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Court further limits reach of gas drilling law

HARRISBURG, PA (AP) — A Pennsylvania court has further limited the reach of a major 2012 law that modernized drilling regulations, ruling Thursday that state public utility regulators cannot review how local zoning restrictions affect the natural gas industry. The Commonwealth Court decision threw out

Russia-China natural gas deal spurs effort to expedite LNG exports

BY R. BROCK PRONKOMBC Regional Business Analyst Russia’s 30-year, $400 billion deal to sell China natural gas from a state-owned gas supplier, Gazprom, stirred a reaction from some members of Congress who want the U.S. Department of Energy (DOE) to expedite its sluggish LNG (liquefied

Shawville power plant to convert to natural gas, reopen in April 2016

BY JULIE BENAMATIMarcellus Business Central Editor   SHAWVILLE, PA – NRG Energy Inc., based in Houston, Texas and Princeton, NJ, recently announced plans to convert the currently coal-fired Shawville Power Plant to a natural gas operation. According to David Gaier, spokesman for NRG, the plant

Summer gas & oil conferences attract crowds with headline speakers, pig roasts

BY JULIE BENAMATIMarcellus Business Central Editor PITTSBURGH, PA – It appears that the summer months are becoming more attractive for hosting gas & oil conferences. More than 3,200 attendees and 321 exhibitors participated in the recent DUG East conference and exhibition in early June at

Marcellus businesses giving back: Williams’ annual BBQ cook-off benefits northeast

BY JULIE BENAMATIMarcellus Business Central Editor NICHOLSON, PA — Williams will be making a significant contribution to local United Ways by hosting its third annual Marcellus Barbecue Cook-Off at the Nicholson Carnival Grounds, Wyoming County on Friday, Sept. 12. Companies in the natural gas industry in northeast

Court further limits reach of gas drilling law

HARRISBURG, PA (AP) — A Pennsylvania court has further limited the reach of a major 2012 law that modernized drilling regulations, ruling Thursday that state public utility regulators cannot review how local zoning restrictions affect the natural gas industry.

The Commonwealth Court decision threw out the Public Utility Commission’s newly authorized power to withhold drilling fee revenue from municipalities whose zoning it deems to illegally restrict drilling activity.

The decision is another blow to an effort by Gov. Tom Corbett and the Republican-controlled Legislature to respond to the drilling industry’s complaints about municipal zoning. It follows a state Supreme Court ruling in December that said the law could not strip local zoning authority over drilling activity, such as the placement of rigs, pipelines, waste pits and compressor stations.

John M. Smith, a Pittsburgh-area lawyer who helped represent the seven municipalities that sued, said they were pleased that the court “once again protected the rights of local governments and Pennsylvania citizens.”

The Commonwealth Court ruling rejected three other challenges in the lawsuit to elements of the sprawling law.

Those three victories led Corbett’s office to say the opinion “speaks volumes to the constitutionality of state regulation of oil and gas activities.” A spokesman would only say that the office is evaluating the impact of the ruling on the intended role of the utility commission.

The court left intact limits on what doctors may reveal about the proprietary contents of hydraulic fracturing solutions.

Still, Smith said that while the court did not find the “medical gag rule” to be unconstitutional, the court interpreted the law to allow certain disclosures that alleviated much of the plaintiffs’ concerns over the secrecy. Those disclosures include to patients who suffer chemical exposures from drilling operations, to other treating physicians and in medical records, Smith said.

The court also refused to require the state to notify people who rely on private water sources of the potential for drilling contamination and it rejected the argument that the law authorized illegal private eminent domain for natural gas pipelines and storage.

In addition to the seven municipalities — four in Washington County, two in Bucks County and one in Allegheny County — the plaintiffs include environmental advocacy group Delaware Riverkeeper and Dr. Mehernosh Khan, a former Pittsburgh-area physician who is now practicing in Massachusetts.

