Alexander Frei, Director, Business Incentives Practice, Global Business Consulting
, Cushman & Wakefield (Q1 / Winter 2013)
You recently gave a presentation at Area Development’s Consultants Forum in Jacksonville about the “oil and gas revolution” in the United States. Can you explain that term?
Frei: I used the term “revolution” in the context of a recurring cycle of events in time. In that instance I was comparing the early oil drilling activities of the mid-nineteenth century and the Texas oil boom, also known as the “Gusher Age,” of the early 20th century to the discoveries of massive shale oil and gas reserves across many regions of the country.
When and how did the “oil and gas boom” begin?
Frei: The event that triggered the Texas Oil Boom is generally attributed to the discovery of a massive oil reserve at Spindletop near Beaumont, Texas, in 1901. Spindletop or “Gusher” became the most productive oil field in the world and the subsequent rush to discover more oil, primarily in Texas, resulted in the United States supplanting the former natural resource powerhouse, Russia, as the leading oil producer in the world.
It can be argued that a key milestone to the current oil and gas boom was an innovative process called slick-water fracturing (“fracking”) pioneered by Mitchell Energy. Fracking resulted in the first economically feasible shale fracture that took place at the Barnett Shale in north Texas in 1998. Since then natural gas from shale has become the fastest contributor to total primary energy in the United States, much like what the Spindletop oil reserve discovery and subsequent oil drilling frenzy contributed in its time.
The IEA says the United States will be the world’s top producer of oil by 2020. How is that possible?
Frei: One way to come to grips with forecasts that the United States could become the world’s top producer of oil by 2020 is to compare current domestic production levels to the leading oil producing countries in the world.
Many people are not aware that the United States is the third-largest producer of oil in the world. According to IEA statistics, in 2011 Saudi Arabia produced 11.2 million barrels per day (bpd), Russia 10.2 million bpd, and the United States followed closely with 10.1 bpd. China and Iran rank a distant 4th (4.3 million bpd) and 5th (4.2 million bpd), respectively.
Based on the aforementioned statistics, for the United States to become the world’s top producer of oil, it would need to produce an additional 1.1 million bpd. The necessary oil resources for that type of production increase are expected to come primarily from unconventional shale oil (“tight oil”) reserves discovered in North Dakota, Montana, and Texas as well as from the ongoing development of conventional offshore resources in the Gulf of Mexico.
Based on information I gathered from various sources, the production of oil from the Bakken basin (which spans through North Dakota and parts of Montana) is currently at 400,000 bpd and could reach one million bpd by 2020. The Eagle Ford basin in Texas has a current production of 100,000 bpd and could reach 450,000 bpd by 2015. Bakken and Eagle Ford production alone would thus yield an additional 950,000 bpd and, when factoring in other conventional and unconventional reserves, it is then feasible to conclude that the United States would be able to surpass Saudi Arabia as the world’s top oil producer. The former assumes that Saudi Arabia is not able to increase its production levels. In fact, a 2011 article by The Wall Street Journal concluded that United States oil production could increase by 25 percent, which equates to approximately 2 million bpd.
The U.S. is also the world’s top energy consumer. When will increased domestic oil and gas production catch up with our needs?
Frei: The United States gobbles up an astounding 95 quadrillion Btu of total annual primary energy, while it produces 73 quadrillion Btu. By comparison, China consumes 90 quadrillion Btu and produces 82 quadrillion Btu; Russia consumes 27 quadrillion Btu and produces 50 quadrillion Btu; and Saudi Arabia consumes 8 quadrillion Btu while producing 23 quadrillion Btu. The referenced energy statistics show that the United States has the largest foreign energy dependence in the world by a significant margin, i.e., 22 quadrillion Btu of total annual primary energy. Russia produces nearly two times as much total annual primary energy than it consumes, while Saudi Arabia produces nearly three times as much.
