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Shale We Review the 2010s?

By Evelyn Teel and Jim McDonnell

With the decade coming to a close, this is a perfect opportunity to look back at how the energy market has changed over the past ten years. It has certainly been a whirlwind ride, starting shortly after the 2008 stock market crash and continuing through the Great Recession and the subsequent recovery. The decade also saw the shale gas revolution take hold. Arguably the most significant change in the energy market over the past ten years, the shale gas revolution has not only provided great economic benefit within the United States but also reshaped our position on the world stage.

The two technologies instrumental to the shale gas revolution – hydraulic fracturing (i.e., fracking, or inducing porosity and permeability in rock) and directional drilling (greatly increasing a wellbore’s exposure to hydrocarbon bearing formations) – have been around for decades. However, Texan George P. Mitchell of Mitchell Energy & Development Corp., through sheer determination and personal will over seventeen years, was able to advance and combine these technologies, thus enabling the extraction of natural gas from shale formations that are of low porosity (i.e., not much pore space in the rock) and low permeability (i.e., the pore spaces are not well interconnected). These formations underlie large swaths of the United States, and the proven reserves of natural gas have consistently increased over the past decade.

The shale gas revolution is commonly considered to have started in 2008, and in the 2010s, we have witnessed the remarkable changes that have resulted from its growth. As fracked wells have come online, the ready supply of low-cost natural gas has transformed the energy industry in America and the world. The graph below on the left shows the volume of natural gas produced daily in the United States between 1997 and 2010, measured in billions of cubic feet per day (Bcf/day). Production over this period remained relatively flat, averaging about 50 Bcf/day. Compare that to the graph on the right, which shows the volume of natural gas produced in the United States from 2010 to the present. The volume of natural gas produced daily has very nearly doubled to about 93 Bcf/day.

Though demand for natural gas has increased, the more dramatically increasing supply of natural gas has driven down its price. The graph below shows how US natural gas prices at the Henry Hub have declined from about $6 per million Btu (mmBtu) to $2.19 per mmBtu today.  

Due to the increased availability of cheap, abundant natural gas, an increasing number of liquified natural gas (LNG) export terminals have come online, and the United States has become a major exporter of LNG. This reverses a long-term trend of rising LNG imports. The graphs below show US LNG imports and exports from 1985 – 2009 (left) and 2010 – 2019 (right).

In most parts of the country, natural gas prices and electricity prices are strongly correlated. As natural gas prices move so do, generally, electricity prices. Thus, as natural gas prices have fallen, electricity prices have fallen as well. The graph below shows wholesale electricity prices in the Mid-Atlantic measured in dollars per megawatt-hour ($/MWH). Wholesale electricity prices are almost half of what they were ten years ago.   

The abundance of natural gas and the declining prices of natural gas and electricity have been driven by the dramatic increase in shale gas production.  

The map and graph below identify the regions and geological “plays” in the US where shale gas production is occurring. Shale gas production has increased to two-thirds of this rising total US natural gas production from only a minor contribution only ten years ago.    

Source: US DOE EIA

Though many people doubted fracking would work with crude oil deposits, as oil molecules are much larger than those of natural gas, Mark Papa of EOG Resources, Harold Hamm of Continental Resources, and others have been able to adapt fracking technology to the extraction of oil. We have thus seen a shale oil revolution take hold, which has brought benefits similar to those of the shale gas revolution. It has driven down petroleum prices in the United States and dramatically reduced our dependence on foreign oil.  The US recently became a net exporter of oil products (refined petroleum and crude oil). Overall, the US is now the world’s largest producer of natural gas (93 Bcf per day versus 58 Bcf per day during 2010) and crude oil (13 million barrels per day versus 5.5 million barrels per day during 2010). 

The shale revolutions have significantly changed the US energy landscape over the past decade. They have brought online abundant sources of low-cost domestic energy, which have driven down consumer prices, boosted our economy, created jobs, improved America’s energy security, and increased revenue to state and local governments and the federal government. Fracking and directional drilling require a smaller footprint than traditional drilling, and have helped reduce CO2 emissions as natural gas is being substituted for coal in electricity generation. Low cost, abundant natural gas complements intermittent sources of energy such as wind and solar.

