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www.allegrodev.com
2013 Allegro Development. All rights reserved.
The Shale Gas Revolution: What You Need to KnowThe Global Energy
Landscape is Shifting and It Starts in North America.
This whitepaper will discuss the shale revolution, its
implications on the U.S. and global economies, and how midstream
oil and gas companies are responding to accommodate the influx of
shale in the US. Furthermore, we will explore the controversies
surrounding the fracking process and what is at stake on both sides
of the debate.
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IntroductionThe history of shale gas production in the United
States (US) is fairly recent, despite the first recorded
extractions occurring in Fredonia, NY in 1825. The shallow,
low-pressure fracturing technology used in that instance has only
recently matured to a level where industrial-scale shale gas
production has become practical.
It wasnt until 1976, when the US government began investing in
gas research, as part of the Eastern Gas Shales Project, that the
tides began to turn. From 1980 to 2000, tax incen-tives promoted
shale drilling domestically. As technology advanced, the US
Department of Energy upped the ante by subsidizing Texas-based
Mitchell Energys first horizontal drill in the north Texas Barnett
Shale in 1991.1
Since then, a shale revolution has occurred in the US that
stands to turn global energy production upside down.
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US Shale Production: Sparking a Global SwingAccording to the
International Energy Agency, the US is on track to surpass Russia
as the largest natural gas producer, and Saudi Arabia as the
largest oil producer, by as early as 2017. The reason: a shale
production boom spurred by hydraulic fracking and deepwater
drilling. Currently importing 20 percent of its total energy, the
US is set to become a net exporter of oil by 2040. Add Canadas rich
Alberta oil sands to the equation, and North America could become a
net exporter by 2030.2
In the US, Texas leads the way. But it is by no means the only
major shale play on US soil. In terms of their size of potential,
the three biggest shale plays in the US are:3
Bakken-Three Forks, North Dakota: Originally discovered in 1951,
this 200,000-square-mile formation effectively launched the US
shale revolution when EOG Resources began horizontal drilling and
hydraulic fracturing in the Parshall field in 2006. To date, most
drilling activity here has taken place above the lower shale source
rock. As exploration and production go deeper, it is estimated that
about 45 billion barrels of oil reserves lie beneath. As of January
2013, total rig count here was set at 185, averaging just over
11,000 barrels of oil production per well. In December 2012, North
Dakota produced roughly 25 billion cubic feet of natural gas. Due
to the continued shortage of natural gas infrastructure,
compression and capacity, close to 30% of gas production is being
flared.21
Eagle Ford, South Texas: Stretching approximately 300 miles,
from Mexico to San Antonio to Austin, Texas, the Eagle Ford
contains dry gas, natural gas liquids and oil in a brittle, high
carbonate shale formation suitable for fracking, at depths much
lower than those found in Bakken. The first company to drill here
was Petrohawk in 2008. Since then, the region has become the
largest single oil and gas development in the world, reaching $28
billion in capital expenditures in 2013, and producing an estimated
500,000 barrels of crude oil or more per day since 2012. As of
January 2013, 232 drilling rigs were actively feeding the midstream
pipeline.
Permian Basin, West Texas/Southeastern New Mexico: Just
northwest of Eagle Ford, straddling West Texas and Southeastern New
Mexico, the Permian Basin covers about 9,000 square miles.
Conventional oil and gas production here dates back to the 1920s,
with the most recent surge of activity occurring since 2010, when
enhanced oil recovery and hydraulic fracking techniques began
producing upwards of 740,000 barrels of oil per day on the Texas
side alone. Rig counts in January of 2013 were at 378, with most
still drilling vertically. However, based on data gathered from
more than 600 recently drilled horizontal wells, the combined
recoverable oil here is estimated to exceed 50 billion barrels,
primarily from shale formations. The Texas side of the basin
accounts for the highest concentration of drilling rigs
worldwide.
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Other significant shale plays in the US include:3
Niobrara Formation, Northeast Colorado/Northwest
Kansas/Nebraska/ Wyoming: More than 70,000 square miles. Crude oil,
natural gas, NGLs. 896 wells drilled from 2009-2012, reaching
26,000 barrels per day by mid-2012.
