January 2012, Vol. 239 No. 1

Features

Shale Gas Supports More Than 600,000 American Jobs, Study Says

The natural gas “shale gale” that has dramatically transformed the outlook for U.S. energy supplies is also having profound economic impacts – creating jobs, reducing consumer costs of natural gas and electricity, stimulating economic growth and bolstering federal, state and local tax revenue, according to a new IHS Global Insight study.

The study found that shale gas production supported more than 600,000 jobs in 2010, a number that is projected to grow to nearly 870,000 by 2015.

The study, The Economic and Employment Contributions of Shale Gas in the United States, is the most definitive study to date tracking the long-term economic impact of U.S. shale gas production, says IHS. It presents the economic contributions of shale gas in terms of jobs, economic value and government revenues through 2035, as well as broader macroeconomic impacts on households and businesses.

“The rapid growth in shale gas production — currently 34% of total U.S.
production — is one of the most significant energy developments in recent decades and is having a significant impact on the nation’s economy in terms of stimulating job creation and economic growth,” said IHS Vice President John Larson, lead author of the study. “This study further informs the discussion with a greater understanding of the economic potential from this vast American energy source.”

Among the study’s key findings:

Shale gas had grown to 27% of U.S. natural gas production by 2010; it is currently 34% and will reach 43% in 2015 and more than double by 2035 to 60%.

In 2010, the shale gas industry supported more than 600,000 jobs; by 2015 the total will likely grow to nearly 870,000 and to more than 1.6 million by 2035

Nearly $1.9 trillion in cumulative capital investments are expected to be made between 2010 and 2035.

Annual capital expenditures, especially strong in the early years, will grow to $48.1 billion in 2015.

The shale gas contribution to the U.S. gross domestic product (GDP) was more than $76.9 billion in 2010; in 2015 it will be $118.2 billion and will triple to $231.1 billion in 2035

Over the next 25 years, the shale gas industry will generate more than $933 billion in tax revenues for local, state and the federal governments

Savings from lower gas prices, as well as the associated lower prices for
other consumer purchases, equate to an annual average addition of $926 in
disposable income per household between 2012 and 2015, and increase to more than $2,000 per household in 2035 on an annual basis

The report’s findings reflect the dramatic impact of shale gas production in the United States. As recently as 2007, it was believed that the country would soon need to import large volumes of liquefied natural gas (LNG) for domestic consumption. Instead, shale gas production has more than doubled the size of the discovered natural gas resource in North America — enough to satisfy more than 100 years of consumption at current rates.

A key reason for the shale gas industry’s profound economic impact is its high “employment multiplier” — the indirect and induced jobs created to support an industry. For every direct job created in the shale gas sector, more than three indirect and induced jobs are created, a rate higher than the financial and construction industries, the report finds.

“Shale gas combines a capital-intensive industry with a broad domestic supply chain,” Larson said. “The United States is a leader in all parts of the shale gas industry which means that most of its suppliers are domestically based, and that means a larger portion of the dollars spent are supporting domestic jobs in trucking, steel fabrication, aggregates, heavy equipment manufacturing, hotels, and restaurants, among others.”

The study also found that shale gas and related jobs pay higher wages on average – currently $23.16 per hour – than those paid to workers in manufacturing, transportation and education.

The IHS Global Insight study measured the broader impact of lower natural gas prices, finding that over the 2010-2035 period prices on average would be at least two times higher absent shale gas production. This impact is even greater now and over the next few years when prices would have been two and a half to three times higher. The lower natural gas prices have resulted in a 10% reduction in electricity costs nationally and that flows through the economy to lead to lower prices for many other consumer purchases.

Lower gas prices also boost the international competitiveness of domestic
manufacturers, resulting in 2.9% higher industrial production by 2017 and
4.7% higher production by 2035.

“Absent the added supply from shale gas production, large volumes of LNG imports would be required and U.S. consumers would be paying European or even Asian
prices which are two to three times what they are today here in the U.S.,” Larson said. “The benefits of that savings reverberate through the wider economy.”

The Economic and Employment Contributions of Shale Gas in the United States was commissioned by America’s Natural Gas Alliance (ANGA). IHS Global Insight offers an independent assessment and is exclusively responsible for all of the analysis, content, and conclusions contained in the study.

