Our national energy policy is akin to a tug of war between national security concerns, environmental issues, and determining what's needed to keep our domestic economy humming. Energy itself usually plays a subordinate role in the discussion; the more pressing issues take precedence and we work our energy policy around them.
That's created a number of stopgap measures, some of which are driven by the market and some are driven by government intervention. Where the government hasn't intervened, at least on a national level, is in maximizing how we use our massive natural gas resources. One state is tired of waiting for direction from above and has decided to take matters in its own hands.
Currently, there are eight natural gas vehicle bills making their way through the Pennsylvania legislature. These bills range in content from tax credits to proposals to move funds from one program to another, all designed to spur the use of natural gas as a transportation fuel. Considering that Pennsylvania is sitting on one of the largest natural gas deposits in the world, it makes sense for the state to do something to increase its own use of that resource.
Natural gas has the power to change the face of the fuel industry. In the state we've seen drillers like EQT (EQT 1.15%) build its own natural gas fuel station, only to find it necessary to expand within 18 months. That's without any help from the government, which gives a bit of an indication as to how powerful the economics of switching has become.
In the state, what's coming out of committees isn't addressing the refueling infrastructure; instead, it's addressing the vehicle side of the equation. Nationally, companies like Clean Energy Fuels (CLNE 4.07%) are addressing the infrastructure side of things. However, that infrastructure needs to be used in order for the investments to grow the infrastructure to continue flowing, which is why tax credits will be important.
The importance of tax credits does stretch beyond the funding of vehicles to switch to natural gas, of course. There is an important economic trickle-down effect for the state, which had been seeing reduced employment as drilling has slowed down due to the price of natural gas falling. By spurring increased demand for natural gas, the state is also hoping to turn around falling rig counts.
Drillers are incentivized to increase drilling activity if the profits justify doing so. Top Marcellus leaseholder Chesapeake Energy (CHKA.Q) has slashed its overall drilling budget by 39% this year. It's turning its focus on the most liquids-rich plays, which is why 35% of the drilling budget is going to the Eagle Ford. It's still drilling in the Marcellus, but it's reduced both its rig count and its capex.
The company has also shifted some of its attention to next-door neighbor Ohio's Utica Shale. It's not the only Marcellus driller to look to the higher profit potential in the liquids-rich Utica. Smaller drillers like Rex Energy (NASDAQ: REXX) are also looking west to the Utica in an effort to grow liquids production. The company reported positive results at three recently drilled wells at its Warrior South project. While all this attention is great for the Utica, Pennsylvania would rather have drillers investing that drilling capital within its borders to add more jobs and tax revenue.
The economic incentives of increased drilling are important parts of the equation. However, using natural gas as a transportation fuel is well-documented as a cheaper and cleaner alternative to gasoline or diesel, making it a win-win solution to use more of it. The state can see that these benefits far outweigh the risks, which is why it's moving ahead to increase its own use of this massive resource.
