Wednesday, June 3, 2009

Changing Environment of Business: The Marcellus Shale

Breaking news in Pennsylvania

Anyone who has picked up a local newspaper, turned on a local television news broadcast, or listened to a local radio station has probably heard about the 3.6 trillion cubic feet of natural gas reserves locked some 8900 feet below Pennsylvania’s surface, in a geological formation known as the Marcellus Shale. According to some experts, this reserve is the one of the largest in North America. This untapped reserve has enormous economic potential for the natural gas industry in Pennsylvania.

A brief background of the history of Pennsylvania's natural gas industry

From a period spanning from the early 1900's into 2007, the industry standards for natural gas production in Pennsylvania were based on drilling large numbers of low volume production wells. These wells were drilled vertically to an average depth of around 3000 feet. Of course, this led to the rise of entire service and supplier based industries built around these standards. As the years passed, these support industries grew more and more complex and became heavily intertwined with the industry as a whole, employing tens of thousands of people ranging from high powered CEO's to rough necks working on the drilling rigs. Many of the natural gas production companies were small, locally owned and operated businesses, allowing for close and personal relationships between the service and support company owners and the producers. Business was done on "a man's good word and a handshake." Although there was much competition among the service based companies, it was not uncommon for these contractors to have exclusivity with the work. In other words, many producers developed what one might call a sense of "brand loyalty" and were willing to pay little extra to retain the services of companies that they trusted.

Major changes and shifts in the industry

The discovery of the Marcellus Shale reserves has dramatically changed the face of the local natural gas industry in Pennsylvania. Many of the cost of completing standard wells (from now on I will reference these wells as "shallow" wells) such as leasing tracts of land, permitting, environmental studies, drilling, and construction were long established by the laws of supply and demand. These expenditures had been very stable and predictable for many years. The news of the Marcellus Shale discovery, along with its astronomical profit potential, attracted the attention of several very large, NYSE and NASDAQ traded companies that could raise huge amounts of needed capital. The cost of completing Marcellus Shale wells (from now on I will reference as "deep-horizontal" wells) was significantly higher than those of drilling the shallow wells. This posed a problem for almost all of the small, locally owned companies that had the leases and reserves to drill the deep horizontal wells, but couldn't get the capital. Many of the large, publicly traded companies were coming to the area and making severely overpriced offers to local producers to acquire their reserves, along with lofty offers to Pennsylvania land owners to obtain new reserves. The industry wide dollar amounts in Pennsylvania literally totaled in the low billions. Also, the philosophy was shifting form a large number-low per capita production rate, to a small number-high per capita one. In other words, this meant a significant reduction in new construction projects. This posed a huge problem for the support and service based business in the region, including my own. The overpriced offerings have completely turned the local natural gas economy upside down in Pennsylvania. Hundreds of local jobs have been lost, due to the reduction of new construction volume. To compound the problem, the Pennsylvania Department of Environmental Protection (DEP) has taken notice to the increased demand for water in order to complete these deep-horizontal wells. Many new agency laws and restrictions have been recently enacted by the DEP such as requiring more intense environmental impact studies, water restrictions, and more strict requirements for drilling permits, driving the cost of Marcellus based drilling even higher. This means that natural gas prices have to continue to rise to make production profitable. Finally, the recent economic prices have sent natural gas prices plummeting. The industry is currently in "sleep" mode. Many of the remaining small, locally owned producers are unable to acquire new leases for shallow drilling because the overpayment for leasing has literally driven the per acre cost of leasing new tracts of land hundreds of times higher than in 2005.

This revolutionary change has driven many small local service based companies out of business. The new, NYSE traded producers do not care about the principle of "brand loyalty" I discussed earlier, or about building trusting relationships with experienced service contractors. It now goes to the lowest bidder. Every aspect of the projects is solicited for bid, even minuscule amounts by industry standards. Many of the local companies need a "steady and consistent diet" of work to survive. They are not accustomed to the sporadic work generated by the new "bid everything" policies. However, it would appear that the change is here to stay, at least for a while. If a company is to survive, its management has to recognize this changing environment and must adapt. I have made several fundamental changes to my consulting and construction business in order to survive. I have sat down with my partner and went through our budget line by line and cut out any and all unecessary expenditures. We also restructured our employee personnel by consolidating two of our construction crews into one, saving on vehicle and heavy equipment overhead costs. We also had to make minor adjustments to our employee health care plan to ensure the survival of our firm. I have sharpened my skills immensely at scrutinizing every project we bid to determine the best profit margin I can work with, but still be competitive. I still work on the same basic principles, just changed my style. To quote Thomas Jefferson, "in matters of style, swim with the current; in matters of principle, stand like a rock."


