15/11/13

American industry and fracking: From sunset to new dawn | The Economist

American industry and fracking

From sunset to new dawn

Capitalists, not just greens, are now questioning how significant the benefits of
shale gas and oil will be for America. The new sceptics are missing the big picture

Nov 16th 2013 | NEW YORK | From the print edition

IN A new book,
The Frackers,
Gregory Zuckerman
says of the late
George Mitchell, a
pioneer of the
technique of

Fracking the midnight oil

hydraulic fracturing
to tap unconventional reserves of oil and gas, that his impact eventually might even
approach that of Henry Ford and Alexander Graham Bell. Y et of late doubters have been
making themselves heard too. In October Peter Voser said that one of his biggest regrets as
boss of Shell is the $24 billion his firm has invested in North Americas shale beds. This
summer, the firm took a big writedown on this investment and slashed its production
targets. Also last month BHP Billiton, which spent around $20 billion in 2011 in a bet on
shale, said it would auction half of its oil and gas acreage in Texas and New Mexico.
It is not just the biggest energy companies that have turned sceptical on shale. More than a
dozen chief executives of smaller firms specialising in unconventional gas and oil have lost
their jobs this year, as the firms troubles have made them the targets of activist investors.
Adding to the general air of negativity, last month economists at Goldman Sachs put out a
report arguing that even at its current cheap price, shale gas would provide only a modest
boost to the American economy as a whole. It argued that the energy industry is itself a
fairly small part of the economy and creates relatively few jobs; and it was doubtful about
the pace of innovation in fracking, and the extent to which cheap energy will prompt other
industries to invest more.
No one disputes that the new technology has transformed Americas prospects as a
hydrocarbons producer. Gas output has risen by one-third since its most recent trough in
2005, and oil production has risen by 30% since its recent low in 2008 (see chart). This year
www.economist.com/news/business/21589870-capitalists-not-just-greens-are-now-questioning-how-significant-benefits-shale-gas-and/print

1/5

15/11/13

American industry and fracking: From sunset to new dawn | The Economist

America is expected to overtake Russia and Saudi Arabia to become the worlds largest
producer of oil and gas combined. Jobs in energy have nearly doubled in America since
2005; since the end of the recent recession they have grown at a faster rate than in any other
big industry. North Dakota, which sits on the huge Bakken oil and gas field (pictured), now
boasts an unemployment rate of just 3%, the lowest among all the states.

Some pessimists worry about the speed at which shale-bed wells run dry. David Hughes, a
geologist at the Post Carbon Institute, a greenish think-tank, says the combination of gass
low price and the heavy spending needed to keep it flowing casts doubt on whether the
exploitable reserves of unconventional oil and gas are as big as they are fracked up to be.
Optimists argue that the fast decline rate has come as no surprise, and that the technology,
and the industrys experience in deploying it efficiently, are improving fast enough to
mitigate much of the effect of weak prices. Each stage of fracking is significantly evolving,
says Rick Grafton, an oil and gas veteran at G2, an investment firm. Y et he concedes that
while gas prices remain at historic lows, it will remain unattractive to invest in wells that
produce only gasas opposed to ones that produce oil or a mix of gas and natural-gas
www.economist.com/news/business/21589870-capitalists-not-just-greens-are-now-questioning-how-significant-benefits-shale-gas-and/print

2/5

15/11/13

American industry and fracking: From sunset to new dawn | The Economist

liquids (NGLs) such as butane and propane.

As new gas has flooded onto the American market since 2008, its price has fallen by twothirds to less than $4 per million British thermal units (BTU). The average price needed to
cover all the costs over a wells life cycle is around $6, says Mr Grafton. He expects it to stay
below that level for three to five years, if not longer.
As a result, gas exploration in America is increasingly being determined by the prices of oil
and NGLs. If they are high enough, energy firms will drill for these, treating the gas as a byproduct. In North Dakota, the infrastructure to get much of this gas to market affordably is
lacking, so the gas is burned, generating an intense light that can be seen at night from
space. Roughly speaking, fracking for oil and NGLs is profitable when oil is trading on
American exchanges at above $80 a barrel, as it has mostly done for the past four years. As
long as energy firms expect this to continue, there will be lots of drilling, and thus lots of gas
as well as oil and NGLs.
The market consensus is that the problems of Shell, BHP Billiton and some other big firms
mostly reflect a combination of coming late to the party, paying top dollar for drilling sites
and choosing some that turned out less productive than expected. Firms that made better,
timelier choices are still doing well. Until Twitter went public earlier this month, the years
hottest American IPO was of shares in Antero Resources, whose wells in the Appalachians
are expected to increase their output by 76% in 2014 and 47% the year after.
There is a danger that somethingan unexpected slide in oil prices, saymight make
investors turn cold on shale firms. Many of them are master limited partnerships or similar
corporate structures that enjoy tax advantages but in exchange must return their entire
profits to investors each year. That means the firms, which require vast amounts of capital,
must constantly raise it afresh, making them exceptionally vulnerable to sentiment among
investors. However, no such freeze is in sight.
Renaissance men
As for the effects of fracking on the broader American economy, most of the forecasts that
are bullish on this question assume that gas prices will remain at historic lows. I cant see
any scenario, other than a widespread ban on drilling, that would push prices higher than
$6, says Scott Nyquist, one of the authors of a report by the McKinsey Global Institute
which argues that unconventional oil and gas are set to provide a strong lift to American
business.
The report reckons that between now and 2020, shale gas and oil will add $380 billion-690
billion, or two to four percentage points, to Americas annual GDP, creating 1.7m permanent
jobs in the process. Americas New Energy Future, a recent report by IHS, another research
outfit, talks of a manufacturing Renaissance and predicts a $533 billion boost to GDP by
www.economist.com/news/business/21589870-capitalists-not-just-greens-are-now-questioning-how-significant-benefits-shale-gas-and/print

