Last week our attention was drawn to the “State of Energy” report published by the Texas Independent Producers and Royalty Owners (TIPRO). Using Bureau of Labor quarterly census data the report provides a summary of state and national benefits attributed to growing US oil and gas production during 2012. For example, TIPRO reports that oil and gas industry employment increased by 65,000 to 971,000 in 2012. But the benefits of increased production are not just confined to the oil and gas industry. According to a presentation by the Chamber of Commerce Institute for 21st Century Energy (ITCE) the shale revolution provided $237B of growth to the US economy in 2012. Today we look at how huge changes taking place in US energy supplies impact the wider economy.
Oil and gas industry growth in the US over the past 5 years has largely been driven by increased domestic production from what we generically call shale (includes tight gas, tight oil and all manner of unconventional production). Today US production of natural gas and natural gas liquids (NGLs) are at all time record highs and crude oil production is headed back to levels not seen since the early 1980s. The two charts below illustrate the growth in daily US crude oil and natural gas production since 2007. Chart #1 shows Energy Information Administration (EIA) estimates of monthly US total crude oil production increasing by 0.9 MMb/d between January 2007 and December 2011 and then by another 1 MMb/d to 7 MMb/d during 2012. Chart #2 shows EIA estimates for lower-48 natural gas production increasing by 15 Bcf/d from 50.8 Bcf/d in January 2007 to 65.8 Bcf/d in December 2012. Over the same time period US NGL gas plant production increased 44 percent from 1.7 MMb/d to 2.4 MMb/d.
Increased oil and gas production has brought with it a wide range of benefits to the US economy not least of which is new employment. In 2012 alone 65,000 new jobs were created in the industry according to TIPRO. The TIPRO report breaks down employment increases by sector including 36,000 new jobs in operations and support activities, 12,750 jobs in crude oil and gas extraction and close to 8,000 jobs in oil and gas field machinery and equipment. State by state the biggest oil and gas employer by far is Texas (380,000) followed by Louisiana (81,400), Oklahoma (74,600), California (46,400), and Pennsylvania (34,900). During 2012 North Dakota saw the largest year on year growth in employment of 54 percent or 6,400 to 18,400, reflecting the dramatic increase in crude oil production from the prolific Williston Basin.
Shale production has transformed US energy pricing and competitiveness. Natural gas growth between 2009 and 2011 led to a collapse in prices to 10 year lows under $2/MMbtu early in 2012. Domestic crude oil prices also fell by around $20/Bbl during 2011 against international levels as new US and Canadian production flooded the Midwest region with supplies. Low natural gas prices compared to crude encouraged a move away from dry natural gas drilling towards “liquids rich” plays that in turn led to higher NGL production volumes.
Lower crude prices and lower natural gas fuel costs improved the competitiveness of US refiners. As a result while US demand for refined products such as gasoline and diesel has declined, exports have increased dramatically. According to the EIA net US exports of diesel and gasoline were close to 1 MMb/d and 500 Mb/d respectively in 2012 – much of it to Latin America. Prior to 2008 the US was a net importer of both diesel and gasoline. Although US crude prices have been lower and production of light sweet crude grades is rapidly exceeding refining capacity in some regions, Bureau of Commerce regulations forbid the export of crude oil except to Canada. That country is self sufficient in crude but they do import from the US significant volumes of light distillates and very light crude oils called condensates as diluent for heavy bitumen crude (see Fifty Shades of Eh).
Aside from refined petroleum products the US is also shaping up to be a big exporter of natural gas and NGLs. Record natural gas production has exceeded US demand and although prices have rebounded to $4/MMBtu from the lows of $2/MMBtu seen in April 2012, they still compare favorably with international levels. Natural gas exports to Mexico have boomed (see Oh Rio Rio – Gas Across The Rio Grand) and growing gas supplies from the Marcellus in Pennsylvania and Ohio are being exported to Canada (see A New Dawn). Multiple US companies are seeking licenses from the Department of Energy to export surplus natural gas as liquefied natural gas (LNG) to destinations outside North America such as Asia. Although only one company (Cheniere) has so far secured such a license the expectation is that as much as 6 Bcf/d of LNG exports will be permitted by 2016. Exports of propane are also growing – in particular to Latin America as supplies exceed domestic demand and export terminals are constructed (see Come On Move Your Propane).
