The events surrounding the regulation and enforcement of hydraulic fracturing (fracking) in natural gas (and oil) operations have been rapidly evolving over the last year. While this blog has focused primarily on covering those issues, it is worth noting that much also has been happening in the economic and market arena during the same time. And in the end, it may be economic forces, including the long-term supply and price of natural gas, which will play the most important role in determining whether natural gas will truly become the oft-discussed “bridge” fuel that transitions the United States’ economy to a cleaner, more renewable- and domestic-based energy portfolio.
Recent discoveries of unconventional shale resources in this country have been an economic boon to several states—Pennsylvania and Texas in particular. Recently, the Marcellus Shale Coalition reported that a staggering 48,000 new people have been hired in jobs related to drilling for natural gas in Pennsylvania in the past year, and the numbers for the first quarter of 2011 are nearly double from the same time last year. On June 8, 2011 ExxonMobil announced a $1.69 billion purchase of 317,000 acres in the Marcellus Shale from Phillips Resources, Inc. and TWP Inc—a further indication of the promise the majors see in the Marcellus play.
Texas is experiencing a similar phenomenon in the oil-rich Eagle Ford shale play, where Energy In Depth reports that 3,000 wells are slated to be drilled in the next 12 months and where Marathon Oil just bought out Hilcorp-KKR’s interest in 140,000 acres for $3.5 billion. Indeed, the Texas Railroad Commission has put together a special task force to ensure development continues in the predominantly rural Eagle Ford (housing the 19th poorest county in the United States) where forecasters estimate that new discoveries will support 68,000 full-time jobs bringing in $21.5 billion in total economic output by 2020. These are just some of the numbers in some of the natural gas shale plays, but a similar phenomenon is going on in other parts of the country.
Foreign companies are making significant investments to be part of the action. In the Eagle Ford alone, Korea International Oil Corp., China’s CNOOC, and Norway’s Statoil have collectively paid over almost $4 billion for access. In the Niobrara play, which stretches from Northeastern Colorado through Wyoming and parts of Kansas and Nebraska, China’s CNOOC paid Chesapeake over $1 billion for access and drilling rights. And just several weeks ago, Law 360 reported on multiple similar joint ventures with foreign companies in an article titled “It's A Gas: Foreign Cos. Dig The US Shale Market.”
Although the boom in unconventional resources is by no means confined to North America or the United States, a recent report by Markets and Markets states that the United States is the only active region with commercial shale gas production, and is slated to have almost 80% share of the global gas production by 2021. While challenges exist for widespread shale gas production—including not only regulatory and legislative uncertainty, but significant capital expenses associated with frack jobs—many industries are betting on a bright future for natural gas.
For example, Valero Energy Corp., one of the nation’s largest refiners, is designing new gas stations that can handle natural gas, with its first station housing natural gas dispensers to be built soon. In April, Encana Natural Gas, Inc. announced that it will provide Liquified Natural Gas (LNG) from its new mobile LNG fueling station to a fleet of Peterbilt Motors Corp. trucks that provide water hauling well services to Encana. Encana’s announcement comes as T. Boone Pickens continues to push natural gas, calling on the U.S. Government to provide a five-year subsidy for natural gas-powered trucks aimed at reducing the country’s dependence on imports. And the U.S. Department of Energy recently issued a conditional authorization approving an application to retrofit the Sabine Pass LNG Terminal in Louisiana to export LNG – raising the prospect, once thought dead, that the United States may become an LNG exporter.
Many other industries, indirectly related to natural gas and oil drilling, are also experiencing benefits. For example, the unconventional use and demand for sands used to prop open the micro-fissures in the shale are fostering boom times for mining companies specializing in high-quality silica sands. Indeed, some experts predict that demand for foundry sands will experience double-digit gains in a few short years, exceeding $7 billion by 2014. But the picture in this industry is not all rosy; the high demand for foundry sands for fracking applications has forced prices upward, resulting in higher input costs for the broader metal casting industry.
Other industries not yet directly involved in drilling operations are looking to make significant long-term investments around cheap, available natural gas supplies. Officials at Shell, which is currently completing the world’s largest gas-to-liquids (GTL) plant in Qatar, have stated that new shale discoveries in the United States may provide the supply necessary for GTL plants to become a reality in the United States (producing mostly diesel and jet fuel through the Fischer-Tropsch process). And while GTL production requires significant startup capital costs, the potential benefit in terms of reduced lifecycle greenhouse gases (GHGs) and traditional air pollutants could be a significant driver in a carbon-constrained economy.
Even though the economic activity directly and indirectly related to shale gas extraction noted above is undeniable, skeptics remain. On Sunday June 26, New York Times reporter, Ian Urbina (the same reporter that ran the three-part series in February warning of widespread environmental concerns with fracking, which has been widely discredited), ran a prominent story comparing the shale gas boom to recent financial bubbles. Energy In Depth, was quick to respond with a factual rebuttal of Mr. Urbina’s assertions, including the inescapable fact that production numbers across the country have risen steadily over the past two years as shale plays have been discovered and brought into production.
As the country struggles to climb out of a substantial economic depression, the premium on creating and preserving jobs has perhaps never been higher and is not likely to go away. There is no denying that unconventional natural gas development has been a major economic driver in many parts of the country. The large sums of investment capital, the consumption of resources such as sand and steel for drill pipe, all suggest that the fracking boom economic impacts will continue to be felt nationwide for some time to come—despite claims to the contrary.