More Marcellus Shale Nonsense

When policy debates heat up, I'm tuned in to the threat of exodus. Taxes are too damn high and all the job creators are leaving. I've read a lot of similar bluster concerning the Marcellus Shale play. From PA Governor Tom Corbett to industry itself, fear-mongering is the rhetorical tool of choice. The latest spin from fracking battleground New York State:

New York has had a moratorium since 2008 on horizontal drilling and high-volume hydraulic fracturing, which frees natural gas from shale by injecting a well with chemically treated water and sand at enormous pressure. Other states in the gas-rich Marcellus Shale formation have seen local economies boom as drilling rigs have sprouted up.

Jim Smith of the Independent Oil and Gas Association of New York said Sunday that permit applications for conventional vertical gas wells, which are still allowed in the state but are less profitable than the far-larger shale gas wells, have dropped from about 600 in 2008 to below 200 in 2012 as the industry has moved to other states.

“For business owners, the opportunity is not here in New York,” Smith said. “We can assume the exodus we’re seeing now will continue” if the moratorium remains until results of the Geisinger study are in, he said.

I shrug. Will they come back if the moratorium is lifted? If those business owners don't, somebody else will if wells can be drilled profitably. I hope the door hits them in the rear end as they leave.

The drilling itself is not the big job creating bonanza so over-hyped of late. Energy intensive industry will pop up wherever there is a reliable supply of relatively inexpensive fuel. New York doesn't need to drill even one well to cash in:

The Constitution Pipeline is being designed to transport natural gas that has already been produced in Pennsylvania. The pipeline is not dependent upon nor does it require the development of new natural gas wells along the project’s proposed path. The pipeline is already fully contracted with long-term commitments from established natural gas producers currently operating in Pennsylvania.

Emphasis added. The proposed path cuts through New York State to feed energy demand there. You might have noticed that natural gas prices in the United States are low, really low. That's a result of over-production. There's plenty of gas in Pennsylvania to grow the economy in New York. Hence, the proposal to build the Constitution Pipeline. But wait. There's more to this story:

Cabot Oil & Gas's (COG) fourth quarter results report last Thursday (February 21, 2013) was nothing short of spectacular - positive surprises were many and significant and explain the stock's 11% rally on Friday.

In the context of the North American natural gas supply, Cabot is a relatively small player: The company ranked as #19 U.S. natural gas producer based on net volumes during Q3 2012. Nonetheless, its operating results have material implications for the industry as a whole.

First, the most recent wells confirm that the highly productive dry gas sweet spot in the Northeast Pennsylvania extends well beyond the four-five townships in Susquehanna County that have been initially proven up with production.

Second, the discussion during the call shows that well productivity in the area continues to improve fast, with each new generation of well designs and completion techniques.

Third, the company has a potential to emerge, within just four to five years, as a top five U.S. natural gas producer, likely passing by companies such as ConocoPhillips (COP), BP (BP), Chevron (CVX), and Royal Dutch Shell (RDS.A) in terms of net volumes. According to Zeits Energy Analytics' estimate, Cabot's gross operated production may exceed 3 Bcf/d by the end of 2017, limited only by the pipeline off-take capacity from the area. ...

... With recent well results in Northeast Pennsylvania suggesting continued rapid growth of supply from the area, the LNG export solution becomes very compelling. This increases the likelihood that the Cove Point project - which is almost ideally situated to provide an outlet for the Marcellus gas - will add to the growing list of U.S. LNG export projects with high probability of reaching completion.

Emphasis added. Cabot is sitting on the mother lode in Northeastern PA. The shale gas is so abundant in that part of the state that exports are feasible. There is enough for New York and Japan without any fracking to the north.

So, what's the rush? There isn't any. A few landowners would like to cash in on the shale gas bonanza. Moratorium or not, they've already missed the boat. The Governor of New York is dragging his feet. There isn't any pressure on him to open the state up to drilling. Better to focus on the downstream jobs boom that will occur at the end of a pipeline.

Ironic Economic Development

With all the buzz about reshoring American manufacturing jobs, I've been on the lookout for ironic economic development stories. Let's play one of my favorite geography games, "Follow the Natural Resources." Dateline Mexico:

“It is a contradiction in terms that Mexico, a major energy producer, now imports natural gas and gasoline,” says Mr Lozoya. ...

... He pulls out a map that shows one of two new gas pipelines that will bring cheap natural gas south from the US to feed Mexican industry and petrochemical development – especially of fertilisers.

“It is going to boost agriculture and heavy manufacturing, significantly,” he says. Then he adds, arching his eyebrows: “but most important of all, it is a two-way pipeline which will also allow us to send gas the other way.”

Emphasis added. I first stumbled upon this apparent paradox concerning Iran. I read that the country exported oil but imported gasoline. We tend to omit the role of refineries in the energy supply chain, creating a huge blind spot in our understanding of economic geography.

The Financial Times story about Mexico and Pemex should worry manufacturing boosters in the United States. The shale energy revolution is a game-changer. However, the benefits may accrue in ironic locations such as Mexico. A possible scenario is the export of raw resources south of the border and subsequent import of value-added products into the United States. Just something to think about the next time you see sensational headlines about shale gas and oil causing a jobs boom. Where will those jobs be created?

Marcellus Shale Propaganda

The Pittsburgh Business Times accused me of irrational discourse given my attack on how the Marcellus Shale Coalition (MSC) has handled the Act 13 issue. I'll cop to crossing the line between strongly-worded and uncivil conduct. But my main point stands. The MSC has polluted the waters of debate with misinformation. I called it "shameless propaganda" because that's what it is. My conclusions are rational even if my behavior is uncivil.

The MSC may be more civil. It is certainly less rational. The arguments advanced in support of industry positions don't survive scrutiny. There are many assertions and little support. The logic is tortured. The issues are more confused.