The 2012 law grew out of a desire to modernize Pennsylvania’s 20-year-old drilling laws to account for a Marcellus Shale drilling boom made possible by innovations in technology, most notably horizontal drilling and hydraulic fracturing.

The law did not include a severance tax on the industry, but it did allow counties to impose an impact fee. Most of the revenue goes to local governments that host the gas wells, while state agencies and grant programs get the rest.

After the industry descended on Pennsylvania in 2008 to tap into the Marcellus Shale, companies began complaining that some municipalities were exploiting a legal gray area and using zoning rules to illegally limit drilling.

Corbett, a Republican, backed the industry, arguing that a 1984 state law had intended to outlaw municipal regulation of oil and gas operations anyway.

The law’s provisions effectively told municipalities where they must allow various types of drilling activity, but they were put on hold by a lower court and were never enforced before the Supreme Court ruled 4-2 in December that the state had overstepped its bounds.

 

Russia-China natural gas deal spurs effort to expedite LNG exports

BY R. BROCK PRONKOMBC Regional Business Analyst

Russia’s 30-year, $400 billion deal to sell China natural gas from a state-owned gas supplier, Gazprom, stirred a reaction from some members of Congress who want the U.S. Department of Energy (DOE) to expedite its sluggish LNG (liquefied natural gas) export approval process so the U.S. could export more natural gas.

Senators John Hoeven (R-ND), a member of the Senate Committee on Energy and Natural Resources), and Mark R. Warner (D-VA), a member of the Subcommittee on International Trade, Customs, and Global Competitiveness, are concerned the deal will embolden Russia’s position in Ukraine since it makes Russia less reliant on selling natural gas to Europe, and a threat to cut off supplies or raise prices significantly could pressure Western European countries to lift their sanctions.

The senators also are recommending a strategic review of U.S. energy policies, a joint U.S.-European Union initiative on energy security, and further efforts to promote greater energy productivity in Ukraine.

“This strengthens Russia’s hand in regard to what they decide to do in Eastern Europe, and it makes it even more imperative that we advance our legislation to allow exports of LNG to Europe so that they have alternative sources,” said Hoeven.

The House passed HR 6, which states that DOE must make a final decision on an LNG export project within 30 days of the environmental impact statement approval by the Federal Energy Regulatory Commission (FERC). It also provides for an expedited judicial review process in the event that DOE doesn’t meet the deadline. The Senate has a similar bill pending, but it hasn’t taken action on it on a committee level yet.

Hoeven disclosed that he has holdings in oil and gas companies, mostly publicly traded upstream and midstream limited partnerships — between $190,008 and $503,000 in equity in various oil and gas companies, including Energy Transfer Partners, EV Energy Partners LP, and Copano Energy (now owned by Kinder Morgan, a partner with GE in the Gulf LNG Liquefaction Project now before the DOE).

Since a good portion of the gas supplying LNG facilities will be coming from the Appalachian Basin, the outcome of the proposed legislation will have an impact on Marcellus and Utica shale gas companies operating in wet gas regions.

One such company is the Forth Worth-based Range Resources, which recently announced it had signed several agreements involving planned pipeline projects, terminals and ethane crackers in which it agreed to supply natural gas and ethane from the Marcellus shale to export terminals and proposed petrochemical plants.

The projects include: Energy Transfer Partners’ Rover Pipeline, which is expected to connect the Marcellus and Utica shale fields in Pennsylvania, Ohio and West Virginia with Canada and the Gulf Coast by 2017; the Sabine Pass LNG terminal in Cameron Parish, La., where Cheniere Energy Inc. is building a liquefaction plant; an unnamed, planned liquefied natural gas terminal; a proposed petrochemical plant that an affiliate of Sasol Ltd. plans to build near Lake Charles, La.; and the Ascent ethane cracker that Odebrecht proposes to build in Parkersburg, W. Va.

