Posted on 01/30/2015 5:37:01 AM PST by thackney
Horizontal Drilling and Hydraulic Fracturing, represent technology developed in the 1980’s, are responsible for extracting Shale Gas and Shale Oil [Unconventional Liquid Hydrocarbons] from previously non-productive shale formations about one mile below the surface. As this technology was applied throughout the USA environmental upsets occurred (e.g. well water contamination in Weis County TX and Methane leaks in Dimrock PA. Recent peer review studies [Cornel, Stanford, Duke, Texas University, Penn State University and Ohio State University] have shown that these incidents could have been avoided by maintaining proper well integrity. State regulatory agencies now require adherence to industry standards, to ensure and monitoring well integrity while promoting reuse and recycling of production and flowback waters. The technology of Horizontal Drilling and Hydraulic Fracturing has and will improve by applying sound engineering practice. Prior articles have discussed these issues; this article focuses on the economic implications of abundant Shale Gas and Shale Oil.
Previous Economic Benefits Per IHS research, the economic contributions of unconventional oil and gas activity increased U.S. oil production by 50 percent since 2008 and has played a major role in making the country the world’s leading natural gas producer.
Nonetheless domestic production from all sources now meets 84% of total US energy demand, up 15% from the historical low in 2005. Still, petroleum and liquid fuel imports account for approximately 40% of annual oil consumption. Higher energy prices and fuel efficiency measures had helped reduce demand, but not substantially. The Energy Information Administration (EIA) predicts an import share of, at best, 25% through 2040.
Notwithstanding lack of 100% energy independence, employment related to unconventional oil and gas production in these supply chain industries totaled 524,000 jobs in 2012 and is expected to grow 45 percent to 757,000 jobs in 2025, equal to 41 percent of total direct and indirect employment supported by unconventional oil and gas value chain activity. Firms supplying goods and services to shale oil and gas producers will create more than 233,000 new jobs in the United States over the next 10 years, according to a report prepared for the Energy Equipment and Infrastructure Alliance (EEIA) by IHS Global, Inc.
IHS [energy consulting firm predicts that shale or unconventional oil natural gas (1) will increase jobs related to this industry by 0.7 MM by 2025 (2) these jobs will pay $10K > national average jobs and (3) increase revenues paid to government by $10B by 2025. Horizontal drilling and hydraulic fracturing are directly responsibility for these benefits.
Shale energy supply chain employment -- including construction contractors, construction equipment manufacturers and dealers, logistics companies, well services providers, professional service providers such as engineering and architectural firms, and providers of materials and supplies such as sand, cement, and steel pipe -- will grow by 2.9 percent annually, compared to 1.1 percent average annual growth of total U.S. employment, according to the report.
These supply chain industries will contribute more than $16 billion in government revenues in 2015 (up from $13 billion in 2012) and rise to about $23 billion in 2025. Total gross output from this group of industries is expected to grow from $145.7 billion in 2012 to $205.9 billion in 2025, contributing the equivalent of nearly one half a percent total U.S. gross output each year. Total labor income generated by employment in these industries is expected to reach nearly $60 billion in 2025, up from $41 billion in 2012. The average income per employee is estimated to be about $79,000 over the course of the study, exceeding the average annual U.S. wage of $68,000.
Furthermore, Pennsylvania is set to become the nation’s second leading natural gas producer in 2014. In 2011, it was seventh. Pittsburgh media reports that the shale gas sector now employs 46,644 people in its metropolitan area. Its drillers produced 1.5 trillion cubic feet of natural gas in the first half of this year, which will double by year-end and which is up 58 percent from a year ago.
Booming construction in the Marcellus shale play [that extends from New York to West Virginia] led to a 40 percent increase in construction jobs and pumped $5 billion into the region a new study by the Oil and Natural Gas Industry Labor-Management Committee found. Spending in construction and maintenance in the Marcellus area reached $5 billion in 2013, a 61 percent jump over the previous year. In 2013, the oil and natural gas sectors created 4,600 construction jobs in eight trades and 5,500 craft worker jobs. The report said the upward trend in job creation will continue. Since 2008, major plant capital and maintenance work in the oil, gas and indirectly related industries generated 35.8 million labor hours with about a 31 percent annual growth rate. The job growth stimulated by Marcellus projects stands in stark contrast to the nearly 54 percent drop in non-shale related oil and gas construction activity. All these benefits are directly related to Horizontal Drilling and Hydraulic Fracturing.
