A program of the West Virginia Oil & Natural Gas Association

Local companies find ways to tap Marcellus, Utica shale-gas business

By Kecia Ball | February 22, 2015

When the overall economy soured in 2008, Highland Tank & Manufacturing in Stoystown – the largest steel tank manufacturer in the country, according to the company – had a fallback: selling to the burgeoning energy industry.

“It was, and is, good business for Highland Tank,” sales manager Robert Duppstadt said. “From 2008 to 2010, it was a positive influx for sales when the economy wasn’t as good in some areas.”

Regionally, exploration and production of natural gas from Marcellus Shale were creating new opportunities for many companies – those with the drive to tap into the need – but Highland has sold beyond the nearby Utica and Marcellus shales to others across the country: hot spots such as the Bakken in North Dakota and the Eagle Ford in Texas.

For the Somerset County company, finding space within the industry beyond the drilling – or upstream – has made the energy industry an important and lasting market, even as rig counts in other parts of the country have slowed recently in response to lower oil and gas prices.

The focus now is on midstream operations – namely transportation systems, he said.

“Drilling is relatively short-lived in terms of the industry,” Duppstadt said. “Going beyond the drilling process, there is an unbelievable underground network of pipelines in the U.S. to transport natural gas. Those pipelines have compressor stations every 50 miles or so, and there are tank needs on those as well.”

Some companies set up nearby to drill, Duppstadt said, but the real key for Highland Tank was to expand beyond regional buyers and past the initial work of setting up rigs and pulling gas from the ground.

“We’ve had local companies that formed because of the Marcellus Shale boom and purchased tanks from us,” he said.

“And, the Marcellus upstream shale boom has been very good for Highland Tank. It’s evolved from drilling to the expansion of the pipelines – midstream and infrastructure that goes with it.”

Highland Tank is one of a handful of regional companies that have diversified into the oil and gas supply chain.Though Somerset and Cambria counties never have been what exploration and production companies consider a sweet spot for drilling, national and international energy companies have created steady work nearby, in western Pennsylvania, West Virginia and Ohio, drilling in the Marcellus and Utica basins.

Johnstown Area Regional Industries stepped forward early on to help local companies make sense of and money from – the new opportunities.

The economic development organization’s Marcellus Shale Consortium, which meets quarterly, has about 70 companies involved, JARI President Linda Thomson said.

“Not all are doing business with the shale industry, but they’re keeping themselves connected,” she said, adding that she knows of 12 to 15 companies in the region actively working in the natural gas industry.

‘Time to diversify’

Initial presentations focused on informing local companies of the industry’s workings and opportunities.

But the focus now is on events that connect companies to supply chain buyers.

While upstream has slowed somewhat, now is a good time for area companies to start the process of building contacts, she said.

“Yes, the drilling has eased,” she said. “We think that’s temporary. We still maintain really good connections with lots of folks in the industry so we have a feel for what’s going on out there.

“I think it’s still a good time to diversify in the energy industry. You have to invest the time and energy it takes to get into those doors. This is a great time to be laying the foundation for that kind of work.”

Midstream work still is growing, she said.

“What people in the industry are telling me is that they are concentrating on the midstream right now,” Thomson said. “That work is more abundant.”

Lower oil and gas prices have created an additional push to move existing resources from the multitude of wells already drilled and producing. That means a rush to create additional infrastructure.

The federal Environmental Regulatory Commission is poised to give final approval to a pipeline that would stretch 124 miles from the Marcellus region of northern Pennsylvania into New York. A number of other pipeline projects are planned, too, such as a UGI Energy Services project. That company announced recently that it will spend $150 million to run a pipeline 35 miles from the Marcellus region to the site of a former coal plant in Snyder County that is being converted to natural gas power.

And Sonoco Logistics Partners says the company is moving ahead with its Project Mariner East – a pipeline project to deliver propane and ethane from the liquid-rich Marcellus Shale areas in western Pennsylvania to a facility near Philadelphia for processing, storage and distribution to domestic and waterborne markets. The project is anticipated to have an initial capacity to transport approximately 70,000 barrels per day of natural gas liquids and could be scaled to support higher volumes as needed, the company said.

Mariner East is scheduled to be fully operational to deliver propane and ethane in mid-2015. The company also announced an open season for a sister project, Mariner East 2, in November 2014. For Mariner East 2, Sunoco Logistics plans to construct a pipeline from processing and fractionation complexes in western Pennsylvania, West Virginia and eastern Ohio for transport to the same facility.

‘Sandboxes to play in’

JWF Industries’ Environmental Tank and Container, which operates from a former shell plant in Tanneryville, reached out to the industry early – and is reaping benefits now, despite ebbs in upstream activity and an uptick in midstream, President and CEO Bill Polacek said.

“In 2010, I went to our vice president of sales and marketing and said, ‘Stop what you’re doing and figure out products we can sell to oil and gas,’” Polacek said. “We had orders for frack tanks before we built our first one.”

Today, the company employs more than 100. And Polacek said he is not worried about prices, which he said are cyclical.

