Wednesday, February 08, 2012

"This deal here is like winning the lottery"

I always envisioned a 21st-century U.S. industrial revolution as a sustainable one -- both spurred and powered by renewable energy. Alas, we continue to suffer from short-term myopic thinking. We have opted to focus our efforts on developing technologies (and yes, jobs) that squeeze every last bit of our energy capital from the Earth. And all the while, we are jeopardizing our society's - perhaps all of humanity's (but not Earth's) - long-term viability. (GW)

Oil and Gas Boom Lifts U.S. Economy

By Russell Gold
Wall Street Journal
February 8, 2012

The Fleetwood Homes factory in Nampa, Idaho, is building more manufactured homes for oil-field workers.

NAMPA, Idaho—The staccato of nail guns echoes across a cavernous building here as workers piece together manufactured houses with easy-to-clean linoleum floors and rugged interiors for muddy oil-field workers.

There is no oil and gas production in Idaho, but that doesn't mean the U.S. energy boom has bypassed this bedroom community west of Boise. Fleetwood Homes of Idaho, a subsidiary of Cavco Industries Inc., has increased production by 25% since last fall at its Nampa factory, hiring 40 workers and adding hours for employees. It is building the extra-insulated "Dakota" model for shipment 1,000 miles east to the Bakken oil field in North Dakota.

Were it not for the new demand for oil-field housing, factory manager Jeff Chrisman says he would be handing out furloughs, not overtime. Instead, "We've been able to bring back people that we hated losing a couple of years ago," he says.

An energy boom is revving up the U.S. economy. The use of new drilling techniques to tap oil and gas in shale rocks far underground helped add about 158,500 new oil and gas jobs over the past five years, and economists think it has created even more jobs in companies supplying the energy industry and in the broader service industry. U.S. oil production is rising for the first time in decades. Natural gas has become so plentiful that prices recently plunged to a 10-year low.

The economic benefits of rising energy production are spreading far beyond the traditional oil patch, to Ohio and Pennsylvania, Nebraska and New York, North Carolina and Idaho. Truck drivers from pretty much anywhere can find work related to the surging energy business. Private-equity firms completed $24.8 billion of energy deals of all types last year, up from $8.5 billion in 2010, according to data tracker Preqin. Manufacturing plants are returning to the U.S. to take advantage of cheap natural gas, spurring major investments in petrochemical and steel production in the Gulf Coast and Midwest.

Landowners in huge swaths of the country where shale is found are raking in money for leasing their mineral rights. Consumers throughout the U.S. are paying lower bills for heating and electricity because of cheap natural gas. Even the U.S. balance of payments with other countries is improving because of the new energy economy.

"This is probably the biggest stimulus we have going," says Michael Lynch, president of Strategic Energy & Economic Research, a consultant based in Amherst, Mass. Some $145 billion will be spent drilling and completing U.S. wells this year, up from $13 billion in 2000, estimates Spears & Associates Inc., an oil-field market research firm.

Though the energy boom looks like a road to prosperity, it may be a bumpy one. Drilling is disrupting communities in ways that are still unfolding, creating concerns about the costs to local governments for things like road damage. It is also raising fears about potential water contamination, air pollution and even earthquakes from the effects of drilling thousands of new deep wells.

Skeptics warn that individual shale communities could experience an employment boom, followed by a painful bust. Rosy economic models "tell us nothing about what will happen when drilling ends," warns a May 2011 paper published by Cornell University's City and Regional Planning Department and funded in part by a foundation opposed to shale drilling.

Indeed, lower prices already have slowed new drilling for natural gas, causing jobs and investment to shrink in some communities. But energy companies have shifted their spending to shale wells that will provide oil, leading to rapid growth elsewhere. Even if gas prices stay low, overall employment is expected to continue rising, says John Larson, an economist with IHS Consulting.

Government officials are highlighting rising energy production as a bright spot in a still fragile economy. During his State of the Union speech, President Barack Obama said, "The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper." He cited an industry study finding that development of shale gas will create more than 100,000 jobs by the end of the decade. For every new job working in the oil and gas sector, another four are supported by the energy supply chain and by workers spending more money on goods and services, says Timothy Considine, an independent economist who has worked on estimating job creation in the natural resources sector.

Even state officials in New York, which has blocked shale-gas development until an environmental review is completed, say the economic boost would be considerable. "There is potentially a very significant economic upside," says Joe Martens, the state's environmental commissioner. "There's an enormous job impact."

The growth in energy exploration and production is due to the widespread use of horizontal drilling and hydraulic fracturing, or fracking. Horizontal drilling allows energy companies to extract gas and oil up to a mile away from the actual well. Meanwhile, fracking—which involves pumping millions of gallons of water, sand and chemicals to break open dense rocks and release hydrocarbons—has enabled the industry to tap into energy-rich shale formations once overlooked by petroleum geologists.

Beyond simply adding jobs, communities from Pennsylvania and Ohio to Colorado and Texas that are home to this energy boom are experiencing a new emotion: optimism. Jeff Dahl, chief executive of MTR Gaming Group Inc., which operates a casino and resort in Wheeling, W.Va., says he is seeing consumer confidence rising as landowners get leasing bonuses of thousands of dollars and companies compete for workers.

"People are beginning to believe this is a game changer for the region," says Mr. Dahl. The result is more spending on dining out and entertainment.

