Julie M. Carey
Director and Principal, Navigant Economics (Washington, DC)
Christopher L. Ring
Managing Consultant, Navigant Economics (Washington, DC)
Recent recognition of the vast extent of shale oil and gas reserves combined with the development of cost-effective extraction using hydraulic fracturing has catapulted these fuels’ domestic production. This abrupt shift is reshaping the energy industry in ways that would have been unexpected just a few years ago, from the geographic location of the newfound resources to the sheer volume levels available from domestic sources and the impact that will have on many sectors of the economy.
Traveling this unconventional path is creating an economic tailwind to propel an otherwise sluggish economy. Yet, five years ago, no one would have believed that many if not all of the following would come true:
The impact of unconventional oil and gas is permeating throughout the economy. Unconventional oil production growth has been dramatic, in production areas such as the Bakken and Eagle Ford regions as well as the Alberta oil sands region, though this strong growth has not materially impacted global crude oil prices. The sharp increase in U.S. natural gas production has been sufficient to substantially reduce natural gas prices within North American. The development of these unconventional natural gas and oil resources has started an investment boom in natural gas and oil extraction and transportation as well as natural gas processing plants. Furthermore, the substantially expanded U.S. natural gas supply at stable, relatively low prices (e.g., $5 per MCF or less) is stimulating investment in natural gas-using equipment within downstream sectors including manufacturing, transportation and utilities (electricity generators). These investments are creating jobs, increasing wage income, stimulating consumer spending, and – in turn, stimulating additional investment and job creation – and will only intensify going forward.
Unconventional Oil’s Economic Emergence
Government agencies forecast domestic crude oil production in 2013 to reach its the highest annual level of production since the 1990s. This growth in production is driven by drilling activity, particularly in onshore tight oil formations, such as the Bakken region in North Dakota and the Eagle Ford region in Texas. As a result of strong increases in domestic oil production, the Energy Information Administration (“EIA”) expects that the total net import share of U.S. oil consumption will decline from a peak of more than 60 percent in 2005 to 40 percent in 2013. North Dakota crude oil production in the Bakken region has more than quadrupled since 2007. Figure 1 shows a consensus expectation of extraordinary growth in oil production in the next few years. In addition, crude oil production has increased in the Texas-New Mexico Permian Basin Area by 13 percent in the last year ending May 2012, and some expect production to double in the next five to seven years.
Figure 1 
Note: “Other” includes Permian Basin.
Burgeoning shale oil production is creating significant economic impacts. Unemployment (3.3 percent) and home foreclosures (1 in every 63,500 homes) in the Bakken region are the lowest in the country, and state tax revenues from oil and gas production have grown exponentially from approximately $100 million in 2005 to $1 billion for fiscal 2011. In addition, capital investments associated with this activity have and will continue to benefit local economies within the production area, where companies often hire workers to manufacture, install and operate production-related equipment.
Unconventional oil production is expected to grow significantly enough to revitalize declining crude oil production areas and provide a stable domestic supply of light sweet crude oil – extending the economic life of U.S. refineries requiring crude oil. For example, Sunoco’s Philadelphia refinery will continue operating using low-cost Bakken crude oil delivered by rail as feedstock for the refinery and expand its business opportunities with low cost natural gas from the Marcellus Shale region. In addition, shale oil production will reduce dependence on crude oil imports while generating substantial investment and jobs in crude oil production and pipelines. The development of shale oil resources is occurring in production areas which require new infrastructure to deliver the product to market. For example, the dramatic increase in crude oil production that has occurred in recent years in the Bakken region will require new crude oil pipeline capacity extending from the Bakken area to markets on the U.S. Gulf Coast, East Coast and/or West Coast. As a result, numerous pipeline solutions have been proposed, including the reversal of the Seaway pipeline, a new Oneok Partners pipeline that would deliver 200,000 barrels per day (200 MBD) of Bakken crude oil to Cushing when it opens in 2015, and a U.S.-only segment of the proposed Keystone XL pipeline.
While numerous pipeline projects are underway, capacity additions are slow to emerge, and as such, alternative delivery modes such as rail transportation are being utilized both as stand-alone delivery methods and in concert with barge transportation. Rail loading capacity levels in the U.S. Bakken area are expected to increase from 130 MBD at the end of 2010 to an estimated 825 MBD by year-end 2013. Takeaway capacity additions have come in the form of new transloading facilities as well as incremental capacity additions at existing transload facilities. The quick build out of rail loading/unloading capacity for crude oil rail movements (and reliance on extensive and scalable existing rail networks) enabled rail exports of Bakken crude oil from North Dakota to quadruple in approximately one year, with an increase from 50 MBD in the spring of 2011 to 225 MBD in the spring of 2012.