More jobs and improves ND, TX state revenues and GDP’s until Fall of 2015 Boosted by an oil and gas boom, North Dakota’s jobs total grew by 4.8 percent between December 2013 and November of this year, the largest increase of any state. Texas’s employment growth ranked second at 3.7 percent.
Examining employment data on a state-by-state basis, Bank of America Mellon [BoAM], also found a strong relationship between US employment growth and the production of oil and gas over the last five years. Furthermore, wage rises have been strongest in those states with increasing oil output over the same period.
Energy intensive industries like chemicals have been particular beneficiaries of the jump in shale production. But the service sector has also had a taste of the action. BoAML point out that most of the jobs waiting tables and building houses in North Dakota, the fastest growing state last year, can be traced to the boom in shale oil.
This trend is reflected in the state’s population growth as well. Although North Dakota made headlines as the “fastest growing state in the country,” yet again (still a heady thing given that North Dakota was still losing population just a few years ago), the rate of growth in population has also dropped off.
From 2012 to 2013 the growth in the state’s population was 3.9 percent. From 2013 to 2014 the growth was a much slower 2.2 percent.
Current Economic Conditions – Lower Gasoline Prices and Job Losses By the end of 2014, USA oil production has grown about 9 MM bbl/day due to horizontal drilling and hydraulic fracturing. Such domestic oil production reduces our reliance on foreign oil. From June 2005 to September 2014 oil imports declined from 10.8 MM bbl/day to 7.5 MM bbl/day while our production of oil increased by 3.5 MM bbl/day. By producing more oil than it is importing the USA is trending toward energy independence but greater an excess of world supply oil. This excess has lead to a drop of Brent Crude from it high of $100/bbl to less than $60/bbl. Until recently gasoline prices were well above $3/gal but by the end of 2014 gasoline prices had dropped to well under $3/gal. Noting that for each $10/bbl of change in crude oil prices gasoline prices drop by $0.25/gal [US Federal Reserve Bank of St. Louis MO].
Lower gasoline prices about $2.60/gal – benefit consumer and increase USA GDP by 0.5%. The national average gasoline price fell 81 straight days to $2.55 a gallon, its lowest level since October of 2009, according to American Automobile Association [AAA]. At $1.15 a gallon cheaper than its high for the year, saving U.S. households $100 a month. Lower oil prices have reduced profit margins for the Energy and Production Industry.
The Texas Railroad Commission is definitely seeing a slowdown in activity as the price of crude oil nosedives. The state agency issued 1,508 original permits to drill compared to 3,046 permits in October. The price of crude oil has fallen more than $50 a barrel since June. Fewer permits will trickle down to the oil fields where companies will likely begin cutting jobs. The Dallas Federal Reserve Bank projects Texas will lose 125,000 jobs; related to the falling price of oil by mid-2015. The Railroad Commission issued 1,376 permits for new oil and gas wells compared to 2,741 such permits in October.
Baker Hughes Inc. recently reported shutting down four of its rigs targeting crude oil in the Permian Basin region of Texas and New Mexico. Oil prices have fallen 29 percent from the year's peak causing a slowdown in drilling activity. Crude [Brent] futures were trading at about $80 a barrel."Prices in the lower $70s over a period of six months would slow" U.S. oil production, said Daniel Yergin vice chairman of Englewood, Colo.-based consulting company IHS Inc., at a conference in New York. "People have leased rigs. They have rented them for the year and so forth. But you'd start to see an impact."
Lower Gasoline Prices Could Reduce Mortgage Interest Rates Analysts at Bank of America Merrill Lynch said there’s a good chance mortgage rates could drop to as low as 3.25% --a level they said could “get housing back to affordable levels for many”—as oil prices decline. Current interest rates, which have been teetering around 4%, are too high “to allow for sustainable recovery in housing,” the analysts said. Real estate and housing industry economists have uniformly predicted that mortgage rates will increase to the neighborhood of 5% some time in 2015, but those forecasts did not take crashing oil prices into account.
The quick decline of crude oil prices could affect more than mortgage rates. Oil-producing states have created high-paying jobs, which has spurred home buying, construction of retail and office space, consumer spending, and thriving local economies. A crashing oil economy could lead to a layoffs and the impact of more unemployment in the still-thriving oil communities.
Lower Gasoline Prices Hurts those Oil Dependent Countries that support Terrorists ISIS, AL QUADA ihadist groups, including the Islamic State, al-Qaeda and its Syrian affiliate the Nusra Front and Somalia’s al-Shabab.
