The economic boom fueled by new natural gas drilling technologies has been stunning - some parts of the country barely noticed the Great Recession as they scrambled to find enough well-paid workers to extract shale gas from the ground. But what if that boom was just the tip of the economic-development iceberg? What if the gas boom turned out to be a catalyst helping to spark a much-needed rejuvenation in North American manufacturing?
That's a question many business leaders and academics have been asking lately, and the answer is encouraging. One study has projected the addition of a million new jobs in the next dozen years thanks to the availability of more affordable energy, the need for products involved in extracting gas, as well as new manufacturing operations involving various products and byproducts that come from the ground. Other studies look forward to an even bigger impact on jobs, and suggest that manufacturing operations that previously fled to overseas locations may turn around and come home.
The boom stems from the increased use of hydraulic fracturing, or "fracking," and horizontal drilling techniques to unlock formerly inaccessible underground oil and gas treasures. The concept started to catch on in the late 1990s in the Barnett Shale area of Texas and quickly spread to reserves such as Eagle Ford, Marcellus, Utica, and Bakken. These and other shale reserves are rich enough to make the United States one of the world's top producers of shale gas and all of its various downstream products.
A variety of industries will feel the impact, says Kevin Smith, chief economist for the American Chemistry Council. The chemical industry he represents is already seeing growth, and he says to also watch for an impact in such sectors as steel and other metals, plastics and rubber products, glass, paper, and cement - what he says could be "a whole manufacturing renaissance in this country."
Take, as just one example, the plans from Shell Chemical to build an ethane "cracker" in the northeast United States. A "cracker" is what the industry calls a plant that breaks down oil and gas into smaller molecules, and an ethane cracker creates ethylene, which goes into plastic. Shell favors a site in Pennsylvania, one of the hot spots for shale gas development, and Smith's organization has projected that the project could create more than 17,000 permanent jobs, including direct and indirect jobs as well as ripple-effect employment.
Multiply that by the many other kinds of operations fueled by the shale gas boom and you get what a PricewaterhouseCoopers study also terms "a renaissance in U.S. manufacturing." One of that study's lead contributors was Bob McCutcheon, PwC's U.S. industrial products leader and the managing partner in Pittsburgh - a place where both shale gas and the state of manufacturing are on a lot of people's minds.
"We're in the Marcellus Shale country, and a lot of conversation a year ago was centered on the energy sector - jobs, drilling activity, farmers cashing checks," he says. "We were talking to a lot of clients in the industrial products sector and started to have a lot of conversations about what this might mean longer-term for manufacturing. So we tried to take a data-driven approach to the question."
What are the results of this data-driven research? "We believe that the affordable, abundant shale gas that's available with technology in horizontal drilling and fracking is a game-changer for U.S. manufacturing," says McCutcheon. A report from the American Chemistry Council has similar superlatives: "Natural gas from shale is possibly the most important energy development in 50 years. It has huge potential for the United States."
Who's Feeling the Benefits?
Among other things, the PwC study scoured the filings of public companies for evidence of growth or planned expansions resulting from the gas boom. Even relatively early in the game, these documents already include numerous mentions. Some of them point to the cost savings brought about by the drop in natural gas prices. Indeed, the downward effect on natural gas prices is a goldmine for manufacturing, according to the PwC analysis. By 2025, U.S. manufacturers could be saving more than $11 billion a year on natural gas expenses.
But probably twice as many of the public company filings on the topic involve firms that expect to make more use of the various byproducts of shale gas production, or whose products are essential to the extraction of shale gas. According to Smith, there has been a significant increase in capital investments made by chemical-makers and other manufacturing industries - investments that could eventually add up to $75 billion. Gulf Coast locations and Appalachian areas are already seeing the impact, he notes.
One American Chemistry Council study focused on the projected supply response among eight natural gas-intensive manufacturing industries, and forecast an increased output of about $120 billion, which in turn would support the creation of 1.2 million direct, indirect, and induced jobs - not to mention the 1.1 million jobs that would be created by construction.
Even that could be just the beginning of the employment impact, though. Smith points to a Boston Consulting Group study suggesting that America could be in for a wave of "re-shoring," essentially the opposite of offshoring. As the cost picture improves, returning manufacturers could generate two to three million jobs.
Truth is, many industries benefit from both the lower energy and supply costs as well as the opportunity to expand production. Take the metals business. There are plenty of metal tubes and pipes and other components involved in gas drilling itself, McCutcheon notes. Beyond that, "steel work is one of the largest consumers of natural gas, so the cost savings could be a significant competitive advantage for manufacturers here," he observes. In addition, newer steel production technologies could carry the benefits a step further, including processes that substitute natural gas for coke in the steelmaking recipe.
to the Boom
The American Chemistry Council has compiled lists of developments linked to the natural gas boom. Smith says the original intent was to create a "one-pager" summary, but the list quickly grew into multiple pages (in fact, there's a page with fairly small type devoted just to chemical manufacturing developments and another full page of plastics-related projects).
