Gold fever gripped the country more than 150 years ago, luring prospectors West to find their fortunes.
Today’s boom involves a raw material that may lack the glamour of gold but is essential to those who use it to heat their homes, to cook or to run appliances. And there is a largely untapped reserve in a new Western frontier — the Pennsylvania bedrock.
“Natural gas,” said Edward J. Graham, president and CEO of South Jersey Industries, “is the answer for the future.”
So confident is Graham in the necessity of natural gas that he has taken Folsom-based SJI, the holding company of South Jersey Gas, into a different direction: drilling and production.
And if the venture proves successful, the region’s largest public company stands to collect millions of dollars in revenue, analysts say, potentially “dwarfing” its other operations.
In December 2008, SJI told investors that its subsidiary was spending $2 million for a minority interest in the mineral rights of 21,000 acres in western Pennsylvania. The area — known as Potato Creek — is part of the Marcellus Shale.
The land itself, in rural McKean County, is not the prize. SJI cares about the natural gas that lies beneath.
Marcellus Shale is the name of the mile-deep rock formation that spans the Appalachian basin from New York to Virginia and Tennessee. But Pennsylvania is where about 60 percent of the potential gas reserves are located, geologists say.
That’s where the drilling comes in.
SJI is not doing the actual work. Its subsidiary, South Jersey Resources Group, has partnered with Denver-based St. Mary Land and Exploration, which has the digging and production experience.
St. Mary has a lease agreement for the site with a group of leaseholders, of which South Jersey Resources is a 30 percent owner in the lease, said Ken DePriest, president of South Jersey Resources.
Two wells were drilled last year, and both are expected to be connected to a sales pipeline this year: One will be turned on in the first quarter and the other in the second or third quarter, DePriest said.
Brent Collins, director of investor relations for St. Mary, added that two new wells will be drilled this year.
Once the wells start producing natural gas, the company will make its sales data public, Collins said.
SJI already received a $7.5 million upfront payment from St. Mary for its ownership stake, and would earn money from a royalty percentage and extraction rights connected to the gas production.
Under an agreement with St. Mary, SJI will not divulge how much in royalty and working interest it would receive. But the potential amount of natural gas in the Marcellus Shale instills confidence in the project, the companies say.
“We’re encouraged enough to (develop) … although the ultimate scale of that we don’t know,” Collins said.
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About half of the natural gas consumed in the United States is used for either a residential purpose — predominantly home heating — or to create electricity, according to the Energy Information Administration.
While most power plants still run on coal, newer ones are utilizing natural gas, a cleaner-burning fuel.
Why is the Marcellus Shale so important? Pennsylvania State University data suggest it contains more than 489 trillion cubic feet of recoverable gas.
Since the nation uses about 25 trillion cubic feet of natural gas each year, the shale could provide enough new gas to feed the U.S. demand for almost 20 years, Penn State professor and geologist Terry Engelder said.
That would potentially make it the nation’s premier gas producer, suppressing the need to import gas from Canada or the Middle East.
“This is so big, and such a wonderful opportunity for America,” Engelder said.
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Gas producers that began setting up exploration and drilling teams in the shale region in late 2008 consider it a major prospect. Private investors, too, made land grabs, buying and selling thousands of leases.
The frenzy can be seen in how many wells have been drilled: about 195 in Pennsylvania’s Marcellus region in 2008, booming to 763 last year, according to state data. The amount of gas production is nearing 100 billion cubic feet.
More than 1,000 wells are expected to be drilled in 2010. The so-called Marcellus industry already brought in about $2.3 billion in economic development to Pennsylvania in 2008, creating more than 29,000 jobs, a Penn State study reported in August.
For a company such as SJI, the financial rewards could be great.
“South Jersey has chosen to play the Marcellus because they recognize they have some really good property,” Engelder said.
Graham said South Jersey Industries expects the natural gas under its land to be “dry” — meaning it is mostly pure methane and free of hydrocarbons, such as propane and ethane, that would have to be extracted.
“It’s pretty much pipeline-ready and easier to get to market,” Graham said of the dry gas.
In terms of how much gas may be found, Engelder estimates there could be between 275 billion cubic feet and 725 billion cubic feet. (By comparison, the U.S. imports about 500 billion cubic feet a year in liquified natural gas.)
If it turns out to be somewhere in the middle — and gas continues to be valued at close to $6 per decatherm — there would potentially be about $3 billion worth of gas to produce over the life of the project, Graham said. Production could be going on for at least the next 15 years, he added.
The company’s earnings per share could see an additional $2 to $17, depending on the value of the project and the spot price of gas, said James Lykins, an analyst for Kentucky-based Hilliard Lyons.
Since the company already is profiting from a $7.5 million lease payment — more than three times its initial investment — any other revenue is “gravy,” Lykins said. “And there’s potentially a lot of gravy to be made.”
Regardless of such profitability, Graham said that the drilling venture is “purely passive” and he has no plans to turn SJI into an exploration and development company. He would rather focus on selling and transferring the natural gas that is produced, he said.
That would give the New Jersey and New York markets a much closer source of the product, Graham said, which would bring down transportation costs and allow customers of South Jersey Gas to buy gas cheaper.
“Everyone can benefit,” he added.
Uses of Natural Gas
- In 2008, about 24 percent of the energy used in the United States came from natural gas. The amount consumed was about 23.8 trillion cubic feet — an eight-year high, according to the Energy Information Administration.
- Natural gas is used in the production of steel, glass, paper, electricity and other industries, and as an essential raw material for products such as plastics, paints, fertilizer, antifreeze and explosives.
- Slightly more than half of U.S. homes use natural gas for heating. In southern New Jersey, 67 percent of households use natural gas in Atlantic County, 50 percent in Cape May County, 50 percent in Cumberland County and 73 percent in Ocean County, the latest census data show.
Contact Erik Ortiz:
609-272-7253