In addition to all the benefits noted above, low energy prices in the United States have expanded the manufacturing sector and made the country more attractive to companies willing to relocate from overseas. Indeed, the shale revolutions have done nothing less than improve the United States’ geopolitical position, reducing our dependence on foreign oil and shoring up our export capacity.

Like any fuel source, shale gas comes with trade-offs. There are concerns about induced seismicity, water and air pollution, and health impacts. Further technological advances and refinements in the field may alleviate these concerns, and we look forward to seeing how this industry progresses in the 2020s.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

All images copyright 2019 Avalon Energy® Services LLC

Copyright 2019 by Avalon Energy® Services LLC

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Propane and Natural Gas – Birds of a Feather Not Flying Together

Propane is a versatile source of energy common in rural areas that are “beyond the main” of utility natural gas service.  It is often used for home space and water heating and cooking, as well as for agricultural uses such as crop drying, irrigation pump fueling, space heating in green houses, pig and poultry brooding, frost protection, standby electricity generation, and even food refrigeration.

Where does propane come from?

Propane is produced in association with natural gas (along with other natural gas liquids, or NGLs) and is also a byproduct of crude oil refining.  Because propane is a gas at atmospheric pressure, it is compressed into a liquid state under moderate pressure for storage and delivery.

The shale gas revolution has led to dramatic increases in natural gas production.

As previously reported, US natural gas prices have remained low for some time.  This is despite the existence of many influences that more recently would have driven natural gas prices upward (see Natural Gas Market Update, June 2018).

Because propane is produced in association with natural gas, along with the dramatic increase in US natural gas production has come a dramatic increase in US propane production.  As natural gas production has increased, so has NGL production.

With such an increase in propane supply, propane prices, like natural gas prices, are low – right?

No.

While natural gas prices have remained low (red line below), propane prices have risen significantly (blue line below).

    

Why?

Exports of propane from the US have grown and continue to grow.

Conclusion

Rural residential and agricultural customers who rely on propane rather than natural gas are not benefiting from the shale gas revolution to the extent that others are in the US.  Increasing propane exports are a major driver of this phenomenon.  This is another illustration of the complicated dynamics underlying energy commodity markets and an example of how those markets can change over time, often in unexpected ways.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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Natural Gas Market Update, June 2018

Natural gas prices remain low and below their declining 21-year trend.  See graph below.

The prices presented here are for delivery at the Henry Hub in Southern Louisiana.  Natural gas prices in other producing areas of the US, such as Northeastern Pennsylvania, the Permian Basin, and the Williston Basin, are significantly lower.  The prices here are also in nominal dollars.  If plotted in real dollars, the downward trend would be even more pronounced (see These are Days to Remember).

Despite the current low price environment, there are a number of factors putting upward pressure on natural gas prices, including:

  • Increasing liquified natural gas (LNG) exports
    • Cheniere Sabine Pass trains 1-4 online
    • Cove Point terminal on the Chesapeake Bay ramping up
    • 11 additional liquification trains along the Gulf Coast in the works to come online in the next five years
  • Increasing pipeline exports to Mexico
    • Up more than 300% since the Great Recession
  • Increased industrial demand
    • Particularly in the petrochemical industry
  • Increased demand for natural gas-fired electricity generation
    • As coal plants retire
  • Natural gas storage levels down
    • Currently 25% below five-year average at this time of year

Given these influences, how do natural gas prices look in the futures market?  Low and continuing their decline.  See the graph below.

After peaking at $3.16/mmBtu during the winter of 2018/2019, natural gas prices remain below $3/mmBtu for the remainder of the 60-month forward period.

What is driving this?

Supply.  More specifically, dramatically increasing supply.

Natural gas production is up 7 Bcf/day from this time last year to 79 Bcf/day.  The US Energy Information Administration (EIA) projects US natural gas production will reach 83 Bcf/day by December 2018.