I've spilled enough ink about the MSC. My column that ruffled feathers is mostly about Pennsylvania politicians and Governor Tom Corbett. The catalyst for this Sunday morning rant is State Representative Gordon Denlinger. I could quibble with his gushing love letter to Act 13. He makes some good points and contributes to the rational discourse about the energy economy. I would have let it pass without so much as a peep save for the how he decided to end the essay:

People sometimes forget that manufacturing declined in Pennsylvania and the Rust Belt not because of cheap labor overseas, but because federal Environmental Protection Agency regulations for factory emissions became so strict that the only way to meet them was to use natural gas. But because natural gas was too expensive in the United States and energy was cheap overseas at that time, away those manufacturing jobs went.

We've entered Tin Foil Hat territory. How does printing lies serve rationale discourse? How does that help Pennsylvania residents come to a consensus? Ah, the civil tone makes all the difference. As for my uncivil tone (see "Tin Foil Hat territory"), I'm clearly irrational:

When we look at the post-World War II data, a different story emerges. First, productivity grew rapidly in industry, faster than the demand for industrial products, while productivity grew relatively slowly in the service sector. This meant that we needed fewer industrial workers and thus many workers were pushed out of industry. At the same time, we were still getting wealthier and demanding more services, and slow productivity growth in this sector meant that to provide these services it had to pull in the workers shed by industry.

Both push and pull forces were present in both periods. But, pull factors (i.e., the increased demand for services) was the predominant cause of decreasing industrial output and employment before World War II while push factors (i.e., rapid productivity growth in industry and slow productivity growth in services) dominated after the war.

The decline of manufacturing started long before the Environmental Protection Agency existed (born in 1970). Often overlooked are the gains in productivity and how that has impacted employment. Less labor is needed to produce more goods. Something else to chew on are the innovations in shipping:

Just as the computer revolutionized the flow of information, the shipping container revolutionized the flow of goods. As generic as the 1's and 0's of computer code, a container can hold just about anything, from coffee beans to cellphone components. By sharply cutting costs and enhancing reliability, container-based shipping enormously increased the volume of international trade and made complex supply chains possible.

"Low transport costs help make it economically sensible for a factory in China to produce Barbie dolls with Japanese hair, Taiwanese plastics and American colorants, and ship them off to eager girls all over the world," writes Marc Levinson in the new book "The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger" (Princeton University Press).

For consumers, this results in lower prices and more variety. "People now just take it for granted that they have access to an enormous selection of goods from all over the world," Mr. Levinson said in an interview. That selection, he said, "was made possible by this technological change."

Without the shipping container, you can forget about the differences in costs of labor and regulation. Now use that same lens to better understand the economics of the Marcellus Shale. Natural gas doesn't travel as well as oil does. It's more expensive to transport. Hence, there is a huge variation in pricing around the world. Furthermore, it is cheaper to extract the gas in Pennsylvania than just about anywhere else on the planet. That means Pennsylvania could squeeze a lot more revenue out of industry and pile on more regulation without killing the goose laying the golden eggs.

The omission of this kind of discourse from the debate about shale gas is, to say the least, suspicious. I don't expect the MSC to shoot itself in the foot. Keep the cost of doing business as low as you can. But don't make things up in order to advance your cause. The EPA is a straw man and a red herring. Prior to Act 13, the shale gas industry boomed in Pennsylvania. We have to ignore history in order to appreciate industry's position. That is what the Pittsburgh Business Times calls rational discourse.

Marcellus Shale Fueling Brain Drain

State U would like more funding. But college graduates are geographic whores. Why would residents pay higher taxes only to see the best and brightest flee?

On a smaller scale, empty nesters frustrate school district attempts to fund vital educational programs. I live in Loudoun County, Virginia. It's booming. It's wealthy, obscenely so. Yet austerity rules and foreign language instruction for elementary school students feels the weight of the ax. Why should I pay more property tax so your kid can learn a skill that will likely benefit some other community down the line?

Brain drain is a public relations problem for some. It's the ace up the sleeve for real estate developers and big business. I've enjoyed watching the Marcellus Shale Coalition (MSC) play both sides of this fence. Pennsylvania residents should allow drilling so young adults won't have to leave in search of work. Spin from last year:

With natural gas prices slightly more than half of what they were a year ago and drilling rigs moving out of the state to more lucrative plays, the Marcellus Shale Coalition is touting job growth for Pennsylvanians.

At a rally on the Capitol steps Monday, the industry group attempted to counter two of the most persistent criticisms leveled at its jobs claims: that the jobs are temporary, nonunion work and too often go to out-of-state workers from places such as Texas and Oklahoma. ...

... Mike Narcavage, an executive with Chesapeake Energy, a company drilling for gas in Pennsylvania, spoke of a brain-drain “boomerang.” People who had left Pennsylvania for work are returning because of opportunities that have opened up in the Marcellus Shale industries, he said.

Support shale gas development so prodigal sons and daughters will return home. That's funny. Like universities and local schools, the MSC has painted itself into a corner in order to fend off criticism. The Devil's due:

In fact, students trained in Pennsylvania are often flown to shale states like North Dakota for work, said Byron Kohut, the western hub director for the program, based at Westmoreland County Community College.

"It's just the nature of the business" to transport workers from state to state, Ms. Fisher said.

Several years ago, when drilling in the Marcellus Shale region began, one of the chief criticisms of the industry was its importing of trained workers from Texas and Oklahoma to Pennsylvania. Now that training programs are in place here, the ShaleNET organizers have found that students will often be flown to whatever state -- and shale formation -- needs them fastest.

College graduates leaving for greener pastures is an inconvenient truth for public higher education. The same goes for the itinerant energy industry. I blogged about it in 2010 (here and here). I'll quote myself from that second link:

As the global market recovers, itinerant workers in states such as Pennsylvania might be called to other parts of the world. I expect the demand for workers in the Pittsburgh region to increase dramatically even as the number of new drilling sites levels off (if that does indeed happen).

