the-shale-revolution

The Shale Revolution – Boosting U.S. Natural Gas Production – One of the Greatest Reversals of Fortune in Modern Industrial History

By Brian A. Habacivch, Senior Vice President, FellonMcCord A new seamless steel-tube rolling mill is in the last phase of construction in Youngstown, Ohio.

The new $650 million facility, owned by French steel maker Vallourec, represents the largest new investment in the region’s steel-making capacity in forty years. Operations are to begin this month and the plant is expected to quickly ramp up to its capacity of 500,000 tons of steel tubing per year.

In April, Dow Chemical announced plans for construction of a “world-scale” ethylene plant on the U.S. Gulf Coast, with startup sometime in 2017. At the same time Dow announced its plans for a new major on-purpose propylene plant in Texas with operations scheduled to begin in 2015.

Dow is also planning to re-start its ethylene cracker in St. Charles, Louisiana by the end of next year.

In March, Nucor, the largest steel maker in the U.S., broke ground on a $750 million directreduced-iron (DRI) plant in Louisiana, and said it may invest as much as $3 billion in the new facility.

In June, Shell Chemicals announced its intention to build a “world-scale” ethylene cracker somewhere in Appalachia where currently no such plant exists.

What do these announcements have in common? They are part of the growing list of large-scale indirect investment in the natural gas and oil-“Shale Revolution,” arguably the most important development for U.S. manufacturing, national security, and the overall U.S. economy in the last fifty years.

Seamless steel tube is one of the primary ingredients needed to produce natural gas and oil from shale as it provides the required casing for gas and oil wells. Abundant and low-cost natural gas supplies are key in producing finished steel as well. Ethylene is a by-product of natural gas production along with iso-butane, normal butane and propane; these four hydrocarbon liquids are the backbone feedstock for the global petrochemicals industry. The shale revolution is driving investment in North American petrochemical production and employment at a rate not seen in decades.

During the period 2001-2005 U.S. natural gas production fell consecutively from 53 Billion Cubic Feet (BCF) per day to a low of 48 BCF per day. During that time, producers of natural gas were scrambling to increase supplies as drilling activity more than doubled and the price of natural gas more than tripled.

Many industry observers concluded that U.S. production of natural gas had peaked in 2001, something referred to as “peak gas.” As “peak gas” began to be accepted as conventional wisdom, the only way to keep up with future demand for natural gas would be to import supplies from overseas. The energy industry responded to the scenario of “peak gas” by investing billions of dollars in 12 new liquefied natural gas (LNG) import facilities to bring natural gas from overseas, predominantly from the Middle East. These 12 new LNG import terminals quadrupled U.S. natural gas import capacity in a very short period of time. Things came to a head during the summer of 2008 in the teeth of the financial meltdown when commodity markets, fueled largely by a massive bull run in agriculture, metals, and energy, saw the price of natural gas move to an historic high of over $13 per MMBTU.

However, since peaking in July of 2008, natural gas prices have staged a long and steady decline and are now near a ten year low of $3.50 per MMBTU. This collapse in the price of natural gas happened because U.S. production, during a few short years, increased more than 30% to 64 BCF per day creating a large surplus in the market while at the same time making the U.S. the world’s largest producer of natural gas.

The natural gas shale revolution has changed the energy market in the U.S. from one of scarcity and rising prices, to one of surplus and very low prices in just 36 months. This is remarkable as the U.S. is the most mature, most drilled, most explored piece of real estate in the global energy spectrum. Despite this, the U.S. has gained the attention of the global energy industry with advances in hydraulic fracturing and horizontal drilling applied to underground shalerock formations that were uneconomic and unfeasible to drill just ten years ago.

Importantly for the petrochemicals industry among others, is the increase in natural gas liquids resulting from the shale revolution. As can be seen in the chart below, natural gas liquids production is rising rapidly along with natural gas and this means potentially lower prices for

plastics, resins, coatings and all things related to petrochemicals. U.S. manufacturers stand to benefit directly and indirectly if natural gas liquids are abundant, reliable, and competitively priced relative to global competitors.