“The Rover pipeline provides Range flexibility in selling natural gas to high demand markets in Canada and the Gulf Coast, while the LNG and ethane supply agreements further diversify and strengthen our customer base with industry leading companies,” said Jeff Ventura, CEO of Range Resources.

Discontent with the Approval Process

There are two major federal permits LNG companies need to have whether importing or exporting natural gas. One is from the U.S. Department of Energy (DOE) and the other is from FERC (Federal Energy Regulatory Commission).

The DOE regulates the commodity of natural gas for import and export. FERC regulates the design, construction, and operation of the facility and its impact on the environment.

Under DOE’s rules and regulations, when it receives a completed application to export LNG to a non-free trade agreement country, it publishes a notice in the federal registry to allow interested persons to protest it, comment on it, or file motions to intervene.

When that comment period expires if no-one has introduced evidence as to why the project should not go forward, DOE can proceed to an immediate decision.

“That had been DOE’s procedure up until December 2012 when it established what it called an ‘order of precedence” whereby it made decisions on whether or not to proceed with an LNG project based on the timeline when the applicants filed with FERC,” said Bill Cooper, president of the Center for Liquefied Natural Gas, a trade association in Washington, D.C., which has been lobbying Congress to speed up the LNG approval process.

“That change in regulations caused a tremendous amount of consternation for the applicants, contracting partners with the applicants, and with policy makers in Washington who want the process to move along faster.”

Cameron LNG and Dominion Cove Point, which both applied for permits before the changes went into effect are on their way to being close to building their facilities and will likely be approved by DOE by the end of the year.

“Other projects that were higher in the queue under the old system may also have been decided by the end of the year, but now DOE is not going to decide on any of them,” said Cooper.

“Last year, DOE changed its game plan again, and is now saying that it’s no longer going to use when an export company filed at FERC as a timeline when it will proceed with its approval, but instead it’s not going to do any more conditional authorizations, it’s only going to make final authorizations, and it won’t do that until the company completes the environmental process with FERC, which could take up to two years.

“The first change DOE made, the order of precedence delayed the decision make process, and now this decision to go straight to file after the environmental review process, the industry views as a further delay that completely unnecessary.

Having to go through the environmental review process first rather than be granted conditional approval beforehand means that would-be exporters won’t be able to line up gas suppliers or end users in advance or go to the banks and use that conditional approval to secure the capital needed to build the facility.

“We think that DOE is violating the law, and we wholeheartedly support the effort in Congress to force DOE to expedite the process.”

While DOE hasn’t stated the reasons for its change in approval procedures, in 2012 the department commissioned a study by NERA Economic Consulting on the impact that LNG exports will have on the price of domestic gas. The study found that the U.S., in all scenarios, would see an economic boost from exporting natural gas and that any increase in domestic natural gas prices would be insignificant and the U.S. consumer will not be adversely affected.

A number of independent analyses also concluded that LNG exports in the range 6 to 12 Bcf/d would not have a significant impact on domestic prices. For example, the Peterson Institute for International Economics report “Liquefied Natural Gas Exports: An Opportunity for America” concluded that LNG exports would raise domestic natural gas prices between 3.5 to 16 percent, depending on the demand in the U.S. for domestic natural gas.

LNG Export Facilities

Currently, the U.S. has only one LNG export facility in operation, which is located in Alaska, one other has been approved for construction in Louisiana, and two have been conditionally approved, one in Maryland and one in Louisiana, pending final approval from DOE.

ConocoPhillips Co. received approval from DOE to resume exporting LNG from its Kenai, Alaska, facility, and began exporting gas in the spring. It had exported LNG from the facility for decades, but the company shut down its Kenai export terminal in February 2011, citing market conditions, which have since turned around.

Cheniere Energy Partners, L.P. is a Delaware limited partnership that owns 100 percent of the Sabine Pass LNG terminal located on the Sabine Pass Channel in western Cameron Parish, Louisiana. The Sabine Pass LNG terminal has regasification and send-out capacity of 4.0 billion cubic feet per day (Bcf/d) and storage capacity of 16.9 billion cubic feet equivalent (Bcfe). Cheniere’s import/export terminal is the only LNG facility is the lower 48 states that has FERC approval to begin construction.