Unconventional Gas’s Economic Emergence
Production growth in shale gas from U.S. sources is expected to be significant. The EIA’s 2012 Annual Energy Outlook projects that the share of shale gas as a part of total U.S. natural gas production will increase from a scant 4 percent in 2005 to 34 percent and 49 percent by 2015 and 2035, respectively. Large production increases have translated into low natural gas prices—and the expectation of sustained low prices in the future. Interestingly, while the number of rigs drilling for natural gas is declining, production levels continue to rise dramatically as a result of improved productivity from individual rigs. Production levels will increase to eliminate imports and generate exports through the utilization of liquefied natural gas facilities originally built to satisfy import demand. Increased unconventional gas production will also spur growth in energy intensive sectors of the U.S. economy such as manufacturing, transportation, and utilities (electricity generation)— ultimately generating substantial investment and jobs in natural gas production, processing plants, pipelines and other natural gas-related facilities.
Economic activity associated with shale gas production is increasing. Investments have, and will continue to benefit local economies within the production areas as companies hire workers to manufacture, install and operate production-related equipment. Suppliers of shale gas-related production equipment have announced major investments in the U.S., including Vallourec’s $650 million plant for steel pipes in Ohio. In addition, major capital investments (which are expected in the natural gas industry as well as in downstream and other related industries), will cause a ripple effect through the various sectors of the U.S. economy that touch the energy sector. Some industry analysts estimate that nearly $2 trillion in shale gas capital investments will be made between 2010 and 2035, and that the first wave of announcements related to shale gas-related capital investment is only just beginning. Similar to unconventional oil, a factor driving large capacity investments is the geographical location of unconventional gas resources, which tend to be either in new production areas or in areas that do not currently have the infrastructure needed to move products in large volumes. As a result, new pipeline construction, including natural gas liquids pipeline construction, is expected to be strong, including in the Marcellus shale gas region (extending from OH to eastern states of PA, WV, NY and MD). This area had historically imported natural gas to meet consumption needs, but it now has an abundance of local shale gas production. The region’s close proximity to high-demand U.S. East Coast markets facilitates quick delivery of shale gas to these areas. Plans have been announced to build pipelines to support the Marcellus region, some of which dramatically change traditional delivery patterns.
The abundance of unconventional gas will also facilitate other shale gas-related investments such as gas processing plants and the conversion of liquefied-natural-gas (“LNG”) facilities in order to export fuel. Numerous new gas processing plants near production areas are under consideration or have opened recently. For example, Enterprise Products Partners recently began operations at a new Eagle Ford-region shale gas processing plant designed to process up to 300 million cubic feet/day of natural gas and extract up to 37,000 barrels/day of natural gas liquids. In addition, U.S. natural gas resources are ample and clearly vast enough to support the creation and ongoing operation of a domestic LNG export industry, which will help stabilize U.S natural gas prices. By 2020, more than 7 billion cubic feet/day of U.S. LNG export capability will come online. Investments are flowing, as demonstrated by Cheniere Energy LNG’s recent announcement that it will receive approximately $3.4 billion in financing for what may be the first LNG export facility in the continental U.S.
Downstream sectors of the U.S. economy (such as manufacturing, transportation, and electricity generation), which rely on natural gas, are benefitting from a stable supply of relatively low priced natural gas—which is helping to drive the return of energy-intensive manufacturing in the U.S. At the heart of this previously dormant industry’s turnaround are reduced feedstock and energy costs that could save U.S. manufacturers as much as $11.6 billion annually through 2025. In addition, manufacturers of chemicals, metals and industrial products have experienced significant demand growth due to unconventional gas development. And, as a result, new investment is flowing into the manufacturing sector of the U.S. economy. For example, existing petro-chemical facilities have reopened and new ones are being built. As part of a $4 billion investment effort, Dow Chemical Co. will build a $1.7 billion ethylene plant (a key plastics ingredient made from natural gas liquids). In addition, approximately one dozen additional Texas chemical plants are moving forward with new projects.