I didn't have a crystal ball. I wanted to understand the talent migration impact of the Marcellus Shale play. The MSC was making strong assertions in order to advance industry's policy positions. Playing fast and loose with the facts can backfire. A reminder about the propaganda used in 2010 to fend off a severance tax:

Yet as our production expands in Pennsylvania, the competition for the critical capital needed to produce a Marcellus well — each requires about $4 million — grows stronger and fiercer by the day. Other shale gas-producing states — particularly Texas, Oklahoma, Louisiana and Arkansas — want those investments, and those jobs, just as much as we do.

But we’re not just competing with other states for these opportunities. Poland, China, Canada and other foreign nations are working aggressively to secure the capital needed to expand their energy production, too. There’s a reason officials at the Kremlin read news clips from the Marcellus region every morning — and it’s not because they’re looking for coupons.

It’s no secret that our elected officials in Harrisburg are considering a new tax on shale gas production. Unfortunately, some don’t seem to understand that global competition for capital will react to the magnitude of the tax, evidenced by their consideration of a tax that would be the nation’s highest and least competitive.

If Pennsylvania taxes, then there will be a brain drain of investment capital. The assertion didn't make sense then. Now, the claims are comically phony. Brain drain hysteria muddies the policy waters. No one can see the schools of red herring.

To arms, environmentalists! Fracking causes brain drain. What's good for the goose is good for the gander, right Kathryn Klaber?

Brain Drain Boondoggles: Utica Shale and Youngstown

Developing the gas and oil locked up in shale makes a lot of sense. I think we can extract these resources without destroying the environment. The economic development upside is tremendous. Then why do politicians and other industry boosters have such hard time making the case for drilling? In Youngstown:

“Shale gas could really turn our economy around and produce jobs in the future,” Charles Sammarone, the mayor of Youngstown, says.

The city council recently approved an ordinance to allow the lease of the mineral rights of 180 acres of city-owned land. The potential revenue, the mayor hopes, could fund the demolition of abandoned houses and buildings and give Youngstown a facelift. A 2010 survey by the Mahoning Valley Organizing Collaborative showed that there are 3,246 vacant structures within the city limits, or about 44.8 structures per 1,000 residents, a figure 20 times the national average.

At the same time, unemployment has been kept relatively low at 7.9 percent, the national average, but only because so many people have been leaving the area. “We want to clean up our neighborhoods, so we can keep people from moving out,” Sammarone says.

Emphasis added. Okay, I buy the revenue windfall benefit. The mayor should stop there. Those concerned about drilling aren't de facto pro-brain drain. Boondoggle.

I doubt the mayor understands the issue. That's the reason he played the brain drain card. He doesn't know why drilling should be allowed. Fracking will stop our children from leaving. The Utica Shale solves everything.

Whatever The Question, The Answer Is Shale

From Business Insider:

Marcellus Shale Shame

This week, Kathryn Klaber (Marcellus Shale Coalition) is pitching Pennsylvania's shale gas revolution to Philadelphia:

Today, thanks to the tightly regulated development of American natural gas, our region's economy is on the upswing. ...

... Philadelphia's refinery sites are experiencing new life that few could have predicted just a few years ago - buoyed by abundant supplies of natural gas, a fundamental building block for a strong manufacturing sector.

Energy Transfer Partner's acquisition of Sunoco and the Carlyle Group's Sunoco investment are proof of the undeniably positive impact that shale-gas development continues to have on greater Philadelphia's economy. Thousands of jobs will be saved. The prospects for leveraging Marcellus Shale natural gas are indeed promising for Sunoco's Marcus Hook refinery, especially in light of this week's announcement, and may well be a lifeline for hundreds of jobs.

East Coast refineries are on the ropes. Pennsylvania Governor Tom Corbett is bailing out Philadelphia. In a sense, he's subsidizing Delta Air Lines:

In a move from somewhere out in left field, Delta Air Lines decided in late April to tackle energy risk management head-on by taking a rather unorthodox step of managing their fuel cost exposure by…purchasing a refinery. $150 million later (after a $30 million subsidy from the Commonwealth of Pennsylvania), Delta bought the Trainer refinery just south of Philadelphia, which produces 185,000 barrels a day. In addition to the purchase, they are now retrofitting the refinery (to the tune of $100 million) to maximize its jet fuel output.

Corbett would rather invest in industry than people. Klaber and Corbett are selling snake oil at the expense of tax payers. From former Secretary of the Pennsylvania Department of Environmental Protection and Commissioner of the Pennsylvania Public Utility Commission John Hanger:

Pennsylvania's string of bad economic numbers drives home the point that the gas boon alone is not enough to bring prosperity to Pennsylvania, especially when state government slashes budgets for education and does not make needed investments in transportation. The gas industry provides a welcome, needed boost. But it cannot erase strategic budgeting and economic development mistakes.

Emphasis added. Corbett shorts education in order to hand Delta Air Lines $30 million. Quid pro quo, selling out Pennsylvania's future:

We've written before about the declining support by Midwestern states for the state colleges and universities -- especially the big research universities -- that bear their name. A new report has just documented just how sharp this decline has become, why it's a national problem and what it means for our ability to support ourselves in the future.

The report is called "Diminishing Funding and Rising Expectations: Trends and Challenges for Public Research Universities" and is the result of a study by the National Science Board, an arm of the federal National Science Foundation.

Basically, the report says that most states -- including all Midwestern states -- are cheaping out the universities and research that will be their key to competing in a global economy.