Cameron LNG, headquartered in Houston, Texas, is also building an LNG export terminal in Louisiana. Cameron has conditional authorization from DOE and has completed its environmental impact statement. It could receive final approval from DOE by the end the year.

In May, Dominion Energy welcomed the release of a federal environmental assessment by FERC that found the natural gas export project proposed for its existing Cove Point LNG facility in southern Maryland can be built and operated safely with no significant impact to the environment.

Dominion has entered into agreements with companies in India and Japan, who will be receiving LNG via tanker ships.

“The Federal Energy Regulatory Commission and other federal and state agencies that reviewed our proposal are to be commended for their thorough and independent assessment,” said Diane Leopold, president of Dominion Energy.

“The 241-page report represents nearly two years of study, tens of thousands of pages of documentation and many thousands of hours of work.

“This marks another important step forward in a project that has very significant economic benefits and helps two allied nations in their efforts to increase their energy security and reduce their greenhouse gas emissions.”

As of March 10, 29 other LNG export applications have been approved and are currently under DOE review. Two other applications, from Texas LNG LLC and Louisiana LNG Energy LLC, are pending approval.

Shawville power plant to convert to natural gas, reopen in April 2016

BY JULIE BENAMATIMarcellus Business Central Editor

 

Shawville2

SHAWVILLE, PA – NRG Energy Inc., based in Houston, Texas and Princeton, NJ, recently announced plans to convert the currently coal-fired Shawville Power Plant to a natural gas operation.

According to David Gaier, spokesman for NRG, the plant will shutter its doors as planned in April 2015 – but will re-open one year later after the facility undergoes a conversion to natural gas.

It was announced in 2012 that the Shawville Power Plant, formerly owned by GenOn Energy, that the plant would be deactivated and about 80 employees would lose their jobs. It was one of eight plants, including four others in Pennsylvania, that were slated for shutdown.

NRG Energy completed the merger with GenOn Energy in December 2012, creating the largest competitive power generator in the nation. The Shawville plant alone has been providing about 600 megawatts of power annually to the Pennsylvania-New Jersey-Maryland grid for more than 55 years.

Gaier said company officials considered economic and environmental factors before making the decision in mid-May to convert the Shawville plant to natural gas.
“We found the coal units could be converted to operate on natural gas,” Gaier said. “This will improve the plant’s emissions profile and comply with environmental regulations.”

All four coal units will be converted to natural gas and a gas pipeline will be drilled to transport the gas to the plant.

When the plant closes, about 80 employees will be jobless. However, Gaier said he anticipates about 40 employees being needed when the plant reopens in April 2016. He did not say if the furloughed employees will be given first opportunity to return to the plant.

But in good news, Gaier said about 100 to 150 jobs will be created to perform the conversion, which is expected last about one year before the plan reopens.

“I can’t predict where the workers will come from in any particular project, but it’s been our experience that many jobs often come from the local and regional areas,” Gaier said. “The main driver of the jobs is the availability of skilled labor in the trades that are needed.  There will be about 100-150 jobs during the approximate one-year construction period.”

 

Summer gas & oil conferences attract crowds with headline speakers, pig roasts

BY JULIE BENAMATIMarcellus Business Central Editor

PITTSBURGH, PA – It appears that the summer months are becoming more attractive for hosting gas & oil conferences.

More than 3,200 attendees and 321 exhibitors participated in the recent DUG East conference and exhibition in early June at the David L. Lawrence Convention Center.

In response to requests both exhibitors and attendees, DUG East was staged earlier than in the past, changing to a June date instead of the usual November dates. Warmer weather facilitated more interaction among sponsors, exhibitors and conference delegates.