To see how much things have changed, read these older natural gas market updates:

Natural Gas Market Update October 2014

Natural Gas Market Update November 2013

Natural Gas Prices – Time to Hit the Panic Button?

Natural Gas Price – Looking Ahead January 2012

Natural Gas Price Drivers (January 2012)

As a result, natural gas (and electricity prices) are currently attractive—making this a good time to consider locking in your supply needs.

Note:  Evelyn Teel contributed to this article.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at info@avalonenergy.us.

Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.

Copyright 2018 by Avalon Energy® Services LLC

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NCAC – 22nd Annual Washington Energy Policy Conference

ONE WEEK FROM TODAY

Secure your spot here: https://www.ncac-usaee.org/event-2845352

Energy Technologies and Innovations: A Disturbance in the [Market] Force

Thursday, April 12, 2018, 8:30 AM to 6:00 PM

The George Washington University

Keynote speakers:

Mark P. Mills, Senior Fellow, Manhattan Institute

Gil Quiniones, President and CEO, New York Power Authority

In addition to these keynote speakers, the following panels will be held:

PANEL 1: The Grid Awakens: Electricity Generation and Demand
Phil Jones, Executive Director, Alliance for Transportation Electrification
Bryce Smith, Founder and CEO, LevelTen Energy
John Zahurancik, COO, Fluence
Barney Rush, Board Member ISO New England, Rush Energy Consulting (moderator)

PANEL 2: Hydrocarbons Strike Back: Innovations to Maintain the Status Quo

John Eichberger, Executive Director, Fuels Institute
Sid Green, President, Enhanced Production Inc.
Mike Trammel, Vice President for Government, Environmental, and Regulatory Affairs, Excelerate
Rita Beale, CEO and President, Energy Unlimited (moderator)

PANEL 3: Innovation: A New Hope in Energy

Bill Farris, Associate Laboratory Director for Innovation, Partnering, and Outreach, National Renewable Energy Laboratory
Elisabeth Olson, Economist, Office of Energy Policy & Innovation, FERC
Christopher Peoples, Managing Partner, Peoples Partners and Associates
Devin Hartman, Electricity Policy Manager, R Street Institute (moderator)

PANEL 4: Return of Energy Policy

Adele Morris, Policy Director for Climate and Energy Economics, Brookings
Jason Stanek, Senior Counsel, House Energy & Commerce Committee, Subcommittee on Energy
Pat Wood, Chairman, Dynegy
Kevin Book, Managing Partner, ClearView Energy Partners (moderator)

Note: Chatham House Rules apply.

Full Agenda and to register –> http://www.ncac-usaee.org/events.php#event151

RSVP: Required

Conference Information:

Organizer: Michael Ratner, NCAC-USAEE Vice President (mratner@crs.loc.gov) / 202-707-9529
Venue: The George Washington University, The Marvin Center, 3rd floor, Continental Ballroom, 800 21st Street, NW, Washington, DC 20052

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These Are Days To Remember

Natural gas prices are really, really low in the wholesale market.

The graph above shows daily natural gas prices traded at the Henry Hub, in dollars per million British thermal units ($/mmBtu), from January 1997 to today.  Prices on the graph are in nominal dollars, not adjusted for inflation.  Natural gas prices have exhibited a great deal of volatility.  The average price over this period is $4.60 per mmBtu and the long-term trend is upward sloping as shown by the red line.  This fits well with the widespread perception that energy prices always go up.

This graph shows prices on a monthly basis, which smooths out some of the volatility, but not much.  Prices on this graph are in real dollars.  Specifically, they have been converted to today’s (2015) dollars.  After adjusting for inflation, the monthly average price is $5.53 per mmBtu and the long term trend is downward sloping.  In other words, in real dollars, natural gas prices have declined over this period of time.

Why have prices declined?  In a few words—the shale gas revolution.