The transportation and electricity sectors of our economy will benefit from unconventional gas development. Within the transportation sector of the U.S. economy, only a small fraction of trucks and buses currently use natural gas (directly or in liquefied form). IHS CERA estimates that direct vehicle use of natural gas has the potential grow the current small base to just under 1 Bcf per day in the next 25 years and could move beyond bus, truck and car fleets. Evidence of such efforts is beginning to emerge. Shell is currently considering construction of a $10 billion gas-to-liquids plant in Louisiana. General Electric plans to develop a low cost device – less than $500 retail – to rapidly refuel natural gas-powered cars at home by attaching to domestic natural gas lines in order to compress gas and refuel a tank in less than an hour. In the electricity sector, relatively low forecasts of natural gas prices, combined with environmental regulations, will likely lead to a substantial number of coal-fired plants being retired and subsequently replaced by natural gas-fired generation plants. To date, 53 gigawatts (GW) of coal-fired-unit retirements have been publicly announced (out of the 318 GWs in operation during 2010). Assuming the estimated cost to construct one GW of efficient combined-cycle gas generation is $1.25 billion, replacing 60 GW of coal-fired generation capacity with natural gas fired generation capacity will require $75 billion in investment.
According to one recent study, the benefits of increased domestic natural gas and oil production are quickly approaching $1 billion a day, and may have a significant impact on keeping the U.S. from another recession. The benefits from the unconventional gas and oil revolution, however, have only just begun to ripple through the U.S. economy. Seemingly every week, the industry press reports new proposed shale gas-related investments totaling billions of dollars. The momentum is still building and many believe a tipping point will be reached such that the shale gas investment flood gates will open and massive levels of investment will flow. Ultimately, the economic outlook points toward a dominant share of the U.S. gas supply for shale gas, sustained lower domestic natural gas prices, very large investments in natural gas infrastructure and related industries, and continued job creation. The development of unconventional oil resources will also create significant economic benefits. In short, the pervasive impact of unconventional gas and oil are transformational changes for the U.S. economy.
 EIA reported that domestic crude oil achieved 5.67 million bbl/d in 2011, and forecast 6.32 and 6.76 million bbl/d in 2012 and 2013, respectively. Short‐Term Energy Outlook, EIA, June 2012, page 6. http://220.127.116.11/forecasts/steo/pdf/steo_full.pdf.
 “Bakken Achievements Meet Infrastructure Constraints,” IPAA, http://oilindependents.org/bakken-achievements-meet-infrastructure-constraints/.
 “Technology, high rig count has crude gushing from Permian oil fields,” July 5, 2012, Mella McEwen, http://www.mywesttexas.com/business/oil/article_c08ee505-b35c-5375-990e-2529fe591af2.html.
 “Texas oil production is making a comeback,” Jim Landers, The Dallas Morning News, February 27, 2012, http://pbpa.info/2012/02/27/texas-oil-production-is-making-a-comeback/.
 “Energy Carrying America”, Global Energy Week, BOA/Merrill Lynch, July 6, 2012, page 6.
 “Amid rising foreclosure rate, some homeowners have success stories People rally to stop a bank from evicting a couple from their home in the Southgate suburb of Detroit in January.” (CNS/Jim West) By Mark Pattison, Catholic News Service. February 24, 2012. http://www.catholicnews.com/data/stories/cns/1200765.htm.
 “Bakken Achievements Meet Infrastructure Constraints.” http://oilindependents.org/bakken-achievements-meet-infrastructure-constraints/.
 “Carlyle, Sunoco Agree to Joint Venture for Refinery,” Jim Polson, Bloomberg, July 02, 2012. http://mobile.bloomberg.com/news/2012-07-02/carlyle-sunoco-agree-to-joint-venture-for-refinery.
 “New Crudes, New Markets,” Platts, February 2012, page 10.
 “Crude Oil Forecast, Markets & Pipelines”, CAPPs, June 2012, pp 28-30.
 EIA 2012 Annual Energy Outlook, page 93.
 “Hydraulic Fracturing and U.S. Shale Gas Supply Development and Usage,” Richard G. Smead, Navigant Consulting, 2012, pp. 10-11.
 “White House Report Investing in America: Building an Economy That Lasts,” January 2012. http://blog.newsok.com/politics/files/2012/01/investing_in_america_report_final1.pdf.
 “The Economic and Employment Contributions of Shale Gas in the United States,” IHS Global Insight, December 2011.