The change was a success, and has already prompted expo coordinators to begin planning for next year’s event, which is scheduled June 23-25, 2015 in the David L. Lawrence Convention Center.

The most recent conference offered in-depth presentations from executives who lead many of the top operators in the Marcellus and Utica shale plays.

Oil and gas experts are typically booked in advance as speakers on various topics in an effort to draw crowds. At the most recent DUG East conference, top management from CONSOL Energy, Magnum Resources, Stone Energy, Anadarko and Talisman Energy USA addressed the conference. Rice Energy CEO Daniel J. Rice IV was the closing keynote speaker.

As an added attraction, former CIA Director Leon Panetta was shared firsthand accounts of his White House experiences as the conference’s keynote luncheon speaker on June 4.

“Hart Energy events provide a platform for information exchange,” Barry Haest, Hart Energy vice president of events, said in a statement. “This conference, like all of our DUG series forums, focuses on the business side of the oil and gas industry – economics, activity levels and investment plans. It also affords great networking opportunities for operators and service companies who work in this region.”

Two week after DUG East, Mansfield University in Tioga County was the site of the fifth annual Northern Tier Marcellus Shale Business Expo held on Wednesday, June 18. This was the first time the event was held at the university. Prior expos were held in nearby Troy, Bradford County.

The event hosted a barbecue the night prior to the expo after exhibitors set up.

“Overall, MU was very happy with the Expo and the turnout, especially because we sold out vendor space this year,” said Lindsey Sikorski, director of the Marcellus Institute at Mansfield University. “Holding an expo on a college campus brings unique challenges that convention centers and fairgrounds do not have, but we felt we did our best to turn the facilities into a suitable exhibit space.”

She said inviting people to visit the campus as either a vendor or an attendee is also a huge benefit for MU.

“When I spoke with vendors, they indicated that they made some really good contacts from the event and established some worthwhile new business leads,” Sikorski said. “MU is extremely pleased to have helped facilitate these new relationships. “

Original plans for a golf outing the day before the expo fell through due to scheduling conflicts at Corey Creek Golf Course, but the expo did host a networking BBQ on campus the evening of June 17.

In a few more weeks, Pennsylvania Independent Oil & Gas Association (PIOGA) is hosting a PIOGA Pig Roast, Equipment Show and Conference on July 22-23 at Seven Springs Mountain Resort in Seven Springs, Somerset County.

The event will not only be educational, but entertaining.

Golf, sporting clays, Texas Hold ‘Em, food and fireworks are on tap for Tuesday, July 22, and the conference is scheduled on Wednesday, July 23 from 9 a.m. to 3:30 p.m., featuring PA conventional formations with horizontal drilling potential, horizontal drilling with air/foam, water disposal options for state producers, hydraulic fracturing of horizontally drilled conventional formations, LNG for high horsepower applications and alternative fuel vehicles.

And mark calendars for Williams third annual Barbecue Cook-Off to benefit four United Way agencies in Susquehanna County, Wyoming County, Wyoming Valley, and Broome County, NY on Friday, Sept. 12 at the Nicholson Carnival Grounds, Wyoming County.

Teams from the area will compete for best pork rib, pulled pork or beef brisket barbecue. Bragging rights include plaques and trophies – and all proceeds are matched dollar for dollar by Williams, according to Mike Atchie, public outreach representative at Williams,.

While the event is not exactly an expo, many Marcellus-related companies attend as cookers and/or judges, and often bring corporate displays to the event.

Marcellus businesses giving back: Williams’ annual BBQ cook-off benefits northeast

BY JULIE BENAMATIMarcellus Business Central Editor

NICHOLSON, PA — Williams will be making a significant contribution to local United Ways by hosting its third annual Marcellus Barbecue Cook-Off at the Nicholson Carnival Grounds, Wyoming County on Friday, Sept. 12.

Companies in the natural gas industry in northeast Pennsylvania will have the opportunity to compete to see who makes the best barbecue in three categories:  Pulled Pork, Beef Brisket and Pork Ribs.