  1. I appreciate Dan's recognition early on of the need to change his business to compete in the environment created by the Marcellus Shale discovery. He recognized the inevitable and adapted without compromising his principles.

    There has been a lot of discussion in recent years about the demise of the newspaper industry. The increased reliance on the Internet for information has forced newspapers to change the way they do business, and after some time in denial, they are finally beginning to see the writing on the wall. Most offer online subscriptions, are trying to appeal to younger readers with entertainment and lifestyle features, and spending less on journalism. Philip Meyer, author of the book, “The Vanishing Newspaper”, speculates that the last newspaper will be tossed in the trash in the first quarter of 2043. While I maintain newspaper and magazine subscriptions, I find that most of my information gathering is done on Internet. I'm sure most people appreciate, as I do, the variety of sources of information and the opportunity to compare sources for bias and credibility.

    To soften the blow caused by the shift to the Internet, the industry is also considering new ways to generate revenues. According to an article in the Wall Street Journal, entitled, "To Beat Antitrust Rap, Papers Take Cues From Songwriters," by Russell Adams and Shira Ovide, newspapers are considering adopting the model used by the music industry to extract fees from online sources that use their content in whole or in part. Newspapers can band together to demand payment from websites, but must be careful about antitrust violations
    that might limit consumer options.

  2. Views for earlier post

    I agree with Dan's point of view and appreciate the steps he took for changing his business strategy in order to adapt to the changing environment of Oil business.


    The business environment is a continuous evolving process. The altering trends that can easily be reflected in firm's changing market should carefully be studied and adapted to. The global scenario with unleashing and booming businesses combined with the opportunities for growth and investment should be continuously examined. Facing the challenging world and competing against them definitely require the recognition of the changing environment, adapting them and planning to overcome the problems strategically linking the same to the versatile flexible strategy.

    The decision making is not just confined to the top management anymore; it is more distributed to people at all levels in the organization. The business trend is moving towards consumer ease as they have become very intelligent, more informed and sophisticated in their buying style.

    Life Experience Example

    Citing from my hardware business experience, the business environment which I have seen is a continuous evolving and adapting to the changing customer demands. Earlier the consumers were just concerned about the quality of the products and did not gave importance to the factors such as environment, working condition, and health and safety of the workforce. During the last couple of decades, consumers worldwide have shown concern about these factors and gave those companies’s product a priority which met these. BP became one of the world's most respected companies after being the first major oil firm to acknowledge the reality of climate change and taking steps to reduce its emissions and develop renewable energy. My company was amongst the few others who were an early entrant in implementing international standards of quality, working conditions, and health and safety of workforce. Besides implementing these international standards the company made an extensive media communication teaching consumer about why the going green is important and how we contribute to the eco-friendly environment. As a result the company has seen good response from the consumers even in the tough market times such as that of the 2001 and of the present.

    Recently, the company has introduced a retail website for the convenience of the consumers to shop from home. The benefit of this website is that a consumer can get his product custom developed. Furthermore, this website offers deals for the combo pack where in door lock, screws, and the door handle is priced lower than the individual price of any of these items. I don’t think anyone who bought that would have left this combo package deal. This is nothing but tempting an intelligent customer to think and make a brainy decision. Thus in order to be a leader and have greater market share a company should meet or exceed what consumers want and must even surprise them!

    I found the following article very interesting to the topic:


  3. I agree with you that it is really important to keep up with changing environment that is surrounding us. In order for individuals, groups, couples, organizations, companies, and countries to survive, they have to change.

    A personal experience that Saudi Arabia was very conservative country due to its religion and culture. Therefore, it was difficult for certain businesses to become profitably like insurance business. The insurance business was not acceptable by the people. Due to the religious obstacles, people refuse to insure any valuable assets. In the last 15 years the accident rate increased rapidly which forced the Saudis to purchase insurance because the government enforced it. However, the Government considered the culture and the religious status when they enforced the insurance in all aspect of business to protect the citizens and foreigners. Therefore, they developed what we call it corporate insurance. In which the customers are considered as investors. The investors paid in annual membership in case something happens. At the end of each year the company calculates the net revenue and they set certain percentage that goes back to the investor insures and the remaining is the net profit for the company.

    Here is an example that demonstrates the importance of adopting the changing environment for the country as whole. This adaptation is not only for companies and organizations.

  4. The constant thing is that the environment would never be constant.

    Life experience example

    The most important issue recently is the economic recession. On one hand, a significant portion of Chinese economy relies on the consumption in other countries. Due to the recent recession, Chinese export data shrank significantly, which led to jobless people increased by millions. On the other hand, Chinese domestic market has been growing fast. For example, early this year, China passed the United States in monthly auto sales for the first time. Therefore, more and more once OEM manufacturers in China turned their eyes to domestic market.

