ENERGY TRENDS: WHY JOBS, CAPITAL INVESTMENT & TRADE ARE HEATING UP Tanya Bodell, Executive Director, Energyzt Once reigning as the King of Coal, the United States is now referred to as the Saudi Arabia of natural gas. The natural gas industry supports nearly 3 million jobs in the United States, and unconventional natural gas activity is projected to grow from 1 million of these jobs in 2010 to over 2.4 million in 2035. During the recession, the shale revolution was one of the largest job generators in the U.S., supporting nine of the top 11 fastest growing jobs in America. The electricity industry has played a pivotal role in absorbing excess supply generated by shale extraction. However, new sources of demand are required for these growth levels to be sustainable. This session examines global energy industry trends, changing interrelationships between energy sectors, the impact on capital investment and manufacturing, and discusses what is required for long-term sustainable growth in the U.S. and abroad. Tanya Bodell is the Executive Director of Energyzt, a global collaboration of energy experts who create value for our clients through actionable insights. In this role, she oversees Energyzt s advisory services, levering leading analytical capabilities, industry experience and expertise to help clients unlock value through informed business decisions. Using a multi-disciplined team of industry experts and integrated energy market models, Energyzt provides insights into the changing dynamics of electricity, natural gas, petrochemical, coal and rail industries to help companies create competitive advantage. She is based in Boston, Massachusetts. Before joining Energyzt, Ms. Bodell was a Managing Director at FTI Consulting where she co- founded the Electricity Consulting Group. She previously served as the Vice Chair of the International Centre for Expertise at the Interational Chamber of Commerce, Vice President at Charles River Associates, and was a Principal at Putnam, Hayes & Bartlett (subsequently PHB Hagler Bailly), as a member of their energy consulting practices. She has a Masters in Business Administration from the MIT Sloan School of Management, a Masters in Public Policy from the Harris School of Public Policy Studies at the University of Chicago, and an undergraduate degree in Mathematical Economics from Pomona College in Claremont, California. Energyzt 88 South Main Street Cohasset, MA 02025 Telephone: 617-416-0651 Fax: 617-249-0478 E-mail: tanya.bodell@energyzt.com www.energyzt.com
Energy Trends: Why Jobs, Capital Investment and Trade are Heating Up AMT 2013 Global Forecasting & Marketing Conference Presented by: Tanya Bodell, Executive Director 16 October 2013 1 Introduction Objective: Review energy market trends and their impact on the U.S. economy and manufacturing industries Agenda: Energy markets Capital expenditures Global impacts Energy markets are creating manufacturing opportunities and jobs 2 1
ENERGY MARKETS 3 Energy Markets / Energy Industry Value Chains Coal Extraction Dry gas LNG Exports Natural Gas Extraction Wet gas Liquifaction Plant Propane/Ethane NGLs Naphthas Petrochemical Industry Oil Fields Transport Refinery Oil, power, gas and petrochemicals are increasingly interrelated 4 2
Energy Markets / U.S. Shale Plays and Remaining Reserves Niobrara 57 TCF Bakken 19 TCF Woodford 77 TCF Utica 111 TCF Marcellus 369 TCF Fayetteville 48 TCF Barnett 72 TCF Eagle Ford 119 TCF Haynesville 161 TCF Shale Play Remaining Reserves Source: Map: American Petroleum Institute; Remaining and undeveloped reserves by Advanced Resources International, Inc. http://www.adv res.com/pdf/a_eia_ari_2013%20world%20shale%20gas%20and%20shale%20oil%20resource%20assessment.pdf The U.S. has active shale plays with extensive natural gas reserves 5 Energy Markets / Natural Gas Pricing Henry Hub Natural Gas Prices 16 Natural Gas Futures Contract (Dollars per Million BTU) 14 12 10 8 6 4 2 