The company’s strategy has been to diversify within the industry. Promising pipeline work prompted Polacek to open another company, a Johnstown branch of Baltimore-based Atlantic Industrial and Mechanical, which Polacek bought in 1999. The company services gas lines at tank stations and creates piping.

“Drilling, midstream and downstream – those are all sandboxes to play in,” he said.

“That strategy is what we took early on. We looked at it as a commodity. Exploration and production side is slow. The weak will fall, and this will rebound.”

With aggressive growth in midstream – some estimates call for spending of $24 billion in the coming years – the Johnstown company has ample room for growth, he said. Polacek said he also sees potential in power generation and increasing liquid natural gas applications.

“We are now dealing with the largest midstream operators in the country,” he said. “That is starting to gain momentum.

“What I really enjoy is that this has been not just to keep the company healthy and employment up right here. It’s about how we can create spinoff jobs, and then those companies help others in this valley.”

Environmental tank subcontracts light fabrication to five companies, Polacek said.

“That’s another 100 jobs right there,” he said. “Plus, they buy uniforms and other supplies locally. And those people with jobs buy houses and spend in the community.”

Utica Shale requires higher-pressure wells with longer lateral reach, which requires more of the company’s products and equipment, so Environmental Tank achieved an American Society of Mechanical Engineers certification to build tanks and filter systems and to handle high-pressure wells.

One of those niche products is 150-foot long “bullet tanks” for gas storage. In that case, Polacek said the company took advantage of one of its biggest selling points – and one that could be the key for local companies that want to tap into oil and gas: lower transportation costs.

“Our competitors are in places like Houston,” he said.

“Transportation for a tank the size of our bullet tank would be over $1 million from Texas. For us, it was $200,000 to transport to Ohio. We win when it is a high-transportation cost product. That is an $800,000 price advantage for us.”

‘Speed to market’

Aside from cheaper transportation, Polacek said energy players want to buy local, when they can.

“I’m not sure why people are afraid to get into this industry,” he said. “I recommend you diversify yourself. Build strategies to show your advantage. All these companies want to buy local. They know they are coming in and profiting from your region. They want to show that they want our region to profit, too.”

Swift changes in needs offer another opportunity – for those companies willing to react quickly.

“My mantra is to build products a year from now we haven’t ever thought of,” Polacek said. “Speed to market will set you apart.”

The company now has more than 40 product lines – and patents pending on two of those.

As the focus on midstream grows, the company has added increased certifications for pipes and pressure vessels, which means industrial X-ray testing on almost all welds.

Polacek said he looked to a local company, RNDT Inc., an accredited commercial nondestructive testing laboratory in Woodvale, to perform testing.

Though the company was established before the Marcellus and Utica rush, President Fred Raco said drilling-related work now accounts for about 60 percent of RNDT’s business.

“We were a good fit for natural gas applications,” he said.

“We were already working in multiple industries, but this industry kind of found us because we were centrally located, and we had the field-service group established.”

RNDT, founded in 2002, employs 34.

“The field of nondestructive testing is utilized in virtually all industries,” Raco said. “In oil and gas, we are contracted to examine or inspect critical parts or components and determine if they’re made correctly to codes and specs.”

The company broke in with a job with a division of CONSOL Energy around 2008.

“We’ve continued to grow,” Raco said.

Successfully breaking in means heavy networking and finding the right need, Polacek said.

“It is not more difficult than other industries,” he said. “Our model is go find what they need. Too many people will try to sell what they already have.

“Then, you network. This mirrored the defense industry for us. We tried going for the big guys. The environment was so stringent, so you go to the next tier. Here, we didn’t start with Chevron or Hess. We went to the midsize companies. It was an easier transition. Now, guess who we’re doing business with? The big guys.”

‘Always an opportunity’

Commodity price will continue to affect the number and types of opportunities, said James R. Ladlee, associate director of the Penn State Marcellus Center.

“Here in Pennsylvania, the rig count is up slightly,” he said. “Who knows whether that will last? The volatility really makes it a challenge. But, in the right opportunity, with the right environ, if people have the right product, there is always an opportunity.”

He doesn’t look for Cambria or Somerset county to lure drillers, he said – that’s at least with the current technology and production figures.

Cambria County has had no horizontal wells, he said, which are found in the most efficient and best-producing of the region’s shale plays. Somerset County has had five horizontal wells drilled, he said, and the best produced 873 million cubic feet of natural gas – low in comparison to the big finds in Washington or Greene counties.

JARI’s consortium offers a quick entry to connect with area companies that are willing to help, Polacek said.

“You can look at who everybody is talking to, cross-pollinate markets together,” he said.

“Get good advice, and there are people like us who want to take you under their wings and help. Get intel on what’s going on from other companies. What I would like to see is us to bring big companies into our region and have them say, ‘You guys can do everything.’ It can be a renaissance.

“Ever since I was a kid, Johnstown was always looking for that big business to come to Johnstown, to part the clouds and let the sunshine come down. It was right below our feet the whole time. All it takes is a little bit of hustle.”

And his most important resource, Polacek said, has always been located nearby.

“All of this happens because of my employees,” he said. “It’s the ingenuity, hard work and creativity of the Johnstown workforce that allows all of this to become reality.”

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