Exactly how much money has been flowing from energy companies into landowners' bank accounts is unknown; the Internal Revenue Service doesn't track royalties or payments for leasing land for energy exploration. But the industry says it paid out $6 billion from 2008 to 2010 just in Pennsylvania, home to much of the Marcellus Shale, a formation of gas-bearing rock.


Scott Kingsley, chief financial officer of Community Bank Systems Inc., which operates 170 bank branches in rural New York and Pennsylvania, says it has seen a 20% growth in deposits in regions where there is shale drilling, versus about 5% elsewhere. Mr. Kingsley says the bank is adding monthly wealth-management seminars to advise customers unused to a sudden influx of money.

The increase in oil and gas well drilling is boosting Nance County, Neb., a rural area west of Omaha that has traditionally produced cattle, corn and hogs.

Now the energy industry is tapping another Nance County resource: two giant sand dunes. Decades of dredging the Loup River has created these dunes, each about a mile long and 60 feet tall. Sand is a critical ingredient in fracking operations because it props open cracks in the shale, allowing oil and gas to flow out.

In 2007, Preferred Sands LLC bought a struggling sand company that had supplied glass foundries, and began to target oil-field companies instead. Now the largest private employer in the county, it has expanded the local work force to 134 from 15 and plans to add another 10 workers by midyear.

"This deal here is like winning the lottery," says Clair Jones, a member of the county board of supervisors. The only downside is that the wages paid at the sand mine have made it tougher for local companies to compete for labor, he says. "It has raised the bar for everyone."

In rural western Wisconsin, state officials are losing count of all the new sand mines popping up. "We've created way over 1,000 jobs in this industry in the last four months," says Tom Woletz, who works for the state's Department of Natural Resources.

The energy industry has discovered so much new natural gas, causing gas prices to drop 39% over the past year, that it is breathing new life into energy-intensive manufacturing such as steel and plastics.

"We think lower natural gas prices are creating a structural economic advantage for the U.S.," says Chat Reynders, chairman and chief executive of Boston-based Reynders McVeigh Capital Management. "It's a new competitive strength for U.S. manufacturers." He points out that people who purchase energy supplies for companies in Asia pay up to six times as much for natural gas as their counterparts in Texas and Louisiana.

Steelmaker Nucor Corp. is among the companies investing in new U.S. manufacturing plants to take advantage of the abundant gas. In 2004, Nucor closed a facility located along the Mississippi River between New Orleans and Baton Rouge that enriched iron for use in steel mills. The company dismantled the facility and shipped it to Trinidad, where an offshore gas field offered a low-cost, long-term supply.

Last year, Nucor began construction on a new iron upgrader, just a few hundred feet away from the old facility in St. James Parish, La. It will cost $750 million to build and create 150 permanent jobs, which the company says will pay an average of $75,000 a year.

What changed? "Shale gas allows that natural gas to be more competitive, and more competitive natural gas enabled us to build this facility in Louisiana instead of building a second facility in Trinidad," says John Ferriola, Nucor's president.

Petrochemical makers are also adding capacity because of the low-cost energy. Several companies, including Dow Chemical Co., have announced plans to either restart or build new facilities along the Gulf Coast that will churn out basic ingredients for plastic packaging and car bumpers. Royal Dutch Shell PLC has plans for a similar facility near Pittsburgh.

Other parts of the country are looking for ways to take advantage of the cheap gas. In Maine, Kennebec Valley Gas Company LLC is seeking financing to build a gas pipeline into Augusta. The $85 million pipeline, which will create an estimated 500 construction jobs, will allow companies and consumers to switch to lower-cost gas from expensive heating oil—and, backers say, knock $1,200 off the average Augusta homeowner's $4,400 winter home-heating bill.

"That is money people can put in their pocket," says Rich Silkman, a company principal.

The gas will lower fuel costs and help three local paper mills, which employ 1,700 people, stay competitive, says John Williams, head of the Maine Pulp & Paper Association.

Gas now fuels about one-quarter of U.S. electricity production, a figure expected to rise as proposed environment regulations force more coal-fired power plants to close. Last year, Siemens AG opened a $350 million facility in Charlotte, N.C., to build giant turbines that generate electricity from natural gas that has hired 700 workers so far.

Randy Zwirn, global head of Siemens's energy service business, says it made the investment because it predicts a growing demand for gas-powered electricity. "Shale provides almost an insurance, a hedge, to keep gas prices low," he says.

At Fleetwood Home's factory in Idaho, Mr. Chrisman, the plant manager, had no clue about the energy boom until he received a call from a planned 300-unit housing development in Williston, N.D. He traveled there in 2010 and saw well-paid workers sleeping in their cars in a local Wal-Mart parking lot during winter because of the lack of housing.

As the factory's pace of production began picking up last summer, Mr. Chrisman rehired workers he had let go amid the housing downturn. Shannon Smith returned to her job caulking tiles and cleaning up the houses before they are loaded onto trucks.

"In the two years I was laid off, we lost our house" and racked up a lot of credit-card debt, says Ms. Smith, a mother of two. "There was no money and nothing to do. This is chance to buy groceries again and keep paying the bills."

Though she has never seen an oil well, Ms. Smith says, "I hope it keeps coming."

—Ryan Dezember and Gregory Zuckerman contributed
to this article.


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