Oil and Gas Permeates the Economy One Way or the Other

01 Aug, 2012

In This Article

Manufacturers can look forward to low prices as the U.S. gas and oil industry continues “megatrend.”

By Rachel Duran

The U.S. shale gas and oil industry continues to grab headlines, good and bad. Often overlooked in the “frakous” is what the unprecedented amount of domestic production means to industry and the communities that host the activities, in regard to fuel price stability, proximity to feedstock supplies, job creation, tax revenues and more.

“We have really turned the corner,” says Rayola Dougher, senior economic advisor for the American Petroleum Institute (API). “For decades what we have seen is increases in demand and decreases in domestic production.”

Dougher says the industry’s turnaround is not just a temporary one.  One estimate says the increased development has resulted in 1 million new jobs in the country in recent years; the number is expected to increase in the next few years by another half a million jobs. “They are calling it a ‘megatrend’— that is, we can expect to see more production in our energy future,” Dougher says. As leaders in the technology and development of combination hydraulic fracturing and horizontal drilling, the United States has the ability to tap the country’s abundant gas and oil supplies. “It has lowered the costs of natural gas dramatically.”

Hydraulic fracturing has been in place since the 1940s, and there are 1.2 million wells that have been fractured. The process is 90 percent water, 9.5 percent sand and a half of a percent of various chemicals, which are used in a process that shatters the rock beneath the earth’s surface to release trapped oil and gas. Horizontal drilling creates efficiencies because it allows for drilling to occur along the basin and not just at the base of the pipe such as in hydraulic fracturing.

What does this production mean to the bottom line for manufacturers?

It means the ability to count on low priced domestic fuel for decades. Long term, the development of shale plays means manufacturers will benefit from low energy costs moving forward due to the abundant supply of the resources. Dougher says the U.S. Department of Energy estimates that for decades to come, natural gas prices will be relatively low, especially compared to other countries. “Even with the expectation that the U.S. will be a net exporter of natural gas within this decade, prices will be lower than any other place,” Dougher says.

Major shale gas and oil plays include the Barnett Shale formation in north Texas, where the combination of hydraulic fracturing and horizontal drilling was put into action; the Marcellus Shale formation, spanning Pennsylvania, West Virginia, New York and Ohio; the Bakken Shale formation in Montana and North Dakota; and the Eagle Ford Shale formation in southwest Texas.

Beneficiaries of the activity include the petrochemical industry and its need for feedstocks, fertilizer manufacturers and anyone that relies on energy, Dougher notes. For instance, in March, Shell Chemicals announced a proposed petrochemical facility in Pennsylvania, which would process the natural gas from the Marcellus Shale reserve to create polyethylene and other feedstocks for manufacturing facilities.

“Of course we are in the development of these resources,” Dougher notes. Pipelines will have to be built, and infrastructure and housing will have to be built to support the workforce. Companies will need to be transparent and communities will need to be assured of the process. Stimulating the growth of U.S. shale plays has repercussions.

Challenges And Hold Ups

In the Bakken, the rapid production of the resources has created a desperate need for more workers with skill sets ranging from construction to electricians to truck drivers. Production has outpaced the installation of pipelines; product is being loaded on trucks or rail cars, which is inefficient. Rail service runs $20 to $30 more than if there was enough pipeline capacity, says Montana Gov. Brian Schweitzer. “It will make a big difference to the bottom line of these producers once we get additional pipeline capacity.” Producers in the Montana Bakken include Continental Resources Inc.

Dougher says U.S. policy urgently needs to support development of pipelines. “We have increased production at the fastest rate in the country and done so in a way that we can’t get pipeline capacity,” Schweitzer says of the activity in the Bakken. “That is why I personally negotiated with TransCanada in their proposition of the Keystone XL Pipeline that they would build a $140 million onramp that would take up to 100,000 barrels per day from the production in the Bakken.” The Keystone XL Pipeline is billed as a 1,179-mile route from Hardisty, Alberta to Steele City, Neb. According to TransCanada’s Web site, the U.S. Department of State expects to make a decision on the Keystone XL project by the first quarter of 2013. Following the decision, TransCanada expects to begin construction in the first quarter of 2013, with an anticipated in-service date in late 2014 or early 2015. The company is working with Nebraska’s officials to develop an alternate route that would avoid running the pipeline through the state’s Sandhills region.

Schweitzer says TransCanada knows which refineries it will ship to and it has routes mapped and permits in place in Alberta, Montana and South Dakota; and the company knows how to get across Kansas and Oklahoma. Nebraska is tied up in legislative action and court challenges in regard to the pipeline’s route.

Pipeline capacities aside, bringing on the development and production of oil and gas can be quite an adjustment for communities that aren’t used to the dirt, and increases in truck traffic and population.

In south Arkansas, officials are getting out in front of the challenges and opportunities shale plays can bring to a region. The Smackover Brown Dense Shale formation spans southern Arkansas and northern Louisiana. Economic developers from the Magnolia Economic Development Corp. met last fall with economic developers from Williston, N.D., to learn about issues they might face with the expansion of the oil and gas industry and how to address the issues. Williston is at the heart of North Dakota’s Bakken-related activities.

