Tuesday, August 02, 2011

Betting On Marcellus Shale

The fuss about Marcellus Shale jobs is making news again. Read Chris Briem's post about it over at Null Space. The problem I have with all of this is how the numbers are used to justify policy. The corollary to this story can be found in Youngstown, Ohio:

France's Vallourec & Mannesmann Holdings Inc., one of the world's largest makers of steel tubes for the energy market, has decided to build the plant here next to an existing facility for two main reasons. Youngstown has an experienced steelmaking work force and the city is at the door of the Marcellus Shale, a natural-gas basin beneath New York, Pennsylvania, West Virginia and Ohio.

V & M Star made a big bet, $650 million, on shale gas. The company officially made the announcement in early 2010. That deal took about 18 months to complete. You can do the math and figure out how early the Marcellus was making an impact. The plant expansion still isn't finished.

All the talk about investors pulling out because of a tax or shale gas being some sort of mythic bubble ignores what has been going on in Youngstown. As I've posted before, a bunch of industries were already pot committed long before the policy debate heated up. Yet the Marcellus Shale Coalition (MSC) made this weak position central to its public relations campaign. Now the MSC is stuck defending a silly jobs narrative that was unnecessary in the first place, piling one deception on top of another.

The Fort Worth-Arlington MD is expected to see moderate long-term growth. Activity in the Barnett Shale is anticipated to continue to serve as an important source of economic stimulus. While the national downturn and weak oil and gas prices slowed exploration activity from 2008 peaks in 2009, recovery began last year. Because only a small fraction of the field’s oil and gas reserves have been produced, its economic benefits will be felt for decades to come.

If you are interested in how metros drive state prosperity, read that article. Regarding the shale, its importance is as a "stimulus". Think long term and big picture. That is what Vallourec & Mannesmann did in Youngstown. The boost in direct employment is welcome. The overall impact is much more significant. The gas itself fuels a boom:

The steel and shale-gas industries are symbiotic to some degree. Shale drilling, with its network of horizontal pipes, consumes huge amounts of steel tubes and pipe. Steel also is needed to build rigs and excavators for extracting gas.

Meanwhile, increased natural-gas production helps push gas prices lower. That makes steelmakers, which use natural gas for heating, more competitive in global markets as energy costs decline. Forging companies, which make components for drilling equipment and other machines and tools, rely almost entirely on natural gas to heat ovens to 2,300 degrees.

“They need natural gas to make products, which are needed to get the gas that services them,” says Roy Hardy of the Forging Industry Association trade group.

The market for V & M Star steel is global. It looked at expanding operations in Oklahoma and Brazil, ultimately going with Youngstown. Old school economic geography: Locate near natural resources and lower the cost of production.

Is the economic case for shale gas that hard to make? The MSC needn't cook the books or play Chicken Little. I'd like to know more about how the Barnett Shale acts as an economic stimulus for Dallas and Fort Worth. Somehow I doubt the linchpin is the ability to drill within city limits.

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