The Economics and Politics of Domestic Energy Production Growth

The good news is America finally has a national energy policy we can believe in.  Even better news is that this national energy policy is being defined, shaped and driven by the markets and the ingenuity of investors, landowners and business people all across America.  The challenge we face is keeping our government out of the way and out of our pockets so that this economic revival and its multiplying economic effect and the low cost energy it is producing can become sustainable.

There are at least 19 geographic basins identified by USGS and the Department of Energy as sources of shale gas. Today significant natural gas shale production is taking place in the Barnett Shale in the Fort Worth Basin, Lewis Shale in the San Juan Basin, Antrim Shale in the Michigan Basin, Marcellus Shale and Utica Shale in the Appalachian Basin, and New Albany Shale in the Illinois Basin.

“The U.S. Energy Information Administration‘s Annual Energy Outlook 2012 (Early Release) estimates that the United States has 2,214 trillion cubic feet (Tcf) of technically recoverable domestic natural gas resources as of January 1, 2010. Natural gas from proven and unproven shale resources accounts for 542 Tcf of this resource estimate. Many shale formations, especially the Marcellus, are so large that only small portions of the entire formations have been intensively production-tested. Consequently, the estimate of technically recoverable resources is highly uncertain, and is regularly updated as more information is gained through drilling and production. At the 2010 rate of U.S. consumption (about 24.1 Tcf per year), 2,214 Tcf of natural gas is enough to supply over 90 years of use. Although the estimate of the shale gas resource base is lower than in the prior edition of the Outlook, shale gas production estimates increased between the 2011 and 2012 Outlooks, driven by lower drilling costs and continued drilling in shale plays with high concentrations of natural gas liquids and crude oil, which have a higher value in energy equivalent terms than dry natural gas.”

Because shale gas was difficult to economically produce it was largely ignored in favor of easier to get conventional sources. The potential of the Barnett Shale was studied in 1981 but was not economically viable until 1995 when hydraulic fracturing technology was used to produce gas at profitably. When five of the initial six wells started producing more than two million cubic feet of gas per day horizontal drilling and fracking was widely applied and today the Barnett Shale alone two percent of US daily gas consumption.

Shale Oil & Gas Development is an Equal Opportunity Potential for Growth across the US.

A recent Wells Fargo Economics report on the improving fortunes of Pennsylvania from the growth of shale gas development in the Keystone State provides a useful case study in what is happening in other plays all across America.  Pennsylvania sits atop the Marcellus Shale.  The report contrasts how in the 2003-2007 economic expansion Pennsylvania’s job growth lagged the national average while the more recent experience shows that the state added 130,000 jobs since it bottomed out in February 2010 and it now back to the national average but that at current trends it will add 570,000 jobs by 2020.  More on point, the natural resources sector accounts for only one percent of Pennsylvania jobs but it has seen eight percent jobs growth based upon most recently available data performing well above its base position.

A study done by The Ohio State University on the job creating implications of shale gas development in Ohio spends a lot of time discussing the perils of depending upon resource economics.  The academic study warns industry sponsored studies tend to overestimate the positive impacts and underestimate the negative impacts of resource economics.  Nonetheless, it concludes that Ohio is likely to produce 20,000 additional jobs over the next four years from shale gas development in the state.

A good news story is coming out of the Eagle Ford play in Texas.  Since the 2008 discovery of Hawkville Field, the Eagle Ford Shale has grown to represent about $1.3 billion of gross state product impact in Texas with 12,601 full-time jobs created, and $2.9 billion in total revenues produced in the play. This produced $60.9 million in new Texas State revenues and $47.6 million in local tax revenues. Under moderate assumptions, by 2020 (in 2010 dollars), the Eagle Ford Shale is expected to account for close to $11.6 billion in gross state product, $21.6 billion in total economic output (or revenues) impact, and support close to 67,971 full-time jobs in the area. This will add close to $1.2 billion in State’s revenues and more than $450.6 million in local government revenues.

The fight over the Keystone XL Pipeline has turned into a referendum of sorts over the domestic energy production policy.  Keystone was originally designed to bring oil sands from Alberta to the Gulf Coast of the US for refining and storage in preparation for export.  But the growth of shale oil production in the Bakken Play is being held up by the lack of adequate shipping capacity to bring that oil to market.  As a result, the pipeline route was modified to include an intake “onramp” facility in Baker, Montana to enable as much as 300,000 barrels a day of Bakken oil to flow south to the Gulf coast.  The growth in the Bakken play and its transformation economic impact on the North Dakota economy where unemployment rates are below 4% and housing pricing are rising is reinforced by the reality that North Dakota is poised to pass California as one of the largest oil producing states in the US.  The rejection of the Federal permit for the Keystone XL pipeline forces the developer, TransCanada, to build the pipeline in segments within the US where it is regulated by the states it passes through rather than cross the US Canadian border as planned requiring a Federal permit.

SOURCE: OXY

And then there is California, the third largest oil producing state but one of the biggest opponents of offshore drilling and reluctant participant in the shale oil and gas boom—even though the Golden State is out of gold, desperate for job creation and facing large state budget deficits as far as the eye can see. The Monterey Shale has an estimated 15.4 billion barrels of technically recoverable oil and perhaps as much as 400 billion barrels of potential oil.  While oil production has been continuous in California since 1900 the state turned against new oil drilling after the San Barbara oil spill in the 1960’s and not even the largest global oil producers want to hassle the California regulatory process.  So the Monterey Shale will remain largest undeveloped for the foreseeable future.

America’s emerging domestic energy production policy is forcing us to rationalize our conflicting policies and forcing our politicians to face reality.  Fortunately, most of the states see the benefits of domestic energy growth and are focused on developing their own potential even if California, New York and the Federal Government do not.