 Some estimates projecting an increase from the current production level of 4 billion cubic feet/day to 10 billion cubic feet/day within the next five years. “An Outlook for Marcellus Shale Midstream and Pipeline Companies,” July 11, 2012, Market Watch, http://www.marketwatch.com/story/an-outlook-for-marcellus-shale-midstream-and-pipeline-companies-2012-07-11.
 For example, UGI Energy Services Inc. and Inergy Midstream have partnered to build a $1 billion pipeline that will to bring Marcellus shale gas through the mid-Atlantic region by 2015. http://www.centralpennbusiness.com/article/20120301/CPBJ01/120309984/UGI-Energy-Services-to-partner-on-$1B-Marcellus-pipeline. Plans to export Marcellus shale gas to the U.S. Gulf Coast area are in also the works. http://247wallst.com/2012/07/11/an-outlook-for-marcellus-shale-midstream-and-pipeline-companies/.
 “Keystone 2.0? Company Announces Plans For PA-To-Texas Marcellus Pipeline,” January 5, 2012. http://stateimpact.npr.org/pennsylvania/2012/01/05/keystone-2-0-company-announces-plans-for-pa-to-texas-marcellus-pipeline/.
 “Enterprise adds new natural gas processing plant in Eagle Ford,” FuelFix, May 7, 2012. http://fuelfix.com/blog/2012/05/07/enterprise-adds-new-natural-gas-processing-plant-in-eagle-ford/. In addition, Atlas Pipeline Partners LP brought its 60 MMcfd cryogenic gas processing plant online at Velma, OK, in order to provide gas gathering and processing services for Woodford shale gas. Atlas Pipeline brings Woodford gas processing online, June 27, 2012, Oil and Gas Journal. http://www.ogj.com/articles/2012/06/atlas-pipeline-brings-woodford-gas-processing-online.html. Meanwhile, Houston-based Plains All American Pipeline announced the development of a new processing plant. “New gas processing plant planned near Ross”, January 28, 2012, The N.D. Capital and Beyond, http://northdakota.areavoices.com/2012/01/28/new-gas-processing-plant-planned-near-ross/.
 “Cheniere Energy LNG announced that it will receive approximately $3.4 billion,” World Oil, July 13, 2012. http://www.worldoil.com/Cheniere_receives_commitment_for_Sabine_Pass.html.
 “Study: Shale Gas Will Boost U.S. Manufacturing,” Energy Blog Tomorrow, December 14, 2011.
 “Dow to Build Ethylene Plant in Texas on Cheap Gas Prices,” Jack Kaskey, Bloomberg, April 19, 2012. http://www.bloomberg.com/news/2012-04-19/dow-to-build-ethylene-plant-in-texas-on-cheap-gas-prices.html.
 “Texas’ Petrochemical Boom Fuels Hopes and Concerns,” July 15, 2012, Texas Tribune.
 “The Economic and Employment Contributions of Shale Gas in the United States,” Prepared for: America’s Natural Gas Alliance Submitted by: IHS Global Insight (USA) Inc. http://anga.us/media/235626/shale-gas-economic-impact-dec-2011.pdf. http://dialogue.usaee.org/images/stories/v20n3/publicity%20ak%20sofr%2012-0624%2002231a%20monaco.jpg
 “Shell Considers Building Natural Gas to Diesel Fuel Plant in Louisiana,” Duane Nichols, April 11, 2012. http://www.frackcheckwv.net/2012/04/11/shell-considers-building-natural-gas-to-diesel-fuel-plant-in-louisiana/.
 “GE to develop in-home natural gas fueling station,” PennEnergy, Dorothy Davis, July 19, 2012.
 “EEI Comments on Standards of performance for greenhouse gas emissions for new stationary sources electric utility generating units,” Docket Nos. EPA-HQ-OAR-2011-0660; FRL-9654-7, 6/25/12. http://www.eei.org/whatwedo/PublicPolicyAdvocacy/TFB%20Documents/120625KinsmanEpaGhgEmissionsNsps.pdf.
 The study was completed by BOA/Merrill Lynch and captures the natural gas advantage of the US economy relative to Europe or East Asia, the growing revenues from increased exports of fuels, and the reduced crude oil import bill. “Domestic energy supplies boost U.S. economy,” USA Today, July 12, 2012. http://www.usatoday.com/money/industries/energy/story/2012-07-11/natural-gas-finds-lower-energy-costs/56157080/1 “Energy Carrying America”, Global Energy Week, BOA/Merrill Lynch, July 6, 2012, page 6.
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