Saving refinery jobs makes for good publicity. Klaber is trying to cash in on the "good" news to help the flagging reputation of the energy industry. She gets a pass because she is just doing her job. Corbett, on the other hand, is supposed represent PA residents. He's more beholden to Delta shareholders. Corbett appealing to talent to stay in Pennsylvania:

Speaking to a packed ballroom in Southpointe Thursday evening, Gov. Tom Corbett stressed his commitment to keeping young professionals in Pennsylvania and growing the industries that give them the kind of career opportunities that previous generations had to leave the state to find.

Corbett was a guest speaker at a Young Professionals in Energy event and addressed his audience as workers “who are the tip of the spear in our New Industrial Revolution.”

He repeated his mission to “put this state on sound financial ground,” ensure that every Pennsylvanian who wants a job has one, and that citizens of this state are trained to the “careers of this new century.”

Corbett is old school. He privileges industry over talent. He's a smokestack chaser. He's drunk on brain drain hysteria. He doesn't want his progeny to leave, so he doles out millions of dollars. Meanwhile, education goes begging. In terms of economic development, Corbett is a failure. He's living in the past. Pennsylvania is bent over for business.

Pittsburgh Economic Boom And Marcellus Shale

Big Energy would like to take credit for the Pittsburgh boom. An inconvenient truth is that the City bans the drilling process hydraulic fracturing. PA Governor Tom Corbett would have you believe that any such zoning restriction would torpedo the development of shale gas within the state. Marcellus Shale Coalition president Kathryn Klaber went so far as to claim the ban was a matter of national security. Fact is the rush is a sideshow for Pittsburgh and its remarkable turnaround. Eds and meds deserve the lion's share of the credit:

By the end of March, jobs in the Pittsburgh region’s gas industry had almost quintupled to 437 from 93 in the first quarter of 2009, according to state Labor and Industry Department data. Within the seven-county metro area, employment had climbed 4.1 percent, or 46,000 jobs, in the past two years, Wells Fargo economists led by Jay Bryson said in a [March report].

Much of the gain was in health care and education, which accounted for 30 percent of the added jobs and 20 percent of all payroll positions in the region, the economists said. Yet 5 percent of the growth was driven by shale drilling, they said.

Shale drilling is a boon to the region and the City of Pittsburgh. But the concerns raised about the ban, like the hyperbolic employment windfall from hydraulic fracturing, are hogwash. Pennsylvania does not need the local zoning preemption provided for in Act 13. The Pittsburgh rebound preceded the Marcellus Shale boom. Furthermore, the glut of natural gas occurred without the benefit of Act 13. With or without Act 13, the Marcellus Shale is projected to be the number one play in the United States. The governor has no clothes.

Pittsburgh is a thorn in sides of Corbett and Klaber. The energy industry would love to point to the region, with its run of positive publicity, and say, "We did that." No, you didn't build that.

Marcellus Shale Talent Migration

The glut of natural gas is threatening to kill the Pennsylvania energy jobs boom. Or is it? The shift is on from shale gas drilling to shale oil drilling. High oil prices will do that. That's good news for the booming Utica Shale play in Eastern Ohio. In Marcellus Shale country, the buzz is about the transition away from dry gas to wet gas wells. Will the workers follow? That's not an easy question to answer. In fact, more Texas talent is heading to Pennsylvania:

"After the big guys take out a lot of gas, there will be a burst of activity by smaller players," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University. "They have much lower costs, so they can make the economics work." ...

... Bullock said SMU is receiving pamphlets from real estate agents and chambers of commerce around Pittsburgh, with requests to pass them to students. The Marcellus Shale in western Pennsylvania is booming, and companies are looking for graduates from the area.

The issue of concern is the declining activity in the Barnett Shale play. Western PA is hot right now because of the predominance of wet gas. That should put a scare into Williamsport, PA, which is in the middle of the Marcellus dry gas boom. Residents there should be closely following stories about the Barnett, which is undergoing a rapid decline in drilling. No one is sure what will happen.

On the other hand, Pittsburgh is in the middle of a bonanza. Drilling for oil in the Utica is a boon. Wherever the ethane cracker plant ends up, Pittsburgh will still be the main urban center for all the activity. The rush is on and it is about to get bigger, not smaller.

Steubenville Cracker

And I don't mean hilljack. The word out of Youngstown is that Southeastern Ohio will land the prized Shell oil cracker plant:

That’s why experts have pegged Southeast Ohio or Southwest Pennsylvania — locations with direct access to a prime water port, the Ohio River — for Shell’s expansion.

The lack of a port nixed the Mahoning Valley from consideration. As for SW PA, I doubt the loss matters much. I've seen some credible speculation that the plant will end up in Steubenville. The benefits of such a location will cross state borders. National Public Radio explains:

Scoring the cracker would be a coup for any governor, especially when jobs are such a hot political issue. Keith Burdette, commerce secretary for the state of West Virginia, says in the end the ethane cracker will provide jobs throughout Appalachia.

"There'll be a lot of hooping and hollering regardless of where it's picked, whether it's in West Virginia or Pennsylvania or Ohio. We want it built here," he says. "The truth of the matter is the sites [are] just so closely grouped together that the impact across state lines will be significant."

Ohio Governor John Kasich will get to crow about winning the plant. That should tell you a lot about state economic development. It's all about the ribbon cutting. I'm glad to have Ohio subsidizing Pennsylvania jobs. Kasich is still a Pittsburgh boy at heart.

Searching For Marcellus Shale Dividend

To be sure, shale gas has been a boon to the Pennsylvania economy. The debate is about how much of a boon. As one would expect, industry is prone to gross exaggeration. The numbers simply are not as impressive as the pro-fracking camp would like them to be. Along those lines, two posts from the blog Carpe Diem help me explain.

The first one gets at the heart of the job creation story:

The latest numbers from Job Service North Dakota’s Labor Market Information Center report that Williams County has the lowest unemployment rate in the state, and perhaps the lowest in the entire United States September numbers, which are the most recent available, put Williams County at a staggeringly-low 0.9 percent.

