. The center serves as a location for transloading frac sand from rail to truck, storage for rail cars, and laydown space for pipe and other materials needed for drilling after delivery by rail.
The December 2009 opening of the Pittston terminal provided RBMN "with a sizeable new customer to go with our already existing diverse traffic base," said Michel. "Over the next 18 months, we anticipate substantial growth in our frac sand business. Long term, we anticipate handling other shale-related commodities."
The overall growth in business, including but not limited to the Marcellus Shale-related work, has prompted RBMN to expand its workforce, Michel added.
"We believe the shale business will grow to be one of the five pillars of our success in the freight business," said Michel. "As such, it enables us to continue our strategy of diversification, which is critical for the success of a short-line railroad."
The Marcellus gas exploration's impact on the Susquehanna Economic Development Association Council of Governments Joint Rail Authority (SEDA-COG JRA) in Lewisburg, Pa., has been "significant" since 2009, says Jeff Stover, executive director. SEDA-COG JRA owns five short lines operated through a public-private partnership with North Shore Railroad Co.
Rail traffic is up about 20 percent, although not all that growth is related to the Marcellus Shale, Stover says. Some of the authority's lines operate in counties that "have yet to see the boom" in shale-related traffic, and "we understand the big waves" in gas exploration won't hit until 2012 or 2013, he says.
But when those waves do hit, the authority expects its lines will be ready.
"We are building facilities and infrastructure," Stover says, noting that the authority has about $25 million in infrastructure projects in the works. Those projects are being funded through a variety of sources, including a $10 million federal Transportation Investment Generating Economic Recovery II grant to expand railroad infrastructure to accommodate new traffic generated by Marcellus development, he says.
Not only has gas exploration been a boon for railroads, it's brought a much-needed lift to some communities that haven't seen such high levels of economic activity since before the steel-belt recession decades ago, Class I and short-line officials say.
"Now you go up there [to Pennsylvania] and all the hotels are full," says NS' Robinson, who speaks daily with short-line and regional railroads that haul the sand, piping and other materials to well sites. "You go to the car dealerships and all the trucks are sold out because the gas companies are buying everything. And the restaurants are full and the economies are robust."
Not all the activity has been welcome in all areas, however. As with any form of oil or gas drilling, certain environmental groups have objected. In the shale's case, they're concerned about hydraulic fracturing's potential impact on drinking water quality. Other Marcellus opponents object to the effect of drilling on the rural landscape.
In New York, the state's moratorium on drilling remains in place until environmental concerns are addressed and regulations are written. But, rail industry representatives say they believe it's a matter of time before the moratorium is lifted. The nation's demand for new and less expensive sources of energy — as well as the jobs that come with energy production — will result in more Marcellus Shale-related business for the foreseeable future, they say.
"This is not a ‘one and done' thing, where it's here today and gone tomorrow," says Robinson. "I believe it will be a long-term, sustainable market for the railroads."