Utica-Point Pleasant, From Tennessee to New York to
Quebec/Centering on Ohio: Estimated 8.2 billion barrels of
recoverable oil and gas at a 5 percent recovery rate in Ohio alone.
Well-suited for hydraulic fracking. In January 2013, 29 rigs in
Ohio, most drilling oil.
Monterey/Santos Formation, California: Spanning
1,750-square-miles of central and southern California. Estimated
15.4 billion barrels of oil, more than double the amount estimated
in Bakken. Anti-drilling sentiments in California may be changing.
Currently considered a future play.
Tuscaloosa Marine, Southeastern Mississippi/Louisiana: Estimated
7 billion barrels of recoverable oil. Early 2013 explorations by
Encana Corp. averaged 933 barrels of oil equivalent (boe) per day
at Anderson 17H well and 740 boe per day at Weyerhaeuser 73H-1
well.
Woodford, Oklahoma: Covers 3,300-square-miles with oil windows
possibly deeper than 10,000 feet. Conoco and Halliburton are
currently assessing the play.
Marcellus Shale, Pennsylvania/West Virginia: 2013 production in
Pennsylvania alone is up nearly 50% over last year, producing about
1.5 trillion cubic feet of gas with projections for 3.2 trillion
cubic feet by year-end (or about 550 million boe); West Virginia is
also on track to exceed 2012 numbers by 50%.22
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Worldwide Interest In Shale ExplorationGlobally, the
opportunities appear even larger.4 According to a recent survey by
the Energy Information Administration, China, Mexico and Argentina
host massive stores of shale oil and gas; Russia, most of Africa
and the Middle East were not included in the survey. According to
the findings, the US ranked second behind China as the most
promising basin. Considering recent activities, the shale boom has
become a worldwide phenomenon.
With an estimated 36 trillion square meters of reserves
underground, China has made shale gas development a priority. The
Chinese government is now partnering with the US Unconventional Gas
Technical Engagement Program (UGTEP) to identify drilling
locations.
In Mexico, PEMEX, a national company, began drilling in northern
Mexico. Progress has been slowed due to lack of infrastructure,
negotiating delays and political complications.
In Argentina, the government nationalized its primary producer,
YPF S.A., controlling 51 percent of the shares. Subsequently,
Chevron entered into a $1.24 billion joint venture with YPF aimed
at producing shale gas and tight oil.4
Unconventional Methods: Rewriting the Rules
By its nature, shale extraction is considered an unconventional
form of production, involving first mining the oil and gas
upstream, then processing the gas for mainline distribution. In
phase one, a well is drilled, first vertically, then horizontally
to better penetrate the reservoir strata. The borehole is then
encased in steel pipe and concrete to prevent it from collapsing.
Next, small perforations are made in the casing, allowing oil and
gas to flow into the pipe. Finally, the well is fracked by
injecting water, proppant and chemicals into the pipe at high
pressure. This fractures the rock layer, props it open and allows
the resource to flow freely. In production, the well is topped with
a collection of valves and pumps that control the flow, improve
recovery and transfer the gas to the midstream distribution
network.3
When the Bakken formation was first being mined, the drilling
operation often took months to complete, followed by several more
months in fracking. However, with the growing interest in shale
development over the past decade, both extraction and process-ing
technologies have advanced to a point where drilling and completion
cycles, along with cost, have become dramatically compressed.
Advances, such as steerable rotary bits, pad and multipad
drilling (drilling several wells from a single surface location)
and zipper fracking (perforating parallel wells at alternating
intervals), have made it possible to complete shale wells in as
little as a week, reducing cost, rig count and overall surface
impact, while also enhancing productivity.
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To Frack or Not to Frack: Whose side are you on? For all the
promise these discoveries and advancements hold out to nations
starved for energy supply worldwide, there are still strong forces
working against the shale production movement most notably,
environmental concerns about fracking.
Opponents cite potential groundwater contamination (chemicals
forced into or released by wells), depletion of fresh water
(consumed in the hydraulic process), air quality risks (such as
benzene and silica dust), noise pollution, spills, flow-backs and
related health risks as reason enough to resist drilling.5
In densely populated areas, such as New York, California and the
majority of Europe, fracking has been met with popular resistance.