The drop in Brent Oil “wounds Russian and Iran who are dependent on oil income and under economic pressure, from USA and our allies, because of the former’s incursion into Ukraine and the latter’s nuclear program. Syria, dependent on its own oil revenue plus Iran’s economic support finances Hezbollah. Islamic States’ army finances itself by stealing and selling Iran oil on black market i.e. lower oil prices reduces ISSIS’s radical activities. G. F. Seib’ “For Obama, Low Oil Prices Bring Hope”; The Wall Street Journal ; Dec. 9, 2014 Iran’s oil pricing to achieve a balanced budget equals$130.70/bbl. Cheaper Oil softens the effect of Egypt’s unpopular economic cuts confronting an Islamic opposition capitalizing on these measures.
Crude Oil Prices could return to $60-80/bbl within 2016 Please refer to Gold, R., Attworth, E., and Faucon, B.; “U.S. Boom Can Stand Further Fall in Oil Prices”; The Wall Street Journal’ Oct. 30, 2014. In the three most active plays [Permian Basin, Bakken and Eagle Ford] break-even oil price is equal to or less than $60/bbl. British Petroleum’s [BP] break-even profitability cost for new projects of $80/bbl can be used as a proxy for stabilization Brent oil price during first half of 2015.
The Pipeline & Gas Journal in its Dec. 2014 issues predicts during first half of 2015 that Brent crude price will stabilize at $85/bbl and WTI will stabilize at $75/bbl. In Dec. 2014,the EIA (US Energy Information Administration) trimmed its WTI (West Texas Intermediate) crude oil price forecasts to $63 per barrel in 2015. For Brent, the EIA expects prices to average $68 per barrel in 2015. In Jan. 2015, EIA predicts that West Texas Intimidate is expected to average $54.58/bbl during 2015, but finally gain ground in 2016 with an average of $71/bbl.. In comparison for 2015 and 2016 Brent crude oil is forecasted to average $57.58/bbl and $75/bbl respectively. Citigroup estimates find that almost all US shale oil production is economic at crude prices of $70/bbl, but 40% of it becomes uneconomic at prices below $60/bbl and almost 90% of it at prices below $50/bbl. Based on these estimates there is slim margin available to absorb additional operating costs imposed by newer technologies – only those that do not raise operating costs will be acceptable.
As WTI continues to drop and stabilized during the next 2Q’s the EP firms will look at ways to save money and avoid drilling new wells.- ranging in costs from $6 – 10 MM per well. Those technologies that can reduce costs while improving operation (e.g. use less water, reduce repair costs) should succeed.
Drop in Brent Crude Oil may lead to slow-down of tight oil production and postponing new wells during 2015.
Based on technical analysis and recognizing that energy companies will generate downward earnings projections in next 2 Q's, expect Brent Crude Oil to drop to a stable level of support within next six months. Also expect to see hiatus of new Shale Oil -tight oil - wells in USA until this support or equilibrium level is reached. Wood Mac Kenzie Ltd. states “for US tight oil, our detailed breakeven price analysis shows by end-2015, such prices could lead to at least 600,000 b/d being removed from the market”. When crude oil [WTI and Brent] reach a level of support near or above break-even then production will return with additional wells being developed.
As the over leveraged smaller USA E&P firms approach or exceed their breakeven point, their leases may be sold and/or they may be merged with larger capitalized firms. This industrial consolidation is typical of a rapid growth sector and will lead to stabilization of prices and long-term growth but with fewer firms and possibly less jobs. Some OPEC members may opt not to adhere to their 11/27/14 agreement and exceed their production quota to gain more revenue. The next 2Q’s will see a consolidation in USA and stabilization of Crude Oil. In the meantime major firms, e.g. Chevron, Royal Dutch Shell, Conoco Phillips, will reduce their 2015 budget based on $62-72/bbl Brent crude.
Summary – Future Considerations Oil prices have fallen by more than 40% in 2014. Inflation expectations will be lowered further. U.S. growth should be higher longer term. Near term, contagion from the “energy bust” is underestimated by the market. The ongoing shale gas revolution in the United States, dubbed a “game changer” by many experts, is the result of a surge of innovation [horizontal drilling and hydraulic fracturing] that is extracting huge amounts of natural gas from shale deposits once thought to be inaccessible. It has reversed a decade of declining domestic gas production and brought enormous economic benefits to American consumers and businesses: natural gas prices that dropped by two-thirds within 12 months after widespread fracking began and have risen only slightly since then, hundreds of thousands of new jobs, a renaissance of investment in new manufacturing capacities, and improved energy security. The rise of shale gas has had an environmental benefit as well—greatly reduced carbon dioxide emissions, because generating electricity by burning natural gas emits less than half as much carbon dioxide as burning coal.