Is there county anywhere in Pennsylvania that can boast similarly good news? Energy boosters are cherry picking the data. One county does not a national job recovery make.

The second post gets at the heart of the shale oil/gas revenue question:

"Resource-rich Alaska took in nearly $1.9 billion more than expected last fiscal year thanks largely to high oil prices and ended the fiscal year with an estimated $260 million surplus, an amount equal to nearly 4 percent of its general fund.

A handful of states — led by those that enjoy bountiful energy reserves such as West Virginia, Wyoming and North Dakota — have found themselves in similarly enviable positions, oases of optimism in an otherwise barren landscape of budget cuts and government layoffs. A few other states, including Massachusetts, South Carolina and Virginia, have combined slight increases in tax revenue with tight spending controls to produce modest surpluses.

In West Virginia, the surplus is going toward reserves, pension programs and debt. Wyoming put much of the extra money into savings after years of investing heavily in roads and schools.

Pennsylvania enjoys "bountiful energy reserves" such as shale gas. The state is noticeably absent from the story about the revenue boom. So much for the nonsense about public coffers overflowing from existing taxes on Marcellus Shale associated business.

A severance tax on drilling isn't even on the table for discussion in Pennsylvania. It should be. The jobs cup isn't overflowing. The state and its municipalities are still struggling with crushing public debt. The various proposed impact fees are a joke, an insult to PA residents. Industry is having a field day.

The debate is mostly about whether or not to frack shale. How much regulation will there be? How much financial remuneration for the drilling damage? Should local government make drilling regulation? I'm sure industry is happy the current lines in the sand. How can I be sure? Billions of dollars in investment keep streaming into the state.

Marcellus Myths

The jobs geography of shale gas continues to elude news coverage. Typically, numbers from industry boosters are cited. These tall tales simply don't match up with the anecdotes showing up in Marcellus Country media:

By 2010, the previously struggling Gosai family hotels were routinely near full, said Gosai, who spoke Thursday during The Greater Cumberland Committee’s monthly meeting. In fact, the entire southwestern Pennsylvania hotel business is “saturated with Marcellus shale drillers,” he said.

The bulk of the drilling jobs are still going to out of state workers. If Pennsylvania started producing more drillers, then that labor supply will ding the hotel business. Or, it might make more sense for the gas industry to ramp up operations elsewhere. Drilling is itinerant work. The result is the same. The hotel boom goes bust.

Nationally, the shale boom (both gas and oil) is going full throttle. Is energy leading this country out of its employment crisis? No. That should be obvious. Instead, David Brooks is passing along the industry hype:

Already shale gas has produced more than half a million new jobs, not only in traditional areas like Texas but also in economically wounded places like western Pennsylvania and, soon, Ohio. If current trends continue, there are hundreds of thousands of new jobs to come.

Sure, there are parts of Western Pennsylvania that are economically wounded (more about that in a subsequent post). Drilling in the Marcellus Shale has catalyzed some job creation. But the real lift for this region comes from Pittsburgh and its higher education industry. Once known for producing steel, Pittsburgh is now dominated by the production of talent.

As Brooks proves, a good mesofact is hard to kill. The promise of shale extraction jobs is full of such mesofacts. If we can only keep those wacko environmentalists from killing the goose laying the golden egg. The hyperbole on both sides of the debate is irritating. Brooks feeds this polarization with stock stereotypes and makes energy a much bigger election issue than it should be.

Shale Oil Jobs And Migration

While reading about the shale oil boom in North Dakota, I try to imagine what it would look like in Eastern Ohio. I have no idea if the Utica Shale is anything on the scale of the Bakken. But consider this migration tale:

School bus driver Barb Russell heard there was good money to be made here in the oil fields of North Dakota, so last month she packed a bag, locked her Farmington, Minn., home, and headed west. She tripled her income.

The 60-year-old grandmother rose every morning at 3 a.m. in September to drive a bus full of Halliburton workers to drilling rigs in a place where trucks roar non-stop and everybody who wants a job has one. ...

... New drilling technology has freed up vast reserves of oil in the Williston Basin of western North Dakota, fueling an economic bonanza that has become a flat-out gold rush. As the rest of the country desperately tries to skirt a double-dip recession, North Dakota boasts a $1 billion budget surplus and the nation’s lowest unemployment rate. Recruits from Minnesota, Texas and both coasts keep arriving, reversing a long population decline. Schools are rushing to hire more teachers. Towns are adding more cops.

Safe to say that the shale gas in the Marcellus hasn't fueled a similar migration boom. That's a bit of a mystery. Still, things might play out differently in Eastern Ohio. (See this story about Steubenville.)

Don't expect man-camps to pop up in feral Youngstown. Also consider the low unemployment in North Dakota that preceded the rush. The labor market has been tight there for the better part of two decades. School bus drivers won't be moving in from the next state over.

The energy industry talent migration to North Dakota isn't extraordinary and likely temporary. Hence the man-camps or even the booked motels in Williamsport, PA. The more opportunistic migration comes from a neighboring state. Proximity matters. Is someone in struggling Orlando, FL going to roll the dice in Williston, ND? I doubt it, at least not yet.

Beware of the hype that the oil and gas industry is pitching. The impact on unemployment will be subtle. Better for Ohio to figure out how to cash in on revenue from the drilling.

Rick Parry Is A Gas Bag

I expected Rick Parry to use some stock geographic stereotypes and plug the energy economy in such a way that would help spur migration to Pittsburgh. He did not disappoint:

And right here in Penn­syl­va­nia, and across the state line in West Vir­ginia and Ohio, we will tap the full poten­tial of the Mar­cel­lus Shale and cre­ate another 250, 000 jobs by get­ting the EPA out of the way. While Mar­cel­lus shale is today’s oppor­tu­nity, the deeper Utica shale for­ma­tions offer equally vast poten­tial with more jobs over the hori­zon for Penn­syl­va­nia and its neighbors.