To control the industry, some governments have been pressured to
enact legislation limiting drilling activities.
Germany instituted a moratorium on shale gas drilling in March,
2011. 8
France banned hydraulic fracking altogether in September, 2011.
8
Bulgaria followed suit, banning fracking later that same year.
8
In April, 2013, the Sierra Club filed suit to block drilling on
public lands in Californias Monterey, San Benito and Fresno
counties.6
A month later, the New York Supreme Court upheld drilling bans
in Dryden and Middlefield, stopping fracking practices in parts of
New Yorks Marcellus shale formation.7
Even Hollywood and the media have joined the fray. In 2010, the
anti-fracking film, Gasland, was released. This misleading film
depicted a Texas landowner lighting the contents of a garden hose
on fire as evidence of water contamination caused by fracking. The
courts later determined the scene to be a publicity hoax.
In 2012, the movie Promised Land, was similarly debunked. The
movie, starring Matt Damon and funded by the United Arab Emirates,
was based on an unsubstantiated claim that hydraulic fracking had
contaminated drinking water in homes in rural Pennsylvania. The EPA
investigated the claims and found no harm. Hollywood pressed
forward with its fiction anyway.5
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So, is there a problem with fracking?
According to the Texas Water Development Board, in 2010, water
consumption for all Texas-based mining, including oil and gas,
accounted for only 1.6 percent of the water consumed statewide,
compared to 55.9 percent used for irrigation. To put that in
perspective, Texas is the largest shale producer of all 50 states;
2010 was a high tide for shale gas drilling.
According to the Texas Railroad Commission, the state overseer
of oil and gas activities in Texas, not a single case of
groundwater contamination has been documented relating to hydraulic
fracking in over 60 years.3
Regarding air quality, when media reports from the Barnett Shale
asserted that dangerous amounts of benzene were being emitted
across North Texas, actual tests of 126 gas wells showed no
detectable evidence of the gas. A subsequent six-month study showed
that only two of 94 wells exceeded acceptable limits, while 19
others might require facility action.18
If there is a concern, it may be related to fracking and
earthquakes. The US National Academy of Sciences has drawn a
correlation between fracking and wastewater disposal, which
involves pumping wastewater into fracked reservoirs for storage
(not oil and gas activities). Geology magazine published a study
suggesting that wastewater injections may have played a part in the
Oklahoma earthquake of 2011. The smoke surrounding these findings
may draw regulatory heat on shale operators in the future.
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ENERGYS 30-YEAR JOURNEY
8.7 M bbls/day
7.1 M bbls/day
1,259 Billion KWH
1,502 Billion KWH
U.S. Oil Production
Coal
83
83
12
83
13
$2.50/mcf13
$3.50/mcf
83
9,871KWH
13
13,146KWH
13
12,600MMT
83
6,648MMT
Natural Gas
Electrical
Global EnergyConsumption
What Will The
Look Like in 2040?
FUTURE PROJECTION
MoreDependentExporter
Needing Fuel and Electricity by 2040
Non-OECD Nations Demand More
Most in Asia Pacific and Africa
9 BILLIONPEOPLE
MORE
for Residential and Commercial Use
OIL, GAS, COAL, BIOMASS AND
ELECTRICITY
2013 204065%MORETransportation Fuel
50%MORE
Energy Needed for Chemical
Production
20402013
85% SPIKEin Global Electricity Demand
WELCOME TO THE
SHALEREVOLUTION
Will Gas & Tight Oil Fuel North America's Rise?
Gas Approaches Oil as the #1 Source
Renewables Rise Dramatically
ENERGY MIXWhere Will We
Find the Energy?
CLEAN FUEL OECD Nations Slash CO2 Emissions 20%
OECD
North America Becomes an Exporter as Europe and Asia Become More
Dependent
REGIONAL ENERGYBALANCES SHIFT
Non-OECD
Technology Increases New Liquid Supplies by 30%
UNCONVENTIONAL FUELS
SOURCESBP Energy Outlook 2030, January 2013.The Outlook for
Energy, A View to 2040, 2013.