All proceeds from the competition will be divided between the United Ways of Wyoming County, Susquehanna County, Wyoming Valley and Broome County, N.Y. In addition, Williams will match every dollar raised from the event.

According to Mike Atchie, public outreach representative at Williams, the inaugural event in 2012 raised more than $20,000 from tickets and sponsorship. Last year, the event garnered $50,000, which was matched dollar for dollar by Williams for a total of $100,000 – or $25,000 for each United Way.

“Last year’s was bigger than our first year, and we raised twice as much money,” Atchie said. “The idea is to continue to build on this and make it our signature event for the Northeast.”

He said most entries are from natural gas companies, local businesses, catering companies or restaurants.

“It’s bragging rights,” Atchie said. “We give plaques to the winners, and one entry is given a Grand Champion award where they not only win in their category, but also raises the most money through the People’s Choice voting.”

The Grand Champion award is a traveling trophy, which has the company’s name engraved on it. The winner has to return the award the following year to have the trophy engraved with the new winner’s name.

Atchie said the event is mostly attended by gas industry members, but the public is invited to participate.

“This is much different than going to a gas & oil expo,” Athie said. “It’s a totally different environment, but you can still promote your business.”

Atchie said the United Way is the target of Williams’ largest community contributions.

“We wanted to do something to drive interest in (United Way)”, Atchie explained.  “Some companies do golf outings, but this is our industry.  Many Marcellus-related companies have cooking equipment like giant grills or smokers to cook for their workers. So we bring them in for a fundraiser, make it a compettion and have some fun.

“The idea is to continue to build on this and make it our signature event for the Northeast,” Atchie said.

Williams, a leading energy infrastructure company, has partnered with Cabot Oil & Gas, Piedmont Natural Gas, and WGL  Holdings to develop a major transmission pipeline project to connect natural gas supplies in northern Pennsylvania with major northeastern markets.

The approximately 124-mile Constitution Pipeline is being designed with a capacity to transport 650,000 dekatherms of natural gas per day — enough natural gas to serve approximately 3 million homes. The 30-inch pipeline would extend from Susquehanna County to the Iroquois Gas Transmission and Tennessee Gas Pipeline systems in Schoharie County, N.Y. The proposed project route stretches from Susquehanna County into Broome County, N.Y., Chenango County, N.Y., Delaware County, N.Y., and terminates in Schoharie County, N.Y.

The Constitution Pipeline is being designed to transport natural gas that has already been produced in Pennsylvania. The pipeline is not dependent upon nor does it require the development of new natural gas wells along the project’s proposed path. The pipeline is already fully contracted with long-term commitments from established natural gas producers currently operating in Pennsylvania.

And while the pipeline continues to move forward, Williams is hoping their third annual Marcellus Barbecue Cook-Off grows again.

There will be a minimum donation of $150 for the entry of a four person barbecue team. Teams are asked to provide their own meat, grill, and sauce.

Each barbecue team will have their samples judged by those who enter into any of four VIP judging levels: Grill Baby, Grill (minimum donation of $2,000), Smokin’ ($1,500 – $1,999), Mesquite ($1,000 – $1,499) and Hickory ($500 – $999). Each category provides entry into the event for the judges, additional general admission tickets for guests and extra perks based on the category level. Judge teams are also provided a dedicated area and table to display their company’s products or services.

The competition includes a People’s Choice category, which allows anyone attending to play a part in the judging. Everyone can vote for the People’s Choice Award by placing any denomination of bills into People’s Choice buckets to be located at each team’s station. The proceeds from the People’s Choice will go to the United Way designated by the winning team, and every dollar raised will be matched by Williams.

Rice Energy buys wells from Chesapeake Appalachia

(AP) — Rice Energy Inc. said on Monday that it signed an agreement to acquire 22,000 leased acres and 12 developed Marcellus shale wells in western Greene County from Chesapeake Appalachia LLC and partners for about $336 million in cash and debt.

