Oil and gas lawyers said a recent report by the U.S. Energy Information Administration showing the Marcellus Shale play to be the fastest-growing natural gas play in the United States serves as an affirmation for attorneys and law firms that have built their practices around the oil and gas industry in the Appalachian Basin.
According to the EIA report, which was released August 1 and is based on reports from oil and gas producers from around the country, the number of “proved” natural gas reserves — those that drillers are reasonably certain they can recover gas from — in the Marcellus Shale nearly tripled between 2009 and 2010.
That meant that Pennsylvania’s proved natural gas reserves more than doubled in 2010, accounting for about one-fifth of the overall U.S. increase in reserves, the report said.
While none of this is news to drillers or their investors, who have long been privy to this information, it does serve as something of an affirmation for attorneys who have invested their livelihoods in oil and gas.
“It justifies the legal community’s investment in the oil and gas industry as a clientele,” Kevin L. Colosimo, managing partner of the Pittsburgh office of Houston-based energy law firm Burleson LLP, said, adding that the EIA data shows that the natural gas industry in the Appalachian Basin “is going to be around for a long, long time.”
In fact, justifying investments is largely the point of proving reserves in the first place, attorneys said.
Colosimo said oil and gas companies “prove up” reserves in part to instill confidence in their Wall Street backers.
“It’s a lot different than the days of Colonel Drake, when he just stuck a pipe down and whatever came up, came up,” he said.
The lawyers who The Legal spoke to said their practices continue to reflect the growth of the Marcellus Shale play.
Kenneth S. Komoroski, partner-in-charge of Houston-based Fulbright & Jaworski’s Washington County, Pa., office, said that while industry expansion in the Appalachian Basin has slowed some recently as a result of struggling gas prices, it remains on pace to become the largest natural gas play in the country.
As a result, there continues to be plenty of legal work, he said, though the nature of it is changing.
“Early on, there was an enormous amount of title work, but now leasing has slowed,” Komoroski said. “The focus is now on production and infrastructure, so the work has morphed and has been more along the lines of what occurs in a field that’s becoming mature.”
Oil and gas legal work also continues to be lucrative, attorneys said, pointing out that oil and gas companies are willing to pay good money for experienced energy lawyers.
“I would say this clientele is willing to pay for expertise and knows how to find expertise,” Colosimo said. “When you talk about a Marcellus well being a $5 million or $6 million investment, the expertise is warranted.”
According to Colosimo, most oil and gas companies are used to working in more expensive legal markets anyway.
“This is an industry that is largely centered around Houston,” he said. “The benefit here is that Pennsylvania rates are probably a bargain in comparison to Houston rates.”
Still, Colosimo said, lawyers and law firms must be mindful that there are limits, because the oil and gas business is largely dictated by the market price of oil and gas at any given time.
“I suppose you could get lawyers with expertise who could say, ‘You’re not going to be able to get anyone else so I could raise my rates to the moon,’ but that’s not going to work because the great equalizer in the oil and gas industry is price,” Colosimo said.
What the EIA Numbers Mean
According to the EIA report, Pennsylvania, Louisiana and Texas combined for nearly three-quarters of the total nationwide increase in proved reserves in 2010.
While the Barnett Shale play in Texas remains the largest natural gas play in the United States, the Marcellus Shale play saw the most significant increase in reserves between 2009 and 2010.
Between 2009 and 2010, the Marcellus Shale’s proved reserves grew by about 8.7 trillion cubic feet (tcf), from about 4.5 tcf to about 13.2 tcf, according to the report.
Pennsylvania’s proved reserves grew by about 7.1 tcf, from about 7 tcf in 2009 to 14.1 tcf in 2010, the report said.
The report noted that the EIA is currently compiling data for the 2011 reporting year, a summary of which it intends to release in early 2013.
“Pennsylvania, in particular, may expect substantial proved reserves increases for the 2011 reporting year, given the significant quickening pace of drilling and development programs in the Marcellus,” the report said.
So will the EIA’s recent report put to rest the debate about how much natural gas is actually contained within the Marcellus Shale?
Not likely, lawyers said.
The problem with reports like the one the EIA recently released is that they take time to compile, resulting in a significant lag between industry forecasts and the release of proved reserve data, lawyers said.
Komoroski said this lag often leads to accusations by the public and the media that the industry is inflating its projections.
In the meantime, Colosimo said, drilling technology is improving on an almost daily basis, and with it the likelihood of recovery is also improving, so that by the time hard data on proved reserves is released, it’s outdated.
Last August, when the U.S. Geological Survey issued a report estimating 84 trillion cubic feet of “undiscovered, technically recoverable” natural gas — proved gas reserves as well as unproven gas reserves — in the Marcellus Shale, it was a 4,100 percent increase from its previous estimate of 2 tcf in 2002.
The release of that figure prompted the EIA, which had previously relied on industry sources, to announce that it would slash its own estimate of 410 tcf by 80 percent based on the USGS data.
Proponents of drilling touted the USGS survey as proof that the shale has the potential to be even more lucrative than many previously believed, while opponents latched onto the EIA’s announcement as evidence that the industry has been overinflating its own estimates to attract investors.
But energy attorneys said at the time that the USGS report wasn’t nearly the bombshell either of those scenarios would suggest.
In January, the EIA released its revised data, estimating that there are actually 141 tcf of gas in the Marcellus Shale.
But last Wednesday, Colosimo warned that to try to relate reserve estimates to proved reserve figures is to attempt an apples-to-oranges comparison.
“In a [shale formation] as vast as the Marcellus, there are whole geographies of this play where nothing has been proven,” he said, explaining that until those regions are explored, estimates are merely extrapolations based on reserves that have already been proven.