The US success story has stimulated the interest of numerous countries around the world. After all, shale is the most abundant form of sedimentary rock on Earth. Global energy assessments report quantities of shale gas several times that of “conventional” gas—which can be extracted with standard drilling alone. Although the extent of the US experience is unlikely to be replicated elsewhere, and US estimates of economically recoverable quantities remain a matter of debate, shale gas has the potential to become a widely accessible global fuel.
The U.S. growth momentum may pause in the fourth quarter, due to some special circumstances. The outlook for early 2015 shows some upside beyond the 2.5 percent pace. And this is despite continued slow economic growth around the world and a rise in the value of the dollar. The biggest disappointment right now is business spending on equipment which is slowing from an average pace of 11 percent over the past two quarters. But if final demand picks up as expected, business investment might also gain some momentum. One key driver of demand is continued improvement in the labor market. Job growth has been solid for the past year and the signal from the latest reading on The Conference Board Employment Trends Index™ (ETI) is that it will continue at least over the very near term. In fact, continued employment gains are likely to lead to better gains in wages in the first half of 2015. Job and income growth may provide some moderately positive momentum for the housing market. Low gasoline prices will also further support household spending. Finally, very low interest rates, at both the short and long end of the yield spectrum help consumers and businesses. The strengthening of domestic growth is intensifying pressures to increase the base interest rate, but speed and trajectory remain important questions.
In Jan. 9 2015 EIA reports that US commercial crude oil inventories increased by 5.4 MM barrels achieving the highest level of such inventories in the last 80 years. Baker Hughes’ Jan. 2015 rig count shows a reduction of operating rotary rigs from 840 to 755. EIA forecasts US crude oil production to increase from an average of 8.7 million b/d in 2014 to 9.3 million b/d in 2015 and to 9.5 million b/d in 2016.
In North Dakota in November there were only 39 new wells that reached the completion stage, but production levels were sustained. The state is producing 30 percent more oil than it was 18 months ago, less than half the amount of drilling rigs are needed to sustain production. So due to the nature and efficacy of Horizontal Drilling and Hydraulic Fracturing although less rigs are operating production increases.
In Jan. 2015, EIA predicts that West Texas Intimidate is expected to average $54 - 58/bbl during 2015, but finally gain ground in 2016 with an average of $71/bbl. In comparison for 2015 and 2016 Brent crude oil is forecasted to average $57.58/bbl and $75/bbl respectively. Citigroup estimates find that almost all US shale oil production is economic at crude prices of $70/bbl, but 40% of it becomes uneconomic at prices below $60/bbl and almost 90% of it at prices below $50/bbl. Based on these estimates there is slim margin available to absorb additional operating costs imposed by newer technologies – only those that do not raise operating costs will be acceptable.
As WTI continues to drop and stabilized during the next several months the EP firms will look at ways to save money and avoid drilling new wells.- ranging in costs from $6 – 10 MM per well. Those technologies that can reduce costs while improving operation (e.g. use less water, reduce repair costs) should succeed.
Drop in Brent Crude and WTI Oil may lead to slow-down of tight oil production and postponing new wells during 2015 also resulting in a 10-20% consolidation. But due to Horizontal Drilling and Hydraulic Fracturing the USA will continue to produce crude oil and gas from shale, stabilizing the price of crude oil and the growth of the US E&P firms. Per EIA Drilling activity is expected to increase in 2016 and US production should rise to its second highest daily output level since record production was set in 1970. Using EIA oil price predictions WTI and Brent crude oil will stabilize to $71 – 75 per barrel within 2016. Horizontal drilling and hydraulic fracturing are more cost-effective than traditional vertical drilling because just one well is required – as opposed to drilling several vertical wells to recover the unconventional shale oil and gas. Per D, Yergin [Chairman of HIS Consulting] “ by 2020 shale gas and light oil will be supporting over 3 million jobs and generating $125 billion in additional government revenue.”
Like the Maytag repairman over here.
Great article. Yergin for DOE Sec.
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