Cecil-based Rice Energy said it expects to complete the purchase in August. It will increase acreage by 24 percent, Marcellus well locations by 47 percent and production by about 20 million cubic feet of natural gas a year, with five wells in various stages of development.

CEO Toby Rice said the company is evaluating raising additional capital for the acquisition by selling stock. Rice remains on track to add a total of 30,000 leased acres this year, he said.

 

Vantage plans $400M IPO

(AP) — Vantage Energy Inc., a natural gas drilling company with holdings in the Marcellus shale formation, is planning a $400 million initial public offering of stock, according to a filing with the Securities and Exchange Commission. The company, which holds about 50,000 acres in Greene County, did not provide pricing of its shares in the filing. The Englewood, Colo.-based company said it will trade under the ticker symbol “VEI.”

 

2014 Women Making a Difference nomination forms available

Technology Showcase application available

STATE COLLEGE, PA — If you have a new technology or innovation that advances the work or addresses a problem in the shale gas industry, please complete the form available at the Shale Gas Innovation and Commercialization Center’s Web page.

Submitted information will be provided to the Marcellus Shale Coalition’s (MSC) Research Collaborative for their review. The Research Collaborative team will get back in touch with applicants by Aug. 15 to inform if a submission has been chosen for inclusion in the Technology Showcase event scheduled Sept. 23.

Forms can be submitted at http://www.sgicc.org/technology-showcase-application.html.

 

Defense contractors look to reduce costs for a leaner military

By R. Brock Pronko, PBC Regional Business Analyst

For the first time in almost three years, defense contractors have some certainty about the future, at least in the near term. Last December, Congress passed a compromise budget, which provided the U.S. Department of Defense (DoD) with $30 billion more in funding for 2014 and 2015 than it would have received under sequestration.

DoD funding is capped at about $498 billion in 2014, which is $29 billion less than DoD requested but $21 billion more than the original sequester cap. In 2015, DoD funding will be capped at $521 billion, about $9 billion above the previous $512 billion cap. However, if a long-term budget agreement isn’t reached, the sequestration cuts will return in 2016.

Even without sequestration, military spending will likely shrink by at least $480 billion over the next decade due to the winding down of the military conflicts in  Iraq and Afghanistan.

The leaner military strategy announced three years ago by President Obama and top Pentagon leaders forecasts a smaller Army and Marine Corps, with a distaste for protracted wars like those in Iraq and Afghanistan, greater stress on special forces operations and intelligence-gathering, and a changing focus on China and the Pacific.

A survey of defense industry leaders and middle management by McKinsey & Company, a global management consulting firm, found that the respondents agreed on many topics, especially the gloomy outlook for global defense spending. The executives see global defense spending declining over the next three years. They also see the defense industry changing, and they are all taking measures to adapt. Leaders are preparing to meet the challenge of evolving customer needs, particularly the quest for more affordable products.

The term “mil-spec” denotes a product that is overbuilt, made with the strongest materials that could withstand a bullet or a rocket grenade. At the same time, weapons systems, be they aircraft, drones, tanks or handheld combat weapons are growing increasing sophisticated, often incorporating computer hardware and software along with the human interface. In the 1990s, NASA engineers were famous for summing up the problem of building more sophisticated technology with less money: faster, better, cheaper … pick two.

“Back in WWII, the planes, tanks and guns being built were relatively simple items as opposed to the aircraft, drones and ground weaponry the military uses today, which have integrated systems and software control,” said Mike Santoro, general manager at Martin-Baker in Johnstown, which manufactures aircraft injection seats and helicopter seats for the military.

“Detroit could, in short order, convert their automobile production lines from making Fords and Chevys to making aircraft, but they couldn’t do that today.”

The other stumbling block to lowering costs derives from the fact that the materials used in manufacturing aircraft, tanks, ships and handheld weapons come from outside the industry.