    One of my friends owns a small firm which manufactures certain locks. Before this year's economic recession, all of his orders were from the USA. Besides workers in the workshop, he didn't have many employees in the firm. That was because his job was simple: manufacturing upon orders from customers with long time relationship in New York, then shipped all products at the right time to the right place. During the recession time, his orderes from the US decreased by almost 50 %. Now, he began to recruited sales and marketing employees in attempt to expand and brand his business in China Mainland.

    More information about the grim export situation China is facing:

  5. I totally agree with Dan’s point of view. Organizations have to adapt to changing business environment. I appreciate cost cutting steps implemented by Dan, in order to servive in changing oil business environment. Today most company follows employee layoff as cost cutting strategy without focusing on other areas, from which they can save money.

    My Experience:

    During my internship I was working in internet service providing company. At that time this company is the only internet service provider in that city. Therefore they used to charge premium price for their services. But during next 6 months most of the big companies like Reliance and BSNL entered the market. This change to business environment makes it visible that this market is no longer a seller market. Now customers have options to choose from. Our company realizes it on time and start working to offer more improved services at relatively low price. Our company realized that scoring higher among users for satisfaction and retaining customer loyalty are very critical in this kind of market. Therefore, realization of the changing business environment and properly adapting to it helped our company to survive in the long run.

    Related link:

  6. Right On, Dan!! Any company that's not willing to make necessary adaptations, don't deserve to exist. Many companies that can't keep up usually end up going out-of-business or being acquired by a bigger company. In a world where technology has become almost a basic necessity for everyday human activity, one would say that every company should have certain level of technological advancement.

    A perfect example would be Sky Bank. I worked for Huntington National Bank but I was originally employed by Sky Bank which was acquired by Huntington bank. Sky bank was a small community bank that had several branches in western Pennsylvania. However, their performance in the area was limited because they found the more customers were banking with larger banks with more online services and less fees. Sky could not keep up and Huntington bought Sky Bank. As a result of the acquisition, during the mid-Summer, the bank undergone major renovation and hardware/software upgrades. With the new systems and equipment, customers banked more online which caused the lobby and phone traffic to be less busier.

  7. First of all, I really liked the breaking news about natural gas sources in Pennsylvania that Dan Lunger shared. Many changes are brought by breaking news, just like Dane explained in his posting that industry kept growing and became heavily intertwined and he developed new style to be competent in his business although he sticks around same principles.
    Every business needs to communicate strategically and adapt the changes to be successful in 21st century. It is also true that the technology is changing so quick that it becomes difficult to adapt sometime. By the time you adapt one thing and get use to it, that might become obsolete, especially with the internet and digital technology.
    Moreover, one of the reasons behind the need for catching up with change is, now days it is a buyer’s market not a seller’s market anymore. Companies have to tailor design their products for customers.

    My own experience:

    While I was doing my internship with Cipla Pharmaceutical Company as a sales person in which I had to go and approach doctors personally and do detailing about the product. The product (Drug for Blood pressure) which I use to do detailing of during my internship, was little bit changed in the terms of formulation when I was done with my internship. This not only shows the speed at which Research & Development is progressing but also the production plant technology which keeps on getting updated for acquiring these change.
    To address more with the topic of changing business environment, there was a time when pharmaceutical sales reps where use to do detailing about new drugs to the doctors with charts and Brochures. Today they are using laptops with power point presentation and 3D animations & graphics for getting better attention. Now again the trend is changing and new technique of e-marketing and e-detailing is being used. Because it is becoming more acceptable by physicians, companies today have to adapt this change in order to compete in cut throat competition.

    Here is a link with relevant interesting information:

  8. I agree with your opinion Dan and I think the article is very interesting. Also interesting and important is the fact that the State Pennsylvania got an advantage about the natural gas formation. But the mining and the usage of natural resources go with the economic trend. It means it depends on the market value of the gas. About the globalization nowadays all export-oriented countries are in competition to each other.

    The major market-rule “Supply and demand determine the price” nowadays is not always right. Because the gas-price is often made by political influence. The Arabian states provide the gas-price and the other countries can only react.

    Nevertheless, every company have to create a plan about the budgeted costs before a project will start. Also this company has to calculate their costs and the profit above and during the duration of the project.

    The small local companies who are invited in the large project have also calculate their costs. However long-dated contracts have a negative effect with the drilling companies. The smaller local enterprises are therefore bound to the prices for delivery auxiliary materials and removals in the long run.

    Another example about my job are the changing environments in the financial business. Since the end of 2007 the bonds and shares from national and international operating banks decreased about the financial crisis dramatically. New accounting standards were created and all financial institutions have to change their accounting procedure. There is an huge powerful process of adjustment. You can read my excerpt about an article from the Wall Street Journal in my blog entry. You can see the whole article “Congress Helped Banks Defang Key Rule" at: