Cheap domestic energy is driving US economy

July 11, 2013
Guess what? The US manufacturing industry that has been proclaimed dead by economists, analysts, and editorial writers for decades is making a comeback.

Guess what? The US manufacturing industry that has been proclaimed dead by economists, analysts, and editorial writers for decades is making a comeback. And the domestic energy industry can claim partial credit for this amazing turnaround.

The BoyarMiller law firm recently held a conference in Houston that examined this dramatic reversal and the impact that abundant, low-priced natural gas has had on the manufacturing sector. One takeaway from the event is that while investors are injecting more capital into energy, particularly the oil and gas business, the lack of a sensible long-term energy policy and fragile global economies elsewhere continue to have an effect on investor confidence.

"The energy industry is a significant driver for Houston's growth and an important part of our practice," said Bill Boyar, the law firm's founder and former chairman. "We host the energy forum each year providing current trends and developments to help our clients stay ahead of the curve and make smart, informed business decisions."

One of the speakers, David Pursell of Tudor, Pickering, Holt & Co., called for the administration to approve construction of the Keystone XL pipeline. "Reversing the flow in segments of existing pipeline rather than building new pipe according to specifications is insufficient," he said. "A significant amount of the heavy crude from Canada is already being transported to the Gulf Coast by rail and will continue to do so for the next decade."

Carbon emissions actually reached a 20-year low in 2012, according to Pursell, managing director and head of securities at TPH. He says this is a long-term trend that is due in part to less expensive natural gas replacing dirtier coal for power generation.

"We are producing more natural gas, and we are doing it with fewer rigs," said Pursell. "For years we couldn't grow natural gas production, and now we are doing it with fewer and fewer rigs. This is the best thing that has happened to the US economy, especially in the manufacturing sector driven by natural gas and electricity, making it cheaper and globally competitive."

US law prohibits the export of domestic crude, but increased supply, combined with the export ban, means there will be a disconnect between the pricing of oil in the US and everywhere else. As US crude becomes less expensive, refiners can export refined product, which is good for refineries and for the areas where they are located.

"Producers are becoming victims of their own success, making less money due to the increased supply of oil and natural gas," Pursell said. "The people who will profit are companies that transport and refine it."

Tom Hargrove, managing director with GulfStar Group, discussed capital markets and their impact on the energy industry.

"An estimated 80% of wells are now non-vertical, and from a capital standpoint, horizontal drilling requires more equipment, services, and people than vertical drilling," he said. "The Gulf of Mexico has recovered from the Deepwater Horizon spill with increased activity in deepwater exploration. We see new rigs moving into the market and once-rare deepwater production platform orders are now on backlog."

Hargrove noted that there is a huge demand for capital from pipeline service companies.

"New pipelines are needed to transport product from the unconventional oil and gas fields to processing facilities," he said. "Pipeline construction miles are projected to increase to approximately 41,000 in 2013, up from 36,000 in 2012, and total pipeline construction expenditures are expected to reach $41 billion in 2013 – a $7 billion increase from 2012."

In addition, an estimated $95 billion worth of processing plants are planned domestically, according to a Dow Chemical executive.

James Wallis, a vice president at Lime Rock Partners, talked about private equity and noted that a "renaissance" in the US oil and gas industry is underway.

"We've all heard the news," he said. "The industry has reversed a decades-long trend of declining crude oil production, and natural gas production continues to grow despite a significant drop in its pricing and the number of rigs drilling for it."

Recent advancements such as simultaneous fracking, real-time microseismic monitoring, nanoscale reservoir analysis, and pad drilling individually are evolutionary rather than revolutionary, but combined have made a big impact on the industry's understanding of tight reservoirs and its ability to develop "bad rock" more efficiently, Wallis added. The end result is a dramatic increase in the amount of oil and gas resources that can be profitably developed today.

Decreased dependence on energy imports will lower our foreign trade deficit, strengthen the US dollar, and will have implications on foreign policy, he added. "The US is becoming more self-reliant. Our technologies and techniques will be exported, and tight oil will fill a really big gap in future global supplies that existed previously. It is turning into a big solution for the US and the world and that's good for everybody."