Until 2008, the contribution of shale gas production to total US natural gas production was small (see green area above).  Since then, total natural gas production has risen dramatically.  Even more dramatic is shale gas’ contribution to total US natural gas production which today is greater than 56%.  The Energy Information Administration’s 2012 “Outlook” projected this level of contribution on the part of shale gas would not happen until 2035.  Twenty years sooner than predicted, here we are.

Using December 2008 as a demarcation point and splitting the data into two segments, we see two very different worlds.  From January 1997 to December 2008, natural gas prices rose by more than 19% per year.  Since then, they have fallen 5.7% per year.

Other commodities are experiencing declining prices recently.  Iron ore and copper prices, for example, have dropped dramatically, primarily because of declining demand in China.  Natural gas prices have declined in the face of rising demand.  This is truly astounding.

This frequency diagram shows how today’s prices compare to historical prices (all in real dollars). Natural gas prices are really, really low.

But, there is more to this story.  First some background.

During World War II, two pipelines (the Big Inch and the Little Inch) were built by the US government to transport crude oil from the Gulf Coast to refineries in New Jersey. The pipelines allowed the oil to be transported by land, rather than by sea tankers (which were exposed to German U-boats) as had been the practice.  After the war, these pipelines were sold to commercial enterprises and transformed to transport abundant and low cost Gulf Coast natural gas to Northeast industrial markets.  Subsequently, other pipelines were built to move low cost natural gas from the Southwest to the pricier Northeast and Midwest markets.

The difference between the prices of a commodity at two different delivery points is known as basis.  If Gulf Coast natural gas at the Henry Hub sells for $5.53 per mmBtu and sells for $6.53 in New Jersey, the basis differential is $1.00.  And this is the way it was for many decades—natural gas in Northeastern markets trading at a basis (compared to the Henry Hub price) of a dollar or more.  But things have changed.

Because of the immense increase in volume of natural gas being produced from the Marcellus Shale, natural gas for delivery in Pennsylvania and New York State, for example, sells for $1.50 or more below the Henry Hub price. This is a negative basis.  Today, with natural gas trading around $2.60 per mmBtu at the Henry Hub, natural gas can be purchased for a little over a dollar per mmBtu in Pennsylvania and New York.

For energy buyers, these are days to remember.  For natural gas producers, not so much.

Evelyn Teel contributed to this article.

 

The Avalon Advantage – Visit our website at www.AvalonEnergy.US, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.  Please feel free to share this article.  If you do, please email or post the web link.  Unauthorized copying, retransmission, or republication is prohibited.  Copyright 2015 by Avalon Energy® Services LLC

See these related articles:

Real Electricity Prices (Energy Prices Always Go Up, (Part 5)

Energy Price Always Go Up (Part 4)

Energy Prices Always Go Up (continued)

Energy Prices Always Go Up

Natural Gas Prices Continue to March Down

How Low Can They Go?

Natural Gas Prices – Get Real

 

 

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OFO (No Room at the Inn)

Huh? What does OFO mean? First, a step back.

The US natural gas pipeline and distribution system can be thought of as a large container with producers injecting natural gas (supply) and customers withdrawing natural gas (demand).  Last year, during 2011, the US consumed 24.4 trillion cubic feet (TCF ) of natural gas, or, on average, about 67 billion cubic feet (BCF) per day.

Interconnected with the US pipeline system is about 4 TCF of working gas storage capacity that is used to help balance supply and demand. Generally, natural gas is injected into storage during the summer and fall and withdrawn during periods of peak winter demand. Formation pressure from natural gas wells along with pressure added to the systems by mechanical compressors (driven by reciprocating engines and gas turbines) move natural gas through the pipeline and distribution systems. There are times when customers take more natural gas out of the pipeline and distribution network than is being injected by production wells or from storage. This can occur during prolonged cold spells and when surface equipment associated with production wells freezes over, for example. In these cases, the result will be a decline in system pressure. As system pressure drops, the ability to deliver natural gas to all customers diminishes. Systems operators have several tools available to manage pipeline pressure, including using “line pack” or also interrupting service to some customers. However, during extreme conditions, these tools may not be enough to maintain system pressure and operators may resort to an Operational Flow Order (OFO).