In measuring the economic contribution of shale gas, the study fully “sized” the economic influence of the industry by capturing all the supply chain and income effects associated with shale gas activity in the U.S. The results of the production and capital expenditure profile analysis were integrated into a customized modeling approach developed by IHS Global Insight. This approach links Input-Output modeling techniques – similar to those used by the U.S. Department of Commerce and the Congressional Budget Office – with the dynamic modeling capabilities of proprietary IHS models to capture the industry’s comprehensive contribution and impact on the economy. The results represent a
conservative estimate as the study:

• Constrained future production and capital expenditures by realistic market demand as well as technical and economic feasibility of developing shale gas plays.
• Did not consider production or investment activities from additional gas plays that have yet to be discovered.
• Independently evaluated each play to reflect regulatory environments in each region and adjusted production profiles to reflect little or no development if there was uncertainty as to regulation and access.
• Did not consider the economic benefits accruing to the U.S. suppliers who are supplying the Canadian shale gas industry.
• Did not quantify the job creation in industries that would refocus investment back to the United States (for instance, petrochemicals).

To download The Economic and Employment Contributions of Shale Gas in the United States complete report and methodology, visit www.ihs.com/EconomicContributionofShaleGasintheUS.

Average Crude Oil Price Poised To Set 150-Year High
The annual average oil price of global benchmark Brent crude for 2011 is poised to be the highest (in both real and nominal terms) since 1860, the year after the birth of the modern oil industry in Titusville, PA according to a new IHS Cambridge Energy Research Associates (IHS CERA) analysis. Growing demand amidst supply concerns and rising production costs are sustaining prices at record levels.

The annual average price of Brent crude so far this year is well above its previous high of about $97 (and constant dollar terms of about $99) in 2008. IHS CERA expects Brent to average about $111 for the year at the end of 2011.

“Brent crude prices are approaching their highest annual average, a level higher than the peaks recorded by other widely accepted benchmarks going back to Colonel Drake and the origins of the modern petroleum industry in Pennsylvania more than a century and a half ago,” IHS CERA Chairman Daniel Yergin said. “Quite simply, we are looking at the highest average price since the age of oil began.”

The high prices have been buoyed by record high oil demand of 89 million bpd at a time of anxiety about supply from the Middle East and North Africa, where civil war disrupted Libyan supply for much of 2011 and the standoff between the West and Iran continues to increase tension. The report also cites rising oil production costs, such as rising labor and material costs, and the shift to increasingly challenging operating areas, such as the ultra deepwater, as a factor in the record price levels.

“These record prices are being driven by the fundamentals of supply, demand and costs,” Yergin said. “With rising tensions over Iran, geopolitics are coming back into the oil price again.”

“This price level reflects a continuation of the trends from the ‘demand shock’ that lead to the surge in prices that peaked in 2008. What would reverse the trend and send prices down again are a financial contagion and a European recession that slows the world economy.”

New capacity could ease supply concerns and price pressures in the longer term, the analysis says. Higher oil prices—combined with technological advances—have incentivized development of oil that is relatively expensive to produce, such as Canada’s oil sands, the presalt fields offshore Brazil and tight oil formations in the United States. New capacity from these areas, along with new supply from Iraq’s ambitious planned expansion of output from its giant and relatively low-cost fields could ease price pressures in the coming years.

Petrochemical Demand Increases Vital To Ethane Market Balance
The Great NGL Surge!, a new market study from BENTEK and Turner, Mason & Company, reports that U.S. ethane production is expected to increase 50% or 475 Mb/d by 2016.

Texas will account for the majority of total U.S. ethane supply increases, growing 280 Mb/d during that period. Ethane production in PADD I will jump from virtually nothing to nearly 150 Mb/d by 2016 due to growth in the Marcellus, with the majority of that supply expected to be exported to Canada and PADD III. The large increase in ethane production presents an unexpected opportunity for petrochemical producers to build new ethylene production plants in the U.S.

U.S. ethane demand will increase due to feedslate switching, which is already taking place, in addition to expansions, debottlenecks, the restart of idle crackers and new cracker builds. The Great NGL Surge! notes that total demand for ethane (including petrochemical demand and exports) will increase 352 Mb/d over the next five years – which is less than the increase in supply. As a result, the ethane market is forecast to be long between 2014 and continuing through the end of the forecast period. This will lead to lower prices, nearing ethane rejection levels in some areas. Nearly all of the increase in ethane demand will occur in PADD III, with 22% demand growth in Texas and 37% growth in Louisiana.