Increased exports of oil, NGLs, natural gas and LNG generate a positive flow of payments into the US economy. Increased US oil and gas production also have a positive impact on the US trade balance. Every molecule of crude or gas hydrocarbons produced domestically instead of being imported benefits the balance of payments by reducing import costs. According to ITCE lower crude imports by 2020 could reduce America’s oil import bill by as much as $200B. Lower energy costs are in part responsible for a revival in US manufacturing industry that is reducing imports and increasing domestic employment.
The fact that many oil and gas shale formations are located outside traditional production basins (with the exception of the Permian in West Texas) has led to significant new infrastructure investment. Production has to be drilled of course but once the oil or gas is flowing it requires infrastructure to transport to market. That in turn has led to billions of dollars of investment and a boom in financing infrastructure through Master Limited Partnership vehicles (see Masters of the Midstream). In December 2012 the Wall Street Journal quoted an AECOM Technology Corp, forecast that in 2013 as much as $45 billion may be spent on new or expanded transportation infrastructure, including pipelines, rail cars, rail terminals and other projects. To these transportation infrastructure expenditures you can add natural gas processing plants and refinery expansions. In the NGL industry alone over 80 new NGL processing plants are being built that will add 14.6 Bcf/d of new capacity and require 16 pipeline projects to connect them to production. Aside from pipelines there has been a boom in rail terminal and tank car construction. We have covered the expansion of crude by rail transportation extensively in RBN Energy posts (see The Year of the Tank Car). The inland and coastal waterway barge industry has also expanded to meet increased demand for crude transportation (see A Good Year for the Barges).
Apart from primary processing of crude oil, natural gas and NGL’s the increased production has led to investment in secondary processing facilities. New oil refineries are rare but many US refiners have announced plans to upgrade their configurations to handle lighter shale crudes or increase production of diesel for export. These plant expansions typically cost millions of dollars. The Federal Energy Regulatory Commission identifies 18 US projects or proposed sites for LNG exports (list here) – each of which would cost billions of dollars to construct if approved. There are also numerous projects being proposed to manufacture products such as methane (see Ignition, Timing, Countdown) and ammonia (see Fertile Prospects for Natural Gas) that are derived from natural gas. Increased production of low cost NGLs has prompted several projects to build multi-billion dollar petrochemical plants on the Gulf Coast over the next 5 years to process NGL feedstocks and produce ethylene, propylene, butadiene and a myriad of other chemical products and their derivatives.
Dramatic changes in the geography of oil and gas production have not only led to new infrastructure where none existed previously but also to large scale re-plumbing of existing pipeline networks. Significant repurposing of natural gas pipelines to carry crude and NGLs are in the works (for example the proposed Trunkline conversion between Patoka, IL and St. James, LA, the Kinder Morgan, proposed Freedom Pipeline from West Texas to California and the Boardwalk/Williams Mixed NGL line from Appalachia to the Gulf Coast). Other crude pipelines like Seaway have been reversed to facilitate new flow paths to market. Many natural gas pipelines have also been reversed to allow new production viable routes to market. We mentioned earlier the increase in natural gas power generation that has resulted from lower gas prices relative to coal. New gas generation capacity frequently requires improved or new infrastructure to deliver gas to the plant.
And the list goes on. Refineries on the East Coast that were scheduled for closure came back online with the help of lower priced domestic shale crude supplies. Abundant volumes of low cost natural gas have prompted increased use of that fuel for truck transportation and proposals to build prototype LNG locomotives (see Methane Train Running). We haven’t even touched on the army of investors, analysts and consultants (like ourselves!) needed to finance, inform and navigate the industry through all the changes.
As the shale revolution unfolds and transforms the US energy landscape it is sometimes easy to overlook the bigger picture. We tend to concentrate on particular projects or processes because those impacts are under our noses and easier to comprehend and calculate. It is always a good idea to take a step back and comprehend the scale of the changes taking place. After all, the impacts of the shale revolution we are all involved in are far broader than the energy business. They are leading to a renaissance in US manufacturing and the prospect of US energy independence. The economic and geopolitical impacts of those developments will start new games rather than change existing ones.