GROWING DEMAND
EFFICIENCY BECOMES A VIABLE SOURCE OF ENERGY
500 QuadrillionBTUs saved
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Follow the Money: Economics Make a Strong CaseStill, the
economic factors associated with shale exploration and production
weigh heavily in the industrys favor.3 Natural gas is available,
reliable, affordable, efficient and clean, emitting up to 60
percent less CO2 than coal in electricity applications. Its
desirable characteristics put it in high demand worldwide.9
In 2011, industry researchers pegged the global shale-gas market
at $26.66 billion.11 PricewaterhouseCoopers claims that by 2035,
shale oil production could boost the world economy by up to $2.7
trillion.12
ExxonMobils 2013 Outlook for Energy: A View to 2040, named
natural gas the fastest-growing major fuel source worldwide, with
North America projected to produce 20 percent of the worlds fuel
supply by 2040. That same report predicted the US would become a
net exporter of oil and gas by 2030, with 80 percent of gas
supplies coming from local, unconventional resources.9
Of course, with overwhelming production volume, the shale
revolution will require new midstream gathering and processing
facilities, as well as mainline transportation and storage and that
means jobs, which also means tax revenue. According to the Equality
of Opportunity Project, a publicly funded research effort formed to
study upward social mobility, children in lower income households
stand a better chance of becoming top quintile earners if they live
near certain geographies. Interestingly, the study showed that
children raised in Williston, North Dakota (near the heart of the
Bakken formation) had the highest probability of rising to the top
of any in region in the US, with surrounding Williams County having
the lowest county unemployment rates in the US.
Said Dr. Mark J. Perry, an economics professor at the University
of Michigan, of the findings, proximity to shale oil fieldsis
bringing wealth, prosperity, jobs and upward income mobility to
(North Dakota).10
In West Texas, similar success can be found. The Midland-Odessa
Regional Economic Index for April, 2013 reported a 7.3 percent
increase in general taxable spending over the last 12 months, along
with the strongest jobs growth in the nation at 7.6 percent year to
date. Meanwhile building permit valuations for the area surpassed
$98 million in April, the fifth highest month on record;
single-family residential construction permits exceeded 100 for the
fifth straight month. While the rest of the nation was in an
economic down-turn, West Texas was on a roll, despite the regional
petroleum index flattening, albeit at a high level, over the
previous nine months.19
The fact is, you dont need a college degree to appreciate what
shale production brings to the American economy. Average oil and
gas workers can easily earn upwards of $100,000 a year without a
college education.
According to a recent report on Americas Energy Security and
Innovation, Dr. Daniel Yergin estimates that US energy production
now accounts for 1.7 million jobs,
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including actual employment in the sector, plus jobs created by
collateral spending and energy related businesses. For a nation
concerned about energy, national security and financial hard times,
the shale revolution holds out be best hope for good news
ahead.20
A Rich Product Mix
Where there is shale production, there is opportunity.
Hydrocarbons recovered in shale plays yield many types of
marketable products, including oil, condensate, dry gas, mainly
consisting of methane with little or no liquid condensate, and wet
gas, including liquid blends of methane with higher
hydrocarbons.13
During the midstream process, the raw natural gas is processed
to produce pipeline-quality dry natural gas used as fuel in
residential, commercial and industrial applications, and for power
generation. The remaining liquids in the gas stream are called
natural gas liquids, or NGLs, and undergo a further process (called
fractionation) to extract the individual components of the liquid
stream into ethane, propane, butane and natural gasolines, used in
industrial and chemical applications. Once fractionated, the
components are then transported via rail cars, shipping barges,
tankers and pipelines to destinations where they are further
processed, marketed or stored.14
Midstream Infrastructure and Foreign Investments
The related midstream logistics industry is a market unto itself
regarding evolving technologies and growth opportunities. Over the
next 25 years, it is estimated that US transmission infrastructure
improvements will cost upwards of $5.7 billion per year, with
gathering and processing plants adding another $2.6 billion
annually.15
Foreign investors are eager to participate. Joint ventures with
companies based in Canada, Mexico, China, Japan, Australia, Korea
and, even France, account for more than 20 percent of the $130
billion invested in US shale plays between 2008 and 2012. And,
while the US Energy Department has yet to allow exports of natural
gas to outside investors, the deals represent an opportunity for
foreign companies to gain valuable experience in horizontal
drilling and hydraulic fracturing technologies, as their US
counterparts raise necessary financial support to build out their
programs.16
If all the speculation of a global shale oil boom holds true,
and there is no reason to believe it will not, OPEC nations will
likely be pressured to cut oil production. That said, during their
163rd meeting in Vienna last May, OPEC ministers agreed to stay the
course, maintaining output levels despite pressures by 12 member
nations to prop up prices by tightening production.17
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Volatility: Managing the ChaosAs the story continues to develop,
one thing is certain to characterize the exploration and production
of shale oil moving forward: volatility.
Unlike the conventional oil and gas sector, where investments
can reach the billions and profitability is often measured over
decades, shale and tight oil economics occur over a compressed
timeframe. A producer obtains a drilling lease, brings a well on
line, and in a few weeks, peak production can be achieved. However,
by the end of the first or second year, the well may be producing
at less than 50 percent, driving operations quickly to a close.
In a shale operation, the price of oil and NGLs over the
short-haul is of primary importance; time your investments a little
too early or a little too late, and you can fall victim to a major
market swing. In addition, transportation and fractionation costs
must also be factored in, along with royalty and rights management,
regulatory reporting and compliance. Each can weigh heavily on your
overall value creation.
Because of this volatility, hedge strategies are often employed
against a drop in price and, given the broad spectrum of geology
and resources involved, the strategy can vary greatly from well to
well.
Having a reliable process and technology to manage natural gas,
crude, condensate and NGL products across the distribution chain is
therefore critical to success for anyone com-mitted to
participating in the evolving shale boom. The ability to capture,
view and value physical and financial positions, as well as manage
cost, margins and logistics workflow, in real-time, will separate
the leaders from the laggards.
Over the past 30 years, Allegro Development has evolved to
become the leading software and services provider of commodity
intelligence solutions designed to optimize energy assets across
the upstream, midstream and downstream landscape.
To learn more about Allegro and discuss your specific needs in
moving on the upcoming shale revolution, visit
www.allegrodev.com.
About Allegro
Allegro is a global leader in energy trading and risk management
solutions for power and gas utilities, refiners, producers, traders
and commodity consumers. With more than 29 years of deep industry
expertise, Allegros enterprise platform drives profitability and
efficiency across front, middle and back offices, while managing
the complex logistics associated with physical commodities. Allegro
provides customers with agile solutions to manage risk across
natural gas, power, coal, crude oil, petroleum products, emissions
and other commodity markets, allowing decision makers to hedge and
execute with confidence. Headquartered in Dallas, Texas, Allegro
has offices in Calgary, Houston, London, Singapore, Sydney and
Zurich, along with a global network of partners.
For further information please contact Samantha Johnston at
[email protected] or +1.214.237.8149.
or call us at +1.888.239.6850
North America +1.214.237.8000 Europe +44(0)20.7382.4310 Asia
Pacific +65.6236.5730
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ReferencesWikipedia, Shale gas in the US 1.