A 2012 EIA report estimates that the United States will be nearly self-sufficient in energy by 2035, which means that the U.S. will be able to generate an additional 22 quadrillion Btu of total annual primary energy based on current supply and demand statistics.
How is hydraulic fracking contributing to this increased domestic energy supply?
Frei: The technological advancements that have taken place over the last 20 years, which ultimately resulted in the establishment of fracking as an economically feasible method of accessing fossil fuels, is arguably the biggest single reason why today we are talking about the United States becoming energy independent. Specifically, fracking for shale gas could result in the United State becoming a net exporter of natural gas in the next decade.
What are the benefits of fracking and why do environmental advocates oppose it?
Frei: A clear benefit to fracking is it provides access to formerly inaccessible hydrocarbons, which essentially means that we can extract previously difficult to access resources to produce the energy needed to become less dependent, ultimately independent, on foreign energy sources.
The process of fracking involves the propagation of fractures in a rock layer as a result of the action of a pressurized fluid. The process creates conduits along which gas and petroleum from source rocks migrates to reservoir rocks where the resource is accessible for extraction. Because of the invasive nature of the fracking process, it has come under scrutiny internationally with some countries suspending or even banning it completely.
Environmental advocates oppose fracking because of risks related to, but not limited to:
- Potential of groundwater contamination
Risks to air quality during the extraction process
Migration of gases and fracking chemicals to the surface
Surface contamination from spills
There is, however, evidence that certain shale oil and gas companies are making efforts to minimize environmental problems. For example, companies are developing programs to provide state regulators with access to state-of-the-art environmental assessment technologies in collaboration with universities. They are also participating in programs like FracFocus, which is an initiative led by the Interstate Oil and Gas Compact Commission and Ground Water Protection Council under which companies disclose the chemicals they use in the fracking process.
Will there be excess domestic energy available for export?
Frei: The general consensus is that this is a feasible assumption. The export of excess natural gas is most likely to happen before the export of excess oil.
It is important to note that even though the United States currently does not have excess oil and natural gas, it certainly exports both commodities. Natural gas and oil are commodities, and the world market will determine who imports and exports the commodity and how much of it.
What will the oil and gas boom mean for the U.S. economy?
Frei: The answer to this question would likely be hotly contested in an open forum; however, I believe that it could have an overall positive impact on the U.S. economy. The main question is, how much of an impact could it have?
The oil and gas industry accounts for about 1 percent of the United States’ $15 trillion GDP so it can be argued that even the massive growth forecasts of oil and natural gas production may not swing the economic recovery/growth needle in a major way. Furthermore, the manufacturing industry employs approximately 9 percent of the domestic non-farm labor shed; thus the potential job-creation impact of cheaper energy may also not be enough to make up the job losses that have resulted due to years of offshoring and economic recessions.
I do believe, however, that growth in the oil and gas industry can become the catalyst to jump-start the economy and lead to new opportunities or re-births across all categories of industry. For example, it could lead to new foreign direct investment (FDI). The United States has generally been considered to be the most stable country in the world for FDI and becoming less dependent on foreign oil should certainly reinforce this consensus.
What specific new business opportunities are being created by the oil and gas boom?
Frei: Due to the oil and gas industry’s complex supply chain, the opportunities are significant. A direct opportunity has been the influx of oil- and gas-related business into communities that had never been a part of that industry in the past. These communities are struggling to provide the necessary housing and other support-related services; for example, some communities have had to add real estate for housing, and retail businesses have had to hire more staff to serve the new customer base. Some entry-level wages in the oil- and gas-related industry can reach up to $65,000 per year, even for workers that do not have an advanced degree.
Other select opportunities are impacting the transportation industry, heavy manufacturing, and engineering among many others. The transportation industry opportunities can be attributed to the fact that the infrastructure to collect the unconventional oil and gas over a wide region across the country is providing new opportunities for rail lines, trucking, pipelines, and barges. Cheaper energy primarily due to natural gas is helping justify investments in existing and new heavy manufacturing industries. The steel and chemicals industries are thus prime candidates for growth as they are generally large energy consumers. And engineering occupations in every aspect of the energy supply chain stand to benefit, as every industry — whether directly or indirectly tied to the oil and gas industry — will look for ways to use technological advancements to gain an edge over its competitors.