Companies active in the Magnolia region include Southwestern Energy and Cabot Oil. The southern Arkansas and northern Louisiana regions have a history in drilling for oil but not with the added stresses the development of a shale formation has the potential to bring to a community. Magnolia’s population of just fewer than 12,000 people means housing is an issue there and in nearby El Dorado. Southern Arkansas University in the area continues to grow, and when the students filled the college’s dorm spaces, area apartments began filling up with students. Add to that the people that are in and out of the region for various oil-related business, and housing availabilities become strained.

An investment group out of Little Rock is looking to build a 144-unit apartment complex in Magnolia. Other housing developers are also looking at the area. “We want to be ahead of what we know could possibly come so we can be business friendly,” says Cammie Hambrice, executive director, Magnolia Economic Development Corp.

Hambrice says the Magnolia and El Dorado regions want to be on the front end and not have to play catch up. “With those jobs and those salaries there are still negative impacts on your community,” Hambrice notes. “Infrastructure will be a problem. We have to address them before we have collected tax dollars to help pay for it.”

In Montana, Schweitzer says developers are working in the state, and have the support of not only financing but also incentives to support building additional housing and infrastructure so people are able to live and work in the state. “This is important because we can’t continue with people living in cars or campers,” he says.

Montana gives nearly 50 percent of the taxes it does collect from the oil and gas industry back to the local communities where the resources are produced so they can keep up with sewer, water and housing demands. “We fully expect those county commissioners will cooperate with towns so they can upgrade sewer and water for additional housing,” Schweitzer says.

Schweitzer notes that Montana’s tax environment consistently ranks among the 10 lowest in the nation. Specifically in regard to oil and gas taxes, Montana’s rates are lower than Alberta, North Dakota and Wyoming. “We have a tax holiday when you drill a horizontal well and with hydraulic fracturing, you do not pay an oil and gas tax for the first 18 months,” Schweitzer says.

Companies in Montana continue develop the Bakken; and there has been optimism in regard to the state’s other shales, led by the Heath formation. Hundreds of thousands of acres of land have been leased with this formation under them. There are also increases in activity on Montana’s side of the Bakken that spans the Rocky Mountain Front.

Moving south to Texas, production activities are also booming in the Eagle Ford Shale formation, and in San Antonio. The 400 mile long by 50 mile wide formation is located in southern Texas.

In 2011, five major oil and gas supply companies announced 2,600 direct jobs in southern Bexar County. Four of the city’s top 10 investment projects in 2011 were related to the shale formation. This includes Halliburton, Baker-Hughes, Schlumberger and Weatherford International. “Yet, what makes these positive economic trends in San Antonio so unique, is that not a single oil well in the EFS formation exists within the city of San Antonio, or even Bexar County limits,” says Mario Hernandez,  president, San Antonio Economic Development Foundation.

The collaborative nature of the foundation’s partnerships with the city of San Antonio, Bexar County, the San Antonio Water System and CPS Energy, help the region to adapt, enhance and grow infrastructure to meet business requirements. These partners developed infrastructure that allowed Halliburton to move into a location that previously had no waterlines within a three-mile radius, Hernandez notes. The company expects to create 1,500 jobs.

In regard to further supports to the oil and gas industry, the economic development foundation also conducted research as to the types of corporations that could cater to, and benefit from, the Eagle Ford Shale formation. The Eagle Ford Shale Task Force keeps stakeholders up to date as to the relevant topics and activities surrounding the formation.

Active stakeholders are vital to the shale gas and oil sector. API’s Dougher says manufacturers should become active in policymaking so energy resources can reach their full potential. This includes permission to build pipelines to open up areas for development. “That is going to have a positive impact on manufacturers and on economic growth in the United States,” Dougher says.

For complete details on the organizations featured in this article, visit:

America Petroleum Institute

www.api.org

Magnolia (Ark.) Economic Development Corp.

www.magnoliaedc.com

Montana Energy Promotion and Development Division

www.commerce.mt.gov/energy/default.mcpx

Montana Governor’s Office

www.governor.mt.gov

San Antonio Economic Development Foundation

www.sanantonioedf.com

Mandate on Offshore Drilling Limits the U.S. Economy

With the right policies in place, natural gas and oil industry advocates believe the nation will become fairly self-sufficient in meeting our energy needs, curbing our dependence on other nations to meet our needs.

In regard to offshore drilling activities, according to the American Petroleum Institute, 87 percent of the offshore area of the United States has been off limits to development because of federal mandates. “We are only developing a small piece of what may be there,” says Rayola Dougher, senior economic advisor for the American Petroleum Institute.

While the development of oil and gas resources in this country continues to be a political hot potato, it hasn’t prevented advancements in technology from making inroads in deep water exploration and development. Areas can be drilled seven miles deep — which in fact is the cruising altitude of many planes. “We believe as an industry, if we are allowed to go after those resources, we could bring on 1-to-4 million barrels a day more,” Dougher says. Completion of the pipeline with Canada could carry another 830,000 barrels of oil a day to refineries. “We could, within a dozen years, between that and our biofuels [industry], be self-sufficient.”

For complete details, visit www.api.org and www.energyfromshale.org.

Rachel Duran

Rachel Duran is the editor in chief for Business Xpansion Journal. Contact her at rduran@latitude3.com.

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