As natural gas prices collapsed from their highs of 2008, so has the price of electricity across the country, a very significant event for manufacturing. Natural gas prices set the price for electricity in every market in the U.S. This is because the marginal kWh of power dispatched to the grid comes from a natural gas-fired combustion turbine that can be brought online in short order.

Therefore, the forward natural gas price (futures market) curve and the price of natural gas in the nearterm cash market determine the price direction for electric power in the U.S. For manufacturers this is very simple: low natural gas prices mean low electricity prices and low electric power prices represent a significant competitive advantage.

The Shale Revolution – Generating Jobs and Direct Employment at Fast Clip

According to The Wall Street Journal, 18,000 natural gas and oil producing jobs were created this year in Pennsylvania in the Marcellus Shale formation spanning New York, Pennsylvania and West Virginia. Through August of this year, Pennsylvania’s natural gas production from shale was 2.4 BCF per day, a 60% increase over the previous year and the state is poised to become one of the nation’s leading energy producers over the next four years. Moreover, according the Pennsylvania Office of Economic Development, 214,000 new energy-related jobs have been created in the State in the past ten years.

Unemployment in North Dakota is the lowest in the country at 3.5% as it struggles with a housing shortage, a shortage of schools for new residents, and an abundance of $100,000

per year jobs for skilled mechanics, machinists, metals fabricators, and other high-skill manufacturing and engineering positions. Meanwhile, a boom in providing services in lodging, food, entertainment, and health care is ongoing to meet the new job seekers who are moving into the state.

But in North Dakota, it is not natural gas but crude oil from the Bakken Shale formation that is driving low unemployment and high opportunity. The advances in technology that are driving the shale revolution in natural gas are now being put to work in the nation’s oil patches with similar results. As can be seen in the chart below, North Dakota is experiencing an oil boom with production having quadrupled during the past three years. With oil production at 450,000 barrels per day, North Dakota’s annual oil revenues are approaching $18 billion per year, a staggering 72% increase to the state’s 2006 GDP ($25.4 billion, U.S. Bureau of Economic Analysis).

Other major oil-shale formations include the Eagle Ford in west Texas, the Niobrara Shale which expands across Colorado, Kansas and Nebraska and Wyoming and the soon to be developed Utica Shale in east Ohio. U.S. crude oil production is at an eight year high and overall direct employment in oil and gas is up 80% since 2003 (Dow Jones News Service).

The shale revolution is among the most important developments for U.S. manufacturing and global competitiveness in generations. Moreover, it is only in its beginning stage and has vast potential in future decades. The shale revolution has played the key role in keeping U.S. electric power prices low both now and in the near future and has sparked a resurgence in the U.S. petrochemicals sector that was unforeseen just three years ago. The shale revolution is a generator of employment, responsible for one in five of all new jobs in the U.S. since 2005 according to The Wall Street Journal. The direct employment associated with oil and gas development has the added advantage of being very high paying with six figure potential available for skilled welders, electricians, field engineers and environmental services personnel.

The indirect employment associated with the shale revolution is just being realized in states with nascent oil and gas industries such as Pennsylvania, West Virginia, and North Dakota. Ohio is

very much in the discussion as the Utica Shale is showing tremendous natural gas production from preliminary wells and the crude oil potential of the Utica is believed to be significant. The shale revolution’s potential impact on manufacturing is significant and growing as the oil and gas industries are well known facilitators to the output of American industry. The shale revolution may be the “ultimate Mulligan” for U.S. manufacturing.

Brian Habacivch is Senior Vice President with Fellon-McCord (since 1992), a Louisville, KY-based energy management company serving commercial and industrial consumers of natural gas, and electric power as well as industrial and municipal generators of electricity, providing lowest-cost sourcing, risk management, power dispatching, and demand-side energy reduction solutions helping clients drive down energy costs. To learn more, contact Brian at bhabacivch@fellonmccord.com, 502-214-9419, or visit FellonMcCord on the web at www.fellonmccord.com