The ben­e­fits of the boom in Amer­i­can nat­ural gas pro­duc­tion are also demon­strated in man­u­fac­tur­ing and pro­duc­tion. We see that right here at U.S. Steel’s Mon Val­ley Works Plant that employs more than three thou­sand work­ers, many of whom make the steel prod­ucts other com­pa­nies use to develop the Mar­cel­lus Shale today.

The face of man­u­fac­tur­ing in indus­trial states has changed rapidly. Nat­ural gas explo­ration is a game-changer that can bring new oppor­tu­ni­ties to replace the ones that have been lost. Devel­op­ment of nat­ural gas will cre­ate jobs in the sup­ply chain and lead to lower energy costs for manufacturers.

West­ern Penn­syl­va­nia is known for pro­duc­ing great quar­ter­backs I want West­ern Penn­syl­va­nia to Quar­ter­back a new energy rev­o­lu­tion that cre­ates jobs all across America.

There is a lot of silliness in this passage. The biggest laugh at loud moment concerns the increase in shale gas production. Big government is standing in the way? Via Energy Burrito, the odd economics of shale gas extraction:

Wall Street experts say well economics motivate producers to keep drilling for gas even when prices have sifted into the mid-$3s/Mcf. Even at lower prices, analysts say operators still receive good rates of return from gas drilling in the Haynesville and Barnett, as well as other gas fields such as the Fayetteville Shale in Northwest Arkansas and the Marcellus Shale in Appalachia. The Marcellus especially is close to desirable Northeast US markets where premiums to the Gulf Coast Henry Hub price can be $0.50/Mcf or more, experts said.

But the lag in well completions isn't the full story on why output from gas plays continues to rise. Upstream companies that increasingly become expert at finding a play's "sweet spot" are another reason for increasing production, particularly in the Barnett Shale where activity persists a decade after the play became an industry hot spot, John Bookout, managing director of energy for big equity capital investor Kohlberg Kravis Roberts, said.

If there is a problem in the Marcellus it is too much production. We don't have to go into why the EPA doesn't matter. Parry does not appear to understand the domestic energy economy.

Next up are the mesofacts. The Steel City lives! We can thank game-changing shale gas for that. Where would Pittsburgh be without hydrofracking? The region would remain mired in the depression that started in the 1970s when all the jobs were exported to China, Mexico, Japan. Damn that NAFTA. Now damn the EPA for keeping the Rust Belt rusty.

Parry's speech is a time warp. I kept imagining the B-reel footage still associated with the Pittsburgh Steelers and blue collar football while reading the text. From the Cradle of Quarterbacks will come an energy revolution and a manufacturing renaissance. Steel is coming home.

Shale Gas Arbitrage

The Financial Times takes a detailed look at the shale gas boom in the region spanning Western PA, Eastern Ohio, and Northern West Virginia. The geography is important to the story, which looks at the overall economic impact of the fracking revolution in that area. There are other plays, but this one is the biggest. The key is the isolation and the tremendous arbitrage opportunity that it generates:

Shale gas is particularly important because it is stranded in US, with no facilities to sell it on world markets, although the country’s first liquefaction plant to enable the gas to be exported is now under development. As a result, gas is much cheaper in North America than in other leading economies. The US price of about $3.60 per million British thermal units compares with about $8 in the UK and $16 in Japan.

The cost comparison is even more favourable for US manufacturers of petrochemicals that use gas as a raw material and compete with international rivals using oil-based feedstocks. The US gas price works out at the equivalent of $22 a barrel, about one-fifth of the Brent crude price of more than $100.

I've also read, on numerous occasions, that the shale gas in the Marcellus is particularly cheap to extract. I've also posted before that happenstance has resulted in old school economic geography. Proximity to a raw resource drives industry location decisions. More from the Financial Times:

The Pennsylvania-based US Steel is another company investing in Ohio to make tubes for oil and gas wells, committing $100m to a new facility to revitalise a plant that first started production in 1905. As well as benefiting from supplying shale gas producers, it is making growing use of their product as a raw material.

John Surma, US Steel chief executive, explained recently how the company has been substituting cheap gas for expensive coal in its blast furnaces, saving tens of millions of dollars a year, and is exploring techniques to yield even bigger savings. “We are thankful”, he said in a speech to industry executives last month, for “the natural gas your revolutionary work is helping to bring to market”. ...

... “Natural gas is to the chemicals industry as flour is to a bakery,” says Cal Dooley, president of the American Chemistry Council, an industry group. “Cheap gas means both international and American companies are now looking at the US as the preferred location for new investment.”

The big prize in this competition is ethylene, an essential intermediate product used to make many plastics. Dow said this week that while Middle Eastern ethylene producers had the lowest costs of all, the US was now lower-cost than south-east Asia and well below western Europe or north-east Asia. Those calculations have inspired the company to restart one ethylene plant in Louisiana next year and to build a new one in the US to start operating in 2017.

Other companies are reaching similar conclusions. Royal Dutch Shell has said it plans to build an ethylene plant in the Appalachia region, meaning Pennsylvania, Ohio or West Virginia. Other oil and gas groups, including Chevron and ConocoPhillips, are also looking at possible new plants. LyondellBasell, the chemicals company, and Williams, which operates gas pipelines, are looking at adding to their US production capacity.

For the first decade of the millennium, high and volatile gas prices made US production uncompetitive relative to producers in emerging economies. Jeffrey Lipton, a former chief executive of Canada’s Nova Chemicals who now spreads the shale gas gospel, says the balance of power has shifted back to North America. Unlike in some industrial sectors, China has no competitive advantage in chemicals, because it is an importer of gas and oil.