Here are just a few more examples of developments that observers have linked to the natural gas boom:
- Dow Chemical plans to use shale resources along the Gulf Coast to ramp up ethylene production. Earlier this year, the company announced development of a new ethylene production plant in Freeport, Texas, and it plans to restart a Louisiana ethylene cracker and seek additional feedstocks from the Eagle Ford and Marcellus reserves. In announcing the Texas development, the company's Chairman and CEO Andrew Liveris noted, "For the first time in over a decade, U.S. natural gas prices are affordable and relatively stable, attracting new industry investments and growth, and putting us on the threshold of an American manufacturing resurgence."
- Research by the American Chemistry Council includes a long list of iron and steel expansions that can be tied to the natural gas boom in such places as Pennsylvania, Ohio, North Carolina, Minnesota, Texas, Alabama, and Arkansas.
- Nucor Steel has plans for a $750 million direct-reduced iron facility in Louisiana. Like most metals-related plants, it'll need a strong supply of natural gas, and nearby shale resources are considered likely sources.
- Last year, U.S. Steel opened an Ohio mill to make steel pipe for the drilling industry, and a French company named Vallourec & Mannesmann is doing the same.
- The Eagle Ford Shale in Texas is the catalyst behind a $1.7 billion Formosa Plastics chemical complex expansion nearby. Cracking units would produce ethylene and propylene gases for use as raw materials at on-site plastics plants.
- Old Ocean, Texas, is where Chevron Phillips plans two propylene facilities, part of the company's U.S. Gulf Coast Petrochemicals Project. Last year the company announced plans for Gulf Coast ethane cracker and ethylene derivatives facilities.
- Aither Chemicals is exploring development of an ethane cracker in West Virginia. The company is exploring the market interest for chemical feedstocks that its cracking process would produce by tapping into the Marcellus Shale.
- Bridgestone, Michelin, and Continental have South Carolina tire manufacturing developments linked to the gas boom, according to the American Chemistry Council.
Where Are the Benefits Most Powerful?
The natural gas boom is certainly reflected in Area Development's 2012 Leading Locations analysis. Many of the U.S. locations revealed by data sources to be the most prosperous are feeling the impact of fracking - from North Dakota to Texas to parts of Louisiana. Indeed, the impact has been so powerful that many of these areas barely experienced the recession and, if anything, had a surplus of job openings. As David Jenkins, vice president at engineering consultant TRC Companies, points out, there's so much demand for workers that some sites have had to build worker "camps."
The question is how far does the halo expand beyond those areas where the gas is being extracted from the ground? "It depends on the nature of the industry and how important it is to have close proximity to gas," McCutcheon says. "One of the challenges is infrastructure and the ability to transport and store the gas."
Crackers, for example, tend to be in close proximity to the source. And as David Moss of Texas-based Armada Oil observes, end-users may tap right into their producers to trim overhead costs. "Locating manufacturing facilities near the producers is smart if you negotiate direct delivery from them and have or build a pipeline for delivery," he says.
On the other hand, the boom has pushed natural gas prices down across North America, so as McCutcheon points out, "the broader effect is not necessarily going to be as geographically specific." It's no surprise, then, that chemical and plastics developments on the American Chemistry Council's project list can be found all over the North American map, not just in the neighborhood of the shale reserves.
But here's where the story gets particularly positive for the U.S. economy compared with global competitors. "The market is still very inefficient," McCutcheon says, "and that inefficiency in the market creates a competitive advantage in the United States." Three cheers for inefficiency? In this case, yes. A more efficient natural gas market would allow more global pricing, as is the case with oil. But, "natural gas is still essentially regionally priced, so an abundance of natural gas in North America will benefit prices in North America," says McCutcheon.
The price advantage is significant. Natural gas may cost five times as much in some other parts of the world, even six or seven times higher in other places. That erases or at least mitigates a lot of the competitive advantages that have driven manufacturing overseas in recent years.
The swing of the pendulum is quite noticeable when one looks into the nation's liquefied natural gas (LNG) terminals. As the PwC report points out, companies in the past have built LNG import facilities in America, under the assumption that domestic natural gas supplies would be limited. Now that they seem practically unlimited "that trend has reversed, and there is more interest in conversion to LNG export terminals," the report states.
How long will the U.S. advantage last? And aren't there opportunities to frack in other countries? "There are certainly significant shale gas reserves outside the United States, but currently the U.S. has the strategic advantage in technology and the ability to extract the gas," McCutcheon says, adding that he expects the American advantage to last for some time.
And that's why the natural gas boom is potentially amazing news in a lot more sectors than just oil and gas development. "This is a big part of a bigger story," McCutcheon says. "It is a major contributing factor to a competitive environment that could lead to a resurgence of manufacturing."