What geographic areas of the United States stand to benefit the most from new energy industry endeavors?
Frei: The areas of the United States that are experiencing direct and immediate benefits are arguably the communities that are near the thousands of wells that have sprung up over the last few years — in particular, communities near the Bakken reserve in North Dakota and Montana as well as the Eagle Ford reserves in Texas; however, there are many other communities scattered across much of the central and eastern United States that are benefiting as well.
There are also indirect and long-term benefits of the oil and gas industry that could result in a comprehensive U.S. benefit because of the expansive supply chain that links the oil and gas industry.
What challenges are still ahead for the U.S. energy industry?
Frei: This is a tough question to answer. There seems to be a huge amount of discussion about this topic in the media; advocates portray the promise of energy independence as the solution to all of the United States’ problems, while critics portray it as the end of the United States as the world’s powerhouse.
Although it is difficult to predict specific challenges for the energy industry, I would start by grouping the challenges into what I think to be four important categories for discussion: (1) geopolitical, (2) economic, (3) regulatory, and (4) environmental.
I think most people would agree with the statement that U.S. foreign policy has historically been influenced by its dependency on foreign energy, specifically, oil. The United States has led the effort of promoting security in strategic regions of the world to ensure the world’s energy supply and infrastructure remained stable. Historically, as the world’s largest consumer of energy, the United States certainly needed to be in the lead. Now that the possibility of becoming less energy-dependent and ultimately independent is feasible, how will this affect U.S. foreign policy? Will the U.S. lose interest in the Middle East? Will the U.S. be inclined to take proactive military efforts into energy resource-rich countries if they begin to self-destruct in the future? Will the U.S. lose its leverage if it is no longer the biggest buyer of energy in the world? Will the U.S. continue to provide resources to police the world’s energy supply chain?
On the economic front, the shale oil and gas discoveries are not limited to the United States. Major unconventional oil and gas reserves have been discovered all over the world; in fact, I have read reports that state China has the greatest shale gas reserves in the world. The world’s shale oil and gas reserve discoveries should theoretically translate into cheaper energy prices worldwide; after all, oil and gas are world commodities. So will countries that depend primarily on oil production as part of their GDP be forced to make up for a lower price of oil by producing more volume? How will shale impact the price of West Texas Intermediate (WTI) or Brent crude, which have been the benchmarks for investors in oil equities for decades? Cheap energy means cheap energy to manufacturing behemoth China, so would China not gain even more from this than the United States?
Next, government regulation of any kind is generally intended to protect the greater good; however, regulation often evolves into unnecessary financial or other types of barriers that impact the growth or survival of an industry. Because of the thousands of shale wells that have been put into place in the last few years, the debate of whether to change existing regulation of the industry is certainly under observation at the federal and state levels.
Finally, the potential environmental impact of shale oil and gas fracking is something that is difficult to fully understand today. My research has shown that the consensus is that the benefits seem to outweigh the negatives; however, just like there have been numerous environmental disasters associated with extracting conventional oil and gas, there will certainly be issues with extracting shale (unconventional) oil and gas in the future.
Having said that, explain the term “green culture.”
Frei: I think defining “green culture” in a way that is accepted by most people is not an easy thing to do. I think the definition would be comparable to asking someone how religious they are, i.e., do they follow the religion verbatim, draw their own interpretation, or do they only follow the things that are convenient? I think following a green culture is similar in that you could think “living off the land” is the right thing to do or recycling your paper and plastic is good enough.
To me, green culture means being aware of the short and long-term impacts that one’s everyday personal and professional life has on the environment and then making reasonable efforts to minimize said impacts.