EQT’s announcement last week of its acquisition of Rice Energy marks the end of one phase and the beginning of another in the epic U.S. shale revolution. Marcellus 1.0, as I like to refer to it, was mainly about rapidly amassing scale and establishing staying power in the face of enduring lackluster commodity prices. In fact, the merger deal is a proximate result of the Darwinian shakeout of marginal producers that occurred during Marcellus 1.0. The acreage ultimately to be acquired by EQT can trace its lineage back through Rice Energy to the bankruptcy of Alpha Natural Resources – proof that in the energy sector being a “fast follower” is often a superior strategy to that of being the “first mover.” One of the attributes that attracted EQT to Rice is the pricing arbitrage it will garner through Rice’s transport assets that will provide EQT access to premium prices in markets outside the Appalachian basin.
As Marcellus 1.0 ends and the shale play enters the next phase, EQT’s pricing benefit may portend a less sanguine future for the region generally. This phase will require the development of the storage, treatment and processing infrastructure necessary to convert the raw natural gas resource into its more valuable composite derivative products. Unless the necessary midstream infrastructure can be developed at an accelerated pace, this humongous, once-in-a-generation asset will migrate out of the region, and along with it will go all of the accompanying downstream wealth-building commercial activity. I am reminded of that noteworthy metaphor referred to by our last businessman presidential candidate, of a “giant sucking sound” that will occur as the Appalachian gas makes it way out of the basin down to the Gulf Coast for processing before being re-transported north to the largest end use markets.
Of the lessons that emerge from our region’s industrial past, one stands out in cautionary fashion. Wealth accrues not where the commodity is mined but where the value-added processing occurs. This was certainly the outcome of our last industrial revolution (think coal vs. steel). In order to avoid this fate in the shale revolution, regional and state governments, economic development agencies and the corporate community in Pennsylvania and Ohio need to collaborate and get busy building out the necessary infrastructure. So far the signs are promising.
Let’s avoid that giant sucking sound…