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Ohio Energy Forum: Impacts of the rapidly developing oil and gas industry in Ohio

On April 13, 2012, McDonald Hopkins hosted the Ohio Energy Forum, which focused on the impact of shale exploration, drilling and extraction on companies doing business in Ohio. The keynote speaker at the event was Tom Ridge, the first Secretary of the U.S. Department of Homeland Security and former Governor of Pennsylvania, who now heads a firm that serves as a consultant to the energy industry. Mr. Ridge, along with a panel of experts, spoke candidly about business opportunities and challenges presented by the production of oil and gas from the Marcellus and Utica shale formations in Ohio.

Click here to read The Plain Dealer article that covered the event.

Transformational impact

Mr. Ridge focused on the transformational impact of the development of natural gas resources. Mr. Ridge said that natural gas has the potential to be a baseload fuel for the next fifty years, not just a “bridge to renewables.” Although many people are hoping to rely on renewable energy sources, such as wind and solar, Mr. Ridge noted that renewable energy sources are not currently suitable as baseload power sources. Not only are domestic supplies of natural gas sufficient to be a long-term baseload energy resource, but natural gas has half of the carbon of more traditional sources of energy, such as coal.

Mr. Ridge discussed the tremendous impact that the development of natural gas resources can have on counties, states, and even countries. The shale gas and oil boom is bringing jobs to rural counties that otherwise have struggled economically. For example, the shale gas industry already has added 70,000 to 80,000 good paying jobs to Pennsylvania’s local economy. Even though some out-of-state companies are participating in the boom, they are hiring local employees and contracting with local businesses.

He emphasized that increased reliance on domestic natural gas makes that United States less dependent on foreign sources of fuel. This shift reduces the influence that countries such as Iran, Iraq, Saudi Arabia, and Russia can exert on international politics. Reliance on domestic sources also can break the grip of control that energy cartels such as OPEC (Organization of the Petroleum Exporting Countries) exert on energy prices. Utilizing domestic sources of energy can stabilize our energy supply and shift spending away from foreign investment and back into the United States economy.

Environmental challenges

Mr. Ridge noted that there needs to be more emphasis on the environmental safety and soundness of natural gas and shale gas production, which involves hydraulic fracturing or “fracking,” and that environmental issues must be addressed. He encouraged transparency with respect to environmental hazards. He talked about how fluid management has become one of the biggest topics involved in the discussion about the safety of hydraulic fracturing and how developments in technology are making fluid management less of an issue.

Transportation

Mr. Ridge and several panelists emphasized the significant role that transportation plays in energy policy. Mr. Ridge said that Ohio and the other states in the Marcellus and Utica shale region could demonstrate the transformational impact of natural gas to the rest of the country—and the world—by starting with transportation, since about 95% of the fossil fuels in this county are used for transportation. He suggested that the region should start by developing the infrastructure to use natural gas as a transportation fuel for public transportation and trucks and encouraging Detroit to build flexible fuel passenger vehicles that can run on natural gas.

Dr. James Smith, a professor at West Virginia University and the Director of the Center for Industrial Research Applications, noted a 30% projected increase in demand for transportation fuels by 2025 in the United States alone. The United States spent over $1 billion per day on foreign fuel in 2008, and it has been reported that we spent more than $2.74 billion per day in 2011. He remarked that offsetting just 5% of foreign fuel with domestic sources can have an impact of between $1.4 billion and $3.9 billion on the local economy in the region.

The President of the Ohio Gas Association, Jimmy Stewart, commented on the cost effectiveness of natural gas. In fact, he drove a natural gas car from Columbus to Cleveland to attend the Ohio Energy Forum to demonstrate that natural gas cars are a viable means of transportation over long distances. He also explained that the fuel tank of his natural gas car holds one Mcf (one thousand cubic feet) of natural gas, which has the equivalent energy of eight gallons of gasoline. He asked the audience to consider the delivered cost of natural gas, at approximately $5 per Mcf or less, in light of the cost of eight gallons of gasoline. He noted that the cost of natural gas has remained stable and even decreased as the cost of gasoline has continued to increase in recent years.

Panel discussion

Edward Burghard, CEO of The Burghard Group, led a panel discussion following Mr. Ridge’s comments. After Dr. James Smith talked about the potential economic impact of shale gas development, Paul Battista, an entrepreneur and CEO of Sunnyside Supply, discussed how local companies can capitalize on business opportunities presented by the shale boom in Ohio. Gregory Robb, Senior Vice President for Key Private Bank, gave examples of how KeyBank has helped entrepreneurs fund business opportunities in the gas industry and navigate various financial obstacles presented by the rapid growth of their businesses. The Director of Planning and Asset Utilization for Dominion East Ohio, Timothy C. McNutt, talked about Dominion East Ohio’s extensive gathering and distribution system in eastern Ohio and their plans for further enhancements to their gathering and transmission system. Tom Zaino, Chair of McDonald Hopkins’ Multistate Tax Practice and former Ohio State Tax Commissioner, discussed Governor Kasich’s proposed changes to Ohio’s severance tax and various other tax issues related to natural gas production. He emphasized the importance of a tax structure that preserves Ohio’s competitiveness. Mr. Zaino also explained how real property tax issues can pose challenges to the industry. In addition to discussing the potential impact of natural gas on reducing transportation costs, Mr. Stewart talked about how early sampling shows that Ohio looks promising for the production of so-called “wet gases,” such as oil, butane, propane, and methane. These wet gases are appealing to oil and gas companies because they continue to remain very valuable, even as natural gas prices have decreased.

The attorneys of the McDonald Hopkins Energy Practice Group have been advising clients in the oil and gas industry for decades. For more information or to learn about how McDonald Hopkins can assist you and your business, please contact:

Michael L. Snyder
Co-Chair, Energy Practice
216.348.5754
msnyder@mcdonaldhopkins.com

Michael W. Wise
Co-Chair, Energy Practice
216.430.2034
mwise@mcdonaldhopkins.com

Jeffrey R. Huntsberger
216.348.5405
jhuntsberger@mcdonaldhopkins.com

Adam N. Saurwein
216.348.5718
asaurwein@mcdonaldhopkins.com

Click here for more information regarding oil and gas leasing.

Carl J. Grassi, President
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© 2012 McDonald Hopkins LLC All Rights Reserved. This Alert is designed to provide current information for our clients, friends and their advisors regarding important legal developments. The foregoing discussion is general information rather than specific legal advice. Because it is necessary to apply legal principles to specific facts, always consult your legal advisor before using this discussion as a basis for a specific action.