Five years into the shale oil and gas phenomenon, there is no question that its impact on the energy industry, the chemical industry and the global economy will be unprecedented. How far and wide it influences the next chapter of mankind remains uncertain and unclear.
Five industry experts dared to both look into the crystal ball of the future and reflect on the past while serving as panelists at Celerant Consulting’s executive dinner and discussion at Brennan’s Restaurant in Houston on February 20th.
What they shared with the room of 50 industry leaders was that this new era could be one of the most economically substantial trends that can be experienced in a lifetime from an industrial perspective. And this is just the beginning.
“I would suggest that economists are perhaps underestimating the potential for additional gross domestic product growth in the United States,” said panelist Joseph Coote, Senior Vice President and Chemicals Sector Lead at Celerant Consulting.
Coote pointed to the compelling economics and a massive capital wave that is about to hit the industry. There is $350 billion in committed downstream investments, of which $220 billion is in the chemical space. Front and center is olefins and derivatives. On the table are seven new ethylene crackers, seven material expansions and one restart. In total, that is approximately 10 billion pounds of ethylene. The installed capacity in the United States is about 27 billion pounds of ethylene, which represents about a 40% increase. Most of those facilities are scheduled to come online around 2017.
Coote added that proposed North American export-oriented LNG projects also will be included in the capital wave. While there may be 15 planned LNG export projects, it is uncertain how many of those will actually be built over the course of the next five to 15 years.
With this capital wave about to come through, how does the investor proceed?
“What is important is to carefully assess the investment projects with realistic future expectations around pricing for feed stocks,” he said. “We’re talking, $3 or sub $3 ethane today. I think $5 to $6 is a more normal level that would still support attractive returns in the industry and for that matter, future growth.”
Electricity also has been turned upside down with shale gas impacting residential, commercial and industrial markets. Overproduction from shale technology, coupled with warm winters, has resulted in a price nosedive.
“With natural gas currently in the $3/mbtu range, that is about a third of what it was in 2008,” said panelist Lane Sloan, President of Sloan Consulting and Co-chair of the Greater Houston Partnership Energy Collaborative. “So the bottom line is that other sources are finding it very difficult to compete with natural gas in the electricity marketplace. Of course this is not sustainable because $3/mbtu is below cost.”
Sloan said he thinks the price will rise into the $4 to $6 range over the next several years, which will be sustainable enough to ramp up more natural gas production.
Shale taking off globally
Though the U.S. is clearly the leading shale producer, panelist Chris Robart, Principal with PacWest Consulting, explained that on the world stage, shale oil and gas production is gaining serious momentum.
The U.S. and Canada accounts for 80% of the worldwide fracturing capacity; which equals 15.4 million horsepower. Canada operates with 2.1 million horsepower. The rest of the world, both on and offshore, accounts for 4.4 million horsepower. In all, there is almost 22 million horsepower changing the world.
“We forecast that by 2017, the international portion will double from 20% to 40%,” Robart said.
After the U.S. and Canada, China is the next biggest shale operator in terms of horsepower, having doubled its efforts in a year. The Middle East region is also making a move.
“Saudi Arabia and Oman are absolutely the biggest markets right now for frack capacity and activity, Robart said. “We see this trend continuing.”
The change in source for oil and gas will impact the global supply streams and influence North America’s economic and geopolitical stance.
Oil production mentality changing
The shale boom presents the need for a complete change process and a different mindset for everyone involved in the increasingly complex supply chain, said panelist Maarten van Hasselt, Senior Vice President and Energy Sector Lead for Celerant Consulting.
He contrasted the colossal and concentrated capital equipment commitment for drilling in deep water to the more manufacturing-like process of drilling in shale-formations on land that involve hundreds if not thousands of wells to produce the same quantity of oil and gas.
“It is very different from the massive project systems,” Van Hasselt said. “Building these assets is very different and they present complicated challenges because work sites are spread out and extremely fragmented. Equipment and resources have to be moved from one site to the next. The complexity is magnified when people are involved. On the platform, you have to be shipped or flown to a remote worksite. In North Dakota, you can get in your truck and drive home.”
Managers will have to think about how they will operate upstream given the difference in the oilfield as a system. More than ever, integrated operations must be addressed. Managing manufacturing time and rollouts, along with all the other nuances, must be considered.
“It has taken us 135 years to build and evolve this industry from single wells to ever more complicated wells, fields and drilling technologies,” Van Hasselt said. “It will take us some time to figure out the true ramifications of the shale revolution and its lasting impact on the energy industry.”
A chemical renaissance
While the long-term impact is still somewhat ambiguous, Coote indicated that the chemical industry is already financially enjoying the early stages of the boom.
“From my perspective, the reason why the chemical industry is profitable today is because chemical prices are essentially tracking closely to oil prices and we have low feed stock costs because of the very attractive natural gas prices,” he said. “For the chemical industry to remain attractive, we need to have a substantial oil-and-gas price spread. My concern is that we are going to see that spread narrow. It is still going to produce an advantageous situation but I think that the natural gas consumption that we currently see is going to drive natural gas prices upward. Also, I think that tight oil production and a surplus in the U.S. is going to drive oil prices down.”
With all the prognostication, Sloan brought these kinds of notions into perspective.
He said he takes the contrarian view because when he was a corporate planner at one of the majors, he conducted a study that showed the company repeatedly missed the price forecast. Ultimately, it was because the company’s forecast was the same as everybody else’s.
“When the forecast is the same, it automatically is not going to happen,” Sloan said. “If you think prices are low, you do not go and drill. It gets fed right into the budget cycle and nobody drills. Then, guess what? Prices go up. And when everybody thinks prices are going to be high, what do they do? They drill like crazy and prices go down.
“So when everybody thinks the price is going to go down, then I say it is going to go up.”
Guests got a sense that the future not only looks bright for industry today, but it presents a stimulating challenge for those whose time is yet to come.
“There is a lot we don’t know yet, but I am excited that together we can discover it, develop it and work on it,” Van Hasselt said. “And I hope we can entice more young people to join the energy industry and help us to do it because otherwise it will be technically very difficult to unlock all the value that the shale oil and gas development promises today.”