An OFO is an order to transportation customers and their suppliers that they together must keep the amount of natural gas they inject into the system within a tight limit compared to the amount of natural gas a customer burns. If injections for a customer fall below the threshold compared to actual burns, penalties are applied which, in the worst case, can be substantial.

So far, the 2011/2012 winter has not been very cold. Why, then, would a discussion of OFOs be of interest today?

On Friday, March 16, Delmarva Power (which operates a natural gas distribution system) issued an Operational Flow Order “until further notice.” This OFO was issued “due to warmer than normal weather conditions…and the inability to inject gas into storage.” So, here we are still in the winter heating season, when distribution companies are normally withdrawing natural gas from storage, and Delmarva has run out of storage capacity into which to inject natural gas. Rather than being concerned that system pressure will drop to an unacceptably low level, the concern is that system pressure will RISE to an unacceptably HIGH level.

Rather than being concerned that customers will withdraw more natural gas from their system than is delivered into their system, in their OFO, Delmarva indicates that “customers may deliver no more than one hundred and five percent (105%) of the volumes of gas tendered for burn by the customer on a daily basis, net of losses and unaccounted-for gas.”

Because deliveries are scheduled in advance (“nominated”) and because actual usage can vary significantly due to changes in weather and other factors, this is a tight threshold on a short cycle (daily) basis.

And what if a customer over delivers? Delmarva’s OFO states, “For all such … over-delivery volumes, a charge of THIRTY FIVE DOLLARS ($35.00) per MCF will be applied…” (emphasis added).

Currently, Delmarva’s commodity cost rate is $5.28 per MCF. This means the penalty is 563% of the cost of delivered natural gas. If you file your taxes late, you may be subject to a 10% penalty. If you deliver natural gas over the threshold into the Delmarva system, the penalty is more than SIX-FOLD the commodity cost of natural gas.

OFOs, when they are issued, occur during the winter. OFOs issued to ensure adequate delivery of natural gas during times of exceptionally cold weather do occur but are infrequent. OFOs, such as this one, issued during winter time to ensure that excess deliveries are not made are highly unusual. An employee of another East Coast natural gas utility indicated that over the company’s life, there has never been an OFO related to reducing system pressure during the winter time. The size of the penalties in the case being discussed here is a measure of how significant the current oversupply situation is.

What is driving this situation? Simply put, the combination of unusually warm weather this winter and diminished industrial demand for natural gas has created a large natural gas surplus. Normally, imbalances can be managed with storage. But, this year, there is no room at the Inn. Storage levels are far too high. There is nowhere for the natural gas to go.

Below are updates to two graphs presented in a previous blog post (https://avalonenergy.us/2012/02/how-low-can-they-go/).


Natural gas storage levels remain excessively high. And, as noted previously, the gas cannot stay in storage until next winter because the reservoirs need to be cycled down. As we predicted, this “overhang” continues to keep downward pressure on natural gas prices. On Friday, the April 2012 natural gas futures contract closed at $2.33 per dekatherm (Dth) and the twelve month strip at $2.92/Dth.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484- 8096, or email us at jmcdonnell@avalonenergy.us.

Copyright 2012 by Avalon Energy® Services LLC

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Natural Gas Price Drivers

We have noted previously on this blog that natural gas prices have declined dramatically over the last three years. On January 19, 2012 the February futures contract settled at $2.32 per million Btus. This is lower than natural gas prices have been in a decade and we are in the winter heating season, a time when prices generally rise. Adjusted for inflation, prices have not been this low since late 1998.

Looking ahead, the graph below shows the evolution of the twenty-four month natural gas futures curve over the last year and a half. It may seem counterintuitive, but as the futures curve has dropped it has remained upward sloping. In other words, as natural gas prices have declined, the market has continued to expect prices to rise in the future.

Several readers have asked what the major influences on natural gas prices are. Natural gas is very much a commodity and, as such, its price at any point in time is subject to the economic interaction of supply of and demand for natural gas. For our purpose here we have identified a number of influences and grouped them into those that create upward pressure on natural gas prices and those that will continue to moderate natural gas prices.

