STEVE INSKEEP, host:
We're taking a look this week at an old energy source that's getting new attention: natural gas. New production techniques now make it possible to get gas out of underground rock formations. As a result, there is more accessible natural gas in the United States than people even thought was possible. And here's a fact: most natural gas is produced by small, independent companies. This is one game where big oil got beat.
NPR's Tom Gjelten has the story.
TOM GJELTEN: Not long ago, it seemed the United States was running out of natural gas. The big oil companies got out of the U.S. gas business partly for that reason, but then gas producers figured out how to get gas out of shale rock. That opened up whole new opportunities. In the backwoods of West Virginia near Clarksburg, for example, Randy Sleeth(ph) has a crew digging a gas well.
Mr. RANDY SLEETH: You look at the number of companies that are here from other states, everybody's, you know, kind of flocking the Appalachian Basin.
GJELTEN: Sleeth has been drilling gas wells in West Virginia for 30 years, but he's never seen so much outside interest in the local gas deposits.
Mr. SLEETH: People from out west starting up new businesses here pretty much on a monthly basis.
GJELTEN: Randy Sleeth is under contract to Gastar Exploration, a small Texas company with only 23 full-time employees - none of them on the East Coast.
It's not an unusual situation. The energy world as a whole is dominated by a handful of enormous oil companies, but the U.S. natural gas business is a notable exception. Eighty-two percent of all U.S. natural gas is produced by small, independent companies with just a dozen employees on average.
In part, this is a story about how innovation occurs, at least in this industry. Robert Hefner is a 50-year veteran of the natural gas business, and has a company of his own, GHK Exploration in Oklahoma City.
Mr. ROBERT HEFNER (Owner, GHK Exploration): The major oil companies haven't been paying attention to the U.S. for decades - really, since the '60s and '70s. And it's been a lot of independents like us that have found all this gas, developed the technology and made it happen.
GJELTEN: Hefner says one reason small companies have come to play such a big role in the U.S. natural gas business is because individual landowners here generally retain their own mineral rights. They can get a gas well drilled on their own property.
Mr. HEFNER: In America, if that's the dream is to drill a well, you can go out and drill a well. As a result, there's been about three-and-a-half-million wells drilled in America over the years, versus about a million and a half for the rest of the world.
GJELTEN: Many U.S. gas wells are mom-and-pop operations. Often they merge, evolving into slightly larger companies, but even the publicly traded gas companies are generally small. Take Gastar, the Texas company behind the gas well in Clarksburg, West Virginia. Russell Porter, the company chairman, says Gastar has had to learn how to compete with the big energy companies.
Mr. RUSSELL PORTER (Chairman, Gastar Exploration): We certainly don't have an advantage when it comes to capital. The large companies can spend a lot more money than we can. But we can be very quick on the draw, if you will, to seize an opportunity and to buy into a new concept or a new area that we think could be prospective for natural gas. And if we do that, then we usually have a first-mover advantage.
GJELTEN: There's also a practical reason small companies dominate the U.S. natural gas business. Typically, a new gas well produces in abundance in the year after it's opened, but production then begins to decline sharply. If a natural gas company is to keep production steady, it has to keep drilling new wells. This routine of constant drilling of small wells generally is not something that has interested the big oil companies.
Patrick McGinn is a spokesman for Exxon's exploration business.
Mr. PATRICK MCGINN (Spokesman, Exxon): With a company our size, we have to have a larger scale. We have to have a potential resource that has more capability for us to go after.
GJELTEN: The natural gas business, in fact, is a good way to look at how business strategies differ for companies, depending on their size. First, on the small end, a company like Gastar Exploration, with its 23 employees down in Texas, proceeds cautiously when it starts up a new operation far from home.
This brings us back to Clarksburg, West Virginia, where Randy Sleeth and his crew are digging a well for Gastar.
Mr. SLEETH: Right now, we're close to 17 hundred feet down. We will be getting into the shale around 3,000 feet in this area.
GJELTEN: This is actually a relatively shallow gas well. Most shale gas wells are deeper, and they turn to proceed horizontally across a shale layer. Those deep wells are becoming the norm in this part of the country, which is home to the enormous Marcellus shale formation.
Gastar's well-drilling operation is basically the minimum a company can do to establish a foothold in the area. This is part of the Gastar strategy. Chairman Russell Porter says his company, because it's small, likes to let other companies take the lead in the new area and learn from their experience.
Mr. PORTER: Let them drill some of the early wells, try to determine which drilling techniques work the best, which completion techniques work the best, and then once they've done that trial and error and sort of established a pattern that works, we can go in and design our wells without having the trial and error phase, which can be very expensive in a new play.
GJELTEN: The issue of how to handle risk is big in any new industrial venture. In the natural gas business, the smallest companies may in some ways be the most adventurous. The new investments they make are tiny compared to what a large company can make. But they'll still try to shift as much of the risk as they can to their larger rivals.
Paradoxically, the biggest energy companies also try to transfer the risk, only they'd like to put it on the smaller companies. And right now, because shale production in the United States looks so promising, big oil is thinking about getting back into the natural gas game.
Patrick McGinn says Exxon is looking at some possible shale plays in the U.S. right now, but just like Gastar, it's biding its time before making a big move.
Mr. MCGINN: We've taken a couple of years to really work on the technology that's required to do the exploration and production of these kinds of shale plays. And so doing the homework and doing the technology development takes some time for us, and we were willing to wait for that.
GJELTEN: And what would happen to a little company like Gastar, were Exxon to move onto its territory, like in the Marcellus formation in West Virginia or Pennsylvania? Russell Porter says his company will still have its niche on the fringes, if necessary, or it could just let big oil take over its operations.
Mr. PORTER: If Exxon came in and wanted to become a dominant player in the Marcellus shale, I'm sure there are lots of small operators who would be willing to sell out to them if they were willing to pay full value. And then there's always going to be another play for us to go and invest in and sort of start creating value all over again.
GJELTEN: It's all part of the natural gas game. There is one big downside to the fact that small, independent companies still dominate the U.S. natural gas industry: It's harder for them to speak with one voice, and that's important if they are to address concerns about the impact of shale gas drilling on the environment, or if they are to be well represented in Washington when energy legislation is written. That story tomorrow.
Tom Gjelten, NPR News, Washington.
INSKEEP: We're glad you're hearing this story on this public radio station. And when you're checking the news throughout the day at npr.org, you can also learn more about U.S. energy consumption and the quest for shale gas.