http://en.wikipedia.org/wiki/Shale_gas_in_the_ United_States
National Geographic2. , US to Overtake Saudi Arabia, Russia as
Worlds Top Energy Producer, Thomas K. Grose, November 12, 2012
http://news.nationalgeographic.com/news/energy/2012/11/121112-iea-us-saudi-oil/
Harvard Belfer Center, The Shale Oil Boom: A US Phenomenon,
Leonardo 3. Maugeri, June 2013
http://belfercenter.ksg.harvard.edu/files/The%20US%20Shale%20Oil%20Boom%20Web.pdf
Money Morning4. , The Shale Oil Boom is Going Global (Starting
With This Huge Deal in Argentina), Dr. Kent Moors, August 13, 2013
http://moneymorning.com/2013/08/13/the-shale-oil-boom-is-going-global-start-ing-with-this-huge-deal-in-argentina/
Forbes5. , Promised Lands Fracking Fictions: OPEC Goes Hollywood
with Crocudrama, Larry Bell, January 13, 2013
http://www.forbes.com/sites/larrybell/2013/01/13/promised-lands-fracking-fictions-opec-goes-hollywood-with-crocudrama/
LawyersandSettlements.com, From Gavel to Shackles: Celeb and
Sierra Club 6. Protest Fracking, Jane Mundy, August 20, 2013
http://www.lawyersandsettlements.com/articles/hydraulic-fracturing-water-contamination-epa-fracking-hydrofracking/hydraulic-fracturing-water-contami-nation-7-19011.html
Bloomberg7. , Anti-Fracking Laws in New York Towns Upheld on
Appeal, Chris Dolmetsch and David McLaughlin, May 2, 2013
http://www.bloomberg.com/news/2013-05-02/anti-fracking-laws-in-new-york-towns-upheld-on-appeal.html
GasDrillinginBalcombe, Blog at Wordpress.com, Europe against
Fracking a 8. continent says: NO!, January 26, 2012
http://gasdrillinginbalcombe.wordpress.com/2012/01/26/europe-against-frack-ing-a-continent-says-no/
ExxonMobil, 2013 Outlook for Energy: A View to 2040 9.
http://www.exxonmobil.com/energyoutlook
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Oil & Gas IQ10. , Energy Access, Upward Income Mobility
& Shale Production: A Causal Connection?, Nathan Randazzo,
August 20, 2013
http://www.oilandgasiq.com/strategy-management-and-information/columns/upward-income-mobility-shale-production-a-causal-c/
VisionGain11. , The Shale Gas Market Report 2011-2021
http://www.visiongain.com/Report/605/The-Shale-Gas-Market-2011-2021
Saudi Gazette12. , Shale Gas Revolution Changes Geopolitics,
Syed Rashid Husain 24 Feb 2013
http://www.saudigazette.com.sa/index.cfm?method=home.regcon&contentid=20130224154337
Environmental and Energy Study Institute, Fact Sheet: Shale Gas
and Oil Termi-13. nology Explained, Kate Glass, Dec 2011
http://files.eesi.org/fracking_products_120111.pdf
Wikipedia, Natural-gas processing 14.
http://en.wikipedia.org/wiki/Natural_gas_processing
INGAA Foundation, Inc., North American Natural Gas Midstream
Infrastructure 15. through 2035, June 28, 2011
http://www.ingaa.org/File.aspx?id=14911
US Energy Information Administration, Foreign investors play
large role in US shale 16. industry, April 8, 2013
http://www.eia.gov/todayinenergy/detail.cfm?id=10711
Fuel Fix17. , US shale boom putting OPEC on the defense, Harry
R. Weber, June 9, 2013
http://fuelfix.com/blog/2013/06/09/opec-on-the-defense-amid-us-shale-boom/
Drilling Contractor18. , Barnett Shale group challenges benzene
emissions allegations, June 4, 2010
http://www.drillingcontractor.org/barnett-shale-group-challenges-benzene-emission-allegations-5958
OAonline19. , Permian Basin economic indicators remain robust,
Donald Munsch, June 8, 2013
http://www.oaoa.com/news/business/article_3b356960-cfd0-11e2-a43f-0019bb30f31a.html
PBS Newshour20. , Comeback: Why the US Sits at the Brink of a
New Boom, Charles Morris, June 19, 2013
http://www.pbs.org/newshour/businessdesk/2013/06/comeback-why-the-us-sits-at-th-1.html
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Oil & Gas Financial Journal21. , The fight to limit Bakken
shale flaring, Sandy Fielden, May 7, 2013
http://www.ogfj.com/articles/2013/05/the-fight-to-limit-bakken-shale-flaring-.html
Huffington Post22. , Marcellus Shale Gas Production Growing
Rapidly, Having a Major Impact on National Energy, Kevin Begos,
August 15, 2013
http://www.huffingtonpost.com/2013/08/15/marcellus-shale-gas-production_n_3759541.html