3/5

15/11/13

American industry and fracking: From sunset to new dawn | The Economist

2025, creating around 3.9m jobs.

At first, say both McKinsey and IHS, a lot of the action will be in the energy business itself:
not just in drilling and pipelines but in roads and ports, and all the other activities needed to
produce and distribute the fuels. Electricity production is being transformed too, with gasfired power stations being built to replace dirtier coal-fired ones. This has contributed to a
10% fall in the greenhouse-gas emissions from American power generation between 2010
and 2012. IHS reckons gas-fired stations will be providing 33% of Americas electricity in
2020, compared with just 21% in 2008.
In the next few years the benefits of fracking will become more visible in other industries,
especially those, such as chemicals firms, that consume a lot of energy or use raw materials
derived from hydrocarbons. European industry pays around three times as much for its gas
as its American counterpart, and Japanese firms pay more than four times as much. A
report this week by the International Energy Agency, a think-tank backed by energyconsuming rich countries, predicts that by 2015 Americas energy-intensive firms will have a
cost advantage of 5-25% over rivals in other developed countries.
Since 2011, 128 new energy-hungry industrial plants have been announced in the Gulf Coast
region alone, with a combined value of $114 billion. Many are in petrochemicals. Methanex
recently started advertising jobs in a methanol plant it has dismantled and shipped from
Chile to Louisiana. A second plant will start up in 2016. In October Y ara, a Norwegian
fertiliser manufacturer, said it will join forces with BASF of Germany to build a world scale
ammonia plant on the Gulf Coast.
The aluminium, iron and steel industries are also taking advantage of cheap gas supplies.
Recently 19 new or expanded plants have been announced by firms including US Steel, Alcoa
and ArcelorMittal. Nucor is rebuilding on a site in Louisiana, whose original plant was
dismantled and shipped to Trinidad nearly a decade ago, when gas prices were rising in
America. Makers of such things as cement and tyres are heavy consumers of energy, too,
and thus stand to benefit from cheap gas.
Compressed or
liquefied gas can
also be used to
power motor
vehicles. American
firms with big
commercial fleets,

Fracking the midnight oil

such as FedEx and

AT&T, are looking to cut costs by switching to gas power. GM, Ford and Chrysler have
launched pickup trucks that can switch between petrol and gas.
www.economist.com/news/business/21589870-capitalists-not-just-greens-are-now-questioning-how-significant-benefits-shale-gas-and/print

4/5

15/11/13

American industry and fracking: From sunset to new dawn | The Economist

The growing supply of cheap shale gas has led to a wave of investment in converting
terminals that were built to handle imports of gas into ones that can export it. Some, such as
Andrew Liveris, the boss of Dow, a chemicals giant, worry that if too much of Americas gas
is exported, prices will rise, robbing it of its competitive advantage. However, the new export
facilities will come on stream slowly, especially if the government keeps dragging its feet over
granting export licences. And even if all the currently planned facilities are opened, which
would make America the worlds largest gas exporter, gas prices in America would still be
some way below the world priceprobably no more than $6 per BTU, says McKinsey. So
America should be able to enjoy a boost to its trade balance while still preserving its
manufacturers advantage over foreign rivals.
Look on the bright side
The argument over the impact on the job market is essentially over whether the glass is halffull or half-empty. The most that Goldman concedes in its sceptical report is that the longterm decline in jobs in energy-intensive industries has merely bottomed out. But even this
would be worth celebrating. IHS is not the only forecaster to be much more cheerful. It
predicts that unconventional energy, as well as providing jobs in its own right, will be
supporting 400,000 jobs in manufacturing in 2015 and 500,000 jobs, or 4.2% of total
manufacturing employment, in 2025.
The spending-power of those new workers, and the cut in businesses and households energy
bills, should provide a broad boost to the economy. Goldman again puts a cautious spin on
the numbers: shale energys overall effects will add just a few tenths of a percentage point
to the annual growth rate, says Jan Hatzius, its chief economist. But although this sounds
modest, if sustained for a decade or more, it would add up to something big. Not quite a
revolution, perhaps, but a significant turnaround in Americas prospects.

From the print edition: Business

www.economist.com/news/business/21589870-capitalists-not-just-greens-are-now-questioning-how-significant-benefits-shale-gas-and/print

5/5