As the effect of cheaper American raw materials works through the value chain, Mr Dooley says, other manufacturers will also be encouraged back to the US to take advantage. “Even in the auto industry we are starting to see a response,” he says. “There are composite and plastic components presently being made outside the US, because it has been cheaper. That competitive advantage no longer exists. In the future the US will be in a far stronger position to be a supplier to the auto industry.” The ACC estimated in March that a 25 per cent increase in ethane production could create 400,000 jobs.

This is the jobs boom. To date, those gains show up in extraction (see this graph). That's great for Texas, Oklahoma, and Colorado in the near term. Long term will see Pittsburgh emerge a global center for energy related industries as long as the shale gas can't find a way to the rest of the world.

Jobs Boom Hits Pittsburgh Metro

Before I pass along the big news, go read Chris Briem's hot-of-the-presses post at Null Space about the Marcellus Shale hype. Industry boosters are making a bunch of wild claims. There's no need for hyperbole or outright bullshit. From NPR's StateImpact Pennsylvania:

The drilling hotbed of Wash­ing­ton County saw a 4.3 per­cent increase in employ­ment, between March 2010 and March 2011. That’s the third-highest spike in the coun­try, accord­ing to data released today by the fed­eral Bureau of Labor Statistics.

But­ler County fol­lows close behind, with a 4.2 per­cent increase. That’s good for sixth, nationally.

The insinuation is that this impressive job growth thanks to drilling for shale gas. That may be the case. Someone else might be interested in digging deeper into the BLS data.

I don't care about the "why" of the job growth. Both Washington and Butler Counties are part of the Pittsburgh MSA. Just the other day, Chris Briem (Null Space again) pointed out the region was back at peak labor force. Pittsburgh is more than doing relatively well compared to the rest of the country. The metro is making economic history.

Fabricating Energy Jobs

The Utica Shale hype is heating up. Before you start thinking about how great you would look in a new diamond belt, consider the controversy surrounding energy jobs. The latest lightening rod is the Keystone XL pipeline project:

TransCanada’s claims that an estimated 20,000 construction and manufacturing jobs would be created if the Obama administration approves the controversial Keystone XL pipeline are “significantly inflated,” according to a new analysis of the project released today.

The assessment, by the Cornell University Global Labor Institute, concludes that “the construction of Keystone XL will create far fewer jobs in the U.S. than its proponents have claimed and may actually destroy more jobs than it generates.”

Take both views of the matter with a grain of salt. The people who want the pipeline to be built are exaggerating job creation claims. Those against the pipeline contend there is little to no benefit. Anyone with an interest in the issue will have a hard time getting a straight story.

Besides following the award winning coverage by the Pittsburgh Post-Gazette's "Pipeline" team, citizens should following what is happening outside the United States in a far different political climate. From Accra, Ghana:

Citizens in countries throughout Africa have long been angered over the lack of benefits reaped from multinationals exploiting minerals from their seas and land. In recent years, African governments – authoritarian and democratic alike – have come under increasing pressure to develop policies to ensure the exploitation of oil and minerals provide long-term benefits to their citizens, through creating jobs and growth in industries.

At an oil conference in Accra, Ghana, held last week, African countries made it clear that oil industry players would be required to meet "local content laws," which includes hiring a certain percentage of workers locally, if they wanted to tap Africa’s oil reserves.

The dividend from resource extraction tends to be the smallest wherever it is mined. That's as true in Nigeria as it is in Pennsylvania or Ohio. The oil and gas industry is geared to move talent wherever the boom is. Experience, particularly in hydrofracking, is critical. The demand for more labor will be heard in the places where the talent is traditionally produced. The local spoils will be less-skilled (i.e. lesser pay) jobs such as truck driving. As the bust cycle takes hold, those workers will have to move.

History should teach the residents of Pennsylvania and Ohio that some sort of royalty for every citizen is the way to go, at least in the near-term. That money should be used for retraining or simply educating the workforce. That's the only lasting job creation shale gas and oil will generate.

Marcellus Shale Risk And Reward

Shell Oil is set to double down on the Marcellus Shale play. Finally, all the hype about natural gas being a regional game-changer is about to come to fruition. The investment should put to rest any concern about the long-term viability of the energy economy as a major driver of growth in Southwestern PA:

Shell, which paid $4.7 billion last year for gas rights to about 650,000 acres in the Marcellus region, says it's considering building several specialized types of refineries at a complex. If it builds a cracker refinery, the company would thus be able to supply the plant partly with gas from its own wells, giving it more control over supply and costs.

Currently, most crackers in this country are located in Texas and Louisiana. Experts said it's striking that Shell and other companies are considering building new plants, instead of just expanding existing ones.

"This is very different than building a cracker on the Gulf Coast," said Geoffrey Styles, an energy consultant and former senior planner for Texaco with a [widely-read blog]. "If you're building a cracker in the Appalachians you have to be absolutely certain that the supply is there. It's a heck of an endorsement of the Marcellus resource."

Pennsylvania, Ohio, and West Virginia are jockeying to land the plant. Wherever it ends up, Pittsburgh will be at the center of this boom. The city's new found gravity is being tested. Caterpillar Global Mining is looking for an eastern regional headquarters. Pittsburgh is competing with Louisville for the site. I'd bet on Pittsburgh to win because of the Marcellus. I figure the benefits of agglomeration are already a huge factor in the decision.

The jobs associated with resource extraction are small potatoes. But the transformation of Pittsburgh into the next Calgary or Houston is in the pipeline. I still think that even the most optimistic civic boosters are underestimating the impact (in terms of economic growth and migration) of shale gas on Southwestern Pennsylvania.

Wheeling Economic Boom

Wheeling, West Virginia? Yes, Wheeling, West Virginia is in the midst of a boom. The Wall Street Journal is making the assertion:

Now for a good energy news story. I recently traveled to Wheeling, W.V., which is 45 minutes down the road from Pittsburgh along the Ohio River and smack in the heart of the old Rust Belt. Unlike most places you go to these days, the town is booming. Defying the national mood, people are optimistic about the future. Why? It's what residents are calling the "West Virginia gold rush."