Global Gas Shifts Focus Of New Energy Envoy
Growing supplies of natural gas from U.S. shale and several foreign countries have created a “fascinating transition” in global gas markets that will be a key focus of a new team of U.S. diplomats focused on energy policy, U.S. State Department envoy Carlos Pascual told Platts Energy Week (http://www.plattsenergyweektv.com/).

Pascual, who will head the State Department’s new 53-person Bureau for Energy Resources, called new supplies of gas that are coming online one of the most “fascinating transitions” in global energy markets.

“If we look at global trends including shale, as well as new gas from Russia, new gas from Australia, Indonesia, the potential in Argentina, the potential out of Brazil and Nigeria, the volumes of gas that can come onto global markets are huge,” Pascual said. He noted that gas trades are moving toward liquefied natural gas, rather than pipelines.

“It could have huge opportunities for the United States in terms of export potential; huge opportunities for our industries as we export technologies in an environmentally safe development of shale gas; and it’s still going to leave us with many challenges that keep us looking at the environment and the environmental impact of fossil fuels,” he added.

Promoting natural gas will be a key priority for the United States, he said, as both a mechanism to aid U.S. producers and as a means of making progress in the reduction of global carbon dioxide emissions to combat climate change.

“Here’s a fascinating point to look at,” he said. “If China can make a significant shift from coal to gas, that shift alone can have as big an impact as any other measure in China in terms of reducing its CO-2 emissions in the next decade.”

Pascual said the new State Department energy office would focus on developing a long-term policy toward energy development, a priority he said will receive more robust attention than in the past and will include a larger energy-focused staff.

Topping the priorities list is maintaining relationships with key oil and gas suppliers such as Angola, South Africa, Nigeria, Brazil and Iraq.
Pascual also emphasized the need for expanded use of renewable energy and finding ways to expand power access to the 1.3 billion people in the world who don’t have electricity.

“If we can do that in ways that are creative in the applications of renewable technologies, we can do that in ways that avoid repeating the same kinds of infrastructure constraints that we have in the developed world right now,” Pascual said. “It’s a huge opportunity to create a new market that will create new aspects of economic growth.”

Inventory Shortage Termed A ‘Myth’
The Institute for Energy Research has released a groundbreaking North American Energy Inventory exposing the decades-long myth that the U.S. is running out of coal, oil, and natural gas because of inadequate domestic supplies. As a part of IER’s year-long “Energy for America” campaign, the report details the vast energy resources that could power the nation’s future, if not for government policy that stands in the way.

“The current administration and its green energy allies in business and in Washington appear willing to drive up the price of energy for American consumers by limiting access to our vast resources. For the past several years, taxpayer dollars have been spent to fund unproven green energy pipe dreams, while Americans have been denied the opportunity to utilize the coal, oil, and natural gas that is literally under our feet,” said IER President Tom Pyle about the report.

“This energy report should change the conversation in Washington and promote policies that reproduce nationwide the energy boom in places like North Dakota, where unemployment is at now at 3.5% (the lowest in the nation) and domestic production on private lands has more than tripled in the last five years.”

Among the report’s findings are:
•When combined with resources from Canada and Mexico, the total recoverable oil in North America exceeds 1.7 trillion barrels. That’s more than the entire world has used in 150 years, and sufficient to fuel the present needs in the United States for the next 250 years.
•In the last 30 years, the United States produced 77 billion barrels of oil, which was more than 150 percent of the estimated reserves in 1980.
•The total amount of recoverable natural gas in North America is approximately 4.2 quadrillion (4,244 trillion) cubic feet. That is enough natural gas in North America to last for the next 175 years at current rates of consumption.
•There is more recoverable natural gas in North America, Canada, and Mexico than the combined proved reserves in Russia, Iran, Qatar, Saudi Arabia, and Turkmenistan.
•North America has more than 497 billion short tons of recoverable coal, or nearly three times as much as Russia, which has the world’s second largest reserves. In fact, North America’s recoverable coal resources are bigger than the five largest non-North American countries’ reserves combined (Russia, China, Australia, India, Ukraine.)
•A scarcity of good policies, not a scarcity of energy, is responsible for U.S. energy insecurity.