“As subcontractors, we have no control over the cost of materials, so when prices go up, we have to pay more, and then pass those increased costs on the manufacturers who buy our seats, who in turn have to charge the military more for their aircraft,” said Santoro.

“Small companies in particular don’t have a lot of money to either buy in advance to keep prices locked in like prime contractors, or to buy in big lots and pray that they’re actually going to use all the metal to manufacture parts and get paid for them before their company runs out of money.”

Another challenge to lowering costs while maintaining quality comes from managing the risk of developing new technologies, which can be full of budget-eating unknowns.

According to Washington Technology, an online news resource for government contractors and partners, Lockheed Martin Company was the top winner of contracts in 2013, earning $14,947,961,000. LMC, which has offices in Johnstown, Cambria County, is developing the F-35 Lightning II, the world’s most sophisticated stealth fighter. Pilots of the F-35 will wear virtual reality helmets that allow them to see what’s going on outside the aircraft by simply turning their heads and looking in that direction. For example, if the pilot wanted to see if there were any aircraft flying below him, he could drop his head and virtually look through the cockpit into the airspace below the jet.

Data collected by F-35 sensors can be immediately shared with commanders at sea, in the air and on the ground, providing an instantaneous view of ongoing operations. The F-35 will also perform in the most challenging electronic warfare environments with the ability to locate and track enemy forces, jam radio frequencies and disrupt attacks with unparalleled precision.

“While we are still in low rate initial production on this program, we continue to drive down costs and gain new efficiencies, and we expect that to continue as we move closer to full rate production,” said Marillyn Hewson, chairman, president and CEO of Lockheed Martin.

“By the time this aircraft is fully deployed, I can assure you the F-35 will ‘own the skies’ wherever it flies. That’s next generation technology being delivered today.”

The F-35, which is six-years behind schedule, has been plagued with delays and cost overruns, which the DoD has forced LMC to absorb. The cost of F-35 development has risen from an estimated $306 billion in 2001 to an estimated $390 billion this year. That’s the price of developing cutting edge technology, or is it?

Concurrent Technologies Corporation, headquartered in Johnstown, is an applied research, development and solutions defense industry firm. CTC works directly with the federal government, the DoD and some of the large prime contractors to come up with innovative uses of technology to drive costs out of a weapon system or a platform or a component and to help them last longer and perform better.

“We bring in a broad and deep technical ability, which is why in an area of declining budgets, we can help reduce the risk associated having to use new technologies that could potentially drive up costs,” said Edward J. Sheehan, Jr., president and Chief Executive Officer, Concurrent Technologies Corporation.

“When we develop systems that reduce the costs associated with the manufacture of a ship or an aircraft or with the maintenance of those weapon systems, it’s both in the federal government’s best interest and in the private sector’s best interest.

“Anytime you try something new, there’s risk associated with it, and companies and the government can be unsure about the outcome, and that’s why we exist, we reduce the risks.

“We do the research ahead of time and the development of the product in conjunction with industry so the transition can be much more successful.”

CTC accomplishes this feat by using new advanced materials, new IT technologies, and environmentally friendly solutions and then integrating the various systems for seamless operation.

“As an example, instead of costly maintenance program for military aircraft, we developed a laser robotic coatings removal system that could do it in a fraction of the time, reduce the incident of injury, and significantly decrease the operation’s environmental footprint,” said Sheehan.

Developing a risk management program for a Lockheed Martin or another prime contractor working on a new weapon system is more difficult, said Sheehan, because much of what they do is made proprietary for the protection of the military.

“Largely because of our non-profit status, what we develop can be shared with the aerospace industry or shipping building industry, so that the benefits to the government is amplified because the cost-saving solutions we come up with can be applied to a number of different manufacturers as opposed to just one.

“Reducing military spending has become such a priority today that companies like ours who have cost-savings as their primary focus are flourishing and becoming part of every new military technology project.”