Influences that could drive natural gas prices upwards:

– Economic recovery
– Coal fired power plant shutdowns
– Greater industrial use of natural gas
– The development of a US LNG export trade
– More restrictive regulation of hydraulic fracturing (fraccing or fracking)
– Natural gas well shut-ins
– Decreased drilling for natural gas and the shift to more profitable oil basins

Influences that will continue to moderate natural gas prices:

– Further development of shale gas reserves, particularly the Utica Shale in the Appalachian Basin
– Drilling to hold onto mineral leases

This list is certainly not comprehensive but should serve as a good starting point. We will discuss these influences in this and future blog posts.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096, or email us at jmcdonnell@avalonenergy.us.

Copyright 2012 by Avalon Energy® Services LLC

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Is the Shale Gas Revolution for Real?

Some have described the proliferation of shale gas plays as a “quiet revolution.”  But, the revolution is not so quiet.  Stories now appear regularly on the front page of the Philadelphia Inquirer, the New York Times, and many other newspapers far from the oil patch.  What are the facts?

US natural gas production is higher than it has been over the last 30 years.  On a twelve month rolling basis, US natural gas withdraws as of July, 2006, were 23.1 trillion cubic feet (TCF) (see note below).  Current annual US natural gas withdraws are 26.5 TCF, a 15% increase in less than five years.

Examination of the data from the last five years on a month-over-month basis highlights the steady upward progression of natural gas production in the US.

The increase in US natural gas production has been driven largely by increases in shale gas production.  US shale gas production has increased dramatically as shown in the table below:

    Increase
Year TCF   TCF %
2007 1.3
2008 2.2 0.9 69%
2009 3.3 1.1 50%
2010 4.9 1.6 48%

By contrast, annual US crude oil production has declined significantly since peaking at 3.6 billion barrels in 1971.  Currently, US crude oil is being produced at a rate of about 2 billion barrels per year.  This is a 44% decline from the 1971 peak.

The stark divergence in the trends of natural gas and crude oil production in the US stands out even more when the production levels of the two forms of energy are converted to a common energy unit.  The graph below presents US natural gas and crude oil production in millions of mmBtus.  A mmBtu is a million Btus.  Conversion factors of 1,025 Btus per cubic feet of natural gas and 5.8 mmBtu per barrel for crude oil were used.

The discussion above has focused on natural gas production.  Natural gas reserves have increased even more dramatically.  The DOE Energy Information Administration recently estimated US recoverable unproved shale gas reserves at 827 TCF, 474 TCF more than their estimate last year.

So, what could derail the natural gas revolution, “quiet” or otherwise?  The short answer is public sentiment related to two environmental concerns; (i) potential groundwater contamination, and (ii) the disposal of drilling and fracking fluids.

The failure of a well’s casing can lead to drilling or fracking fluids seeping into fresh water aquifers.  Generally, fresh water aquifers are encountered in the first few hundred feet of a well while shale gas reserves exist thousands of feet below.  This is not an environmental risk to be ignored.  However, over many decades there exists a successful track record of keeping ground water aquifers isolated from formation fluids (natural gas, crude oil, natural gas liquids and formation water).  The same techniques and technologies can be applied to keeping groundwater aquifers isolated from fracking fluids.

The improper disposal of drilling and fracking fluids poses a serious threat to surface ecosystems as such fluids can contain toxic materials.  Effective regulation and enforcement of the handling and disposal of these fluids is imperative.  Recently, the development of fracking fluids using chemicals “sourced entirely from the food industry” has been announced.  In any case, the disclosure of detailed information about the chemicals used in its fracking fluids is critical.

Note:  Natural gas and crude oil production and reserve data was obtained from the US Department of Energy, Energy Information Administration website.

The Avalon Advantage – Visit our website at www.avalonenergy.us, call us at 888-484-8096 or email us at jmcdonnell@avalonenergy.us.

Copyright 2011 by Avalon Energy Services, LLC.