Emphasis added. That might be news even for the people residing in Wheeling. The WSJ is using the Marcellus Shale hype to attack President Obama's energy policies. Two can play that game:

Remember Michele Bachmann’s critique of President Obama’s energy policy? “We have resources from coal to oil to natural gas,” she said. “The problem is, under the EPA, they’ve been busy locking up (supplies), especially under President Obama.” Now, the Interior Department controls oil and gas leases, not the EPA, but never mind. Obama, the argument goes, is preventing us from harnessing our vast oil supplies.

But is this actually true? Not according to the [chart on the right], courtesy of the Wall Street Journal. The number of rigs in the United States has been soaring during the Obama years. Oil drilling is up nearly 60 percent in the past year alone. True, it’s hard to credit Obama specifically with that frenzy. As the Journal notes, the main contributing factors are better drilling technology and high crude prices, both of which make it possible — and profitable — for companies to tap new reserves in North Dakota, Texas, Ohio and elsewhere. Bottom-scraping natural gas prices have also prodded energy companies to shift their focus to oil. But in any case, Obama doesn’t seem to be hindering a boom in oil production.

It's an odd political narrative. Out of one side of your mouth you tout the spectacular dividends stemming from Marcellus Shale drilling. Out of the other side, you blame Obama for killing the goose that continues to lay golden eggs. Wheeling is booming. Don't vote for Democrats.

Republicans are trying to reclaim the Drill Baby Drill high ground with wild claims about incredible job growth and cheap petrol if we could just get Obama out of the way. That makes me uncomfortable because it suggests that the GOP likes how the shale gas debate is playing out in Pennsylvania. Not a week goes by without the Marcellus Shale Coalition (MSC) bungling the public relations campaign in support of industry. Worse is the state executive. There doesn't seem to be any fear of retribution for incompetence or outright lying to build public support.

My unease is spilling over into my enjoyment of the Pittsburgh Quarterly. I received the latest issue earlier this week. All the beautiful pro shale gas industry ads have me questioning the integrity of the journalism. Can I trust Seamus McGraw to weigh both sides of the story? I support the extraction of shale gas. The antics of the MSC and the GOP have me rethinking that position.

Energy Jobs Promise

Michelle Bachmann is promising cheap gas and millions of energy jobs. The hyperbole is absurd and sheds light on similar claims coming from the Marcellus Shale Coalition (MSC) and PA politicians in the back pocket of industry. The latest from Bachmann:

“What Barack Obama has done is lock up America’s energy reserves,” she said. “We’re the No. 1 energy-resource-rich nation in the world. We have more oil in three Western states in the form of shale oil than all the oil in Saudi Arabia. That doesn’t include the Bakken oil field in North Dakota or the eastern Gulf region or the Atlantic or the Pacific or Anwar or the Arctic region.”

She said the United States could tap its oil and gas supply to provide Americans with a cheaper, stable alternative.

“Energy could be one of the most stable, accessible forms of resources for business in the United States,” she said. “And we would create millions of high-paying jobs instantly.”

The sales pitch for a very liberal policy regime is energy independence, low prices at the pump, and an employment bonanza. None of the three will come true. The proof, particularly on the jobs front, is in Poland:

Recruiters are already actively in touch with Poles working in oil towns across the world, in Houston; Aberdeen, Scotland; Calgary, Alberta; and in Norway to persuade them to move back to Poland, Mr. Kostecki says. Some have been away for 30 years.

Meanwhile, Polish natural-gas monopoly PGNiG SA, which for decades was the only game in town if one wanted to work in oil and gas extraction in Poland, now has a poaching problem.

"Geofizyka Torun, [a PGNiG subsidiary] took everyone who applied [this year]," says Piotr Kurnik, the coordinator of the AGH conference and a third-year student at AGH.

The company is looking for surveyors and project operators, as well as title negotiators, who get the owners of concessioned land to allow companies to conduct their seismic readings on their property, whether through a sale of the land, a lease or some other arrangement. While Poland's government owns the rights to all the minerals under Polish territory, it doesn't own the land itself. Dealing sometimes with thousands of individual landholders means title negotiation over an area to be explored or exploited often moves at a snail's pace.

Business is picking up, but Geofizyka Torun is facing increasing competition as rival companies set up shop in Poland, bringing their own equipment to do seismic testing and hiring young professionals, says Sylwia Kowalska, a human-resources director at the company. But Geofizyka Torun offers to pay for its employees' lodgings and provides them with English classes, she says.

"We're seeing employees who left coming back," Ms. Kowalska says. "They miss Poland." She estimates that in May the company hired at least 70% more people than a year ago.

Geofizyka Krakow, another PGNiG subsidiary, does subcontracting jobs all over the world and recruits oil and gas workers in many different countries, including Pakistan, Egypt and Canada. But one of its toughest tasks is hiring people in Poland itself, says Filip Rieger, Geofizyka Krakow's chief recruitment coordinator. Those conducting mining-related work need permits from the State Mining Authority to do so. These permits are awarded for different grades of expertise, depending on age, experience and education. "In Poland, the required permits limit the pool of applicants," Mr. Rieger says.

Energy workers are being reshuffled. The jobs are going to established hands, just like they have in Pennsylvania. Perhaps the talent shortage appears in Calgary. New graduates from American programs might have to go to Canada (or Poland) to find work. Of course, producing a "qualified labor force" takes time. Even if Bachmann could deliver millions of jobs instantly, she'd have to open up the border to foreign born talent.

Bachmann is reusing the drill-baby-drill political gambit because it works. It worked in Pennsylvania. It seems to be working in Poland. The boldness of the fib doesn't matter. Just make sure you use big numbers, the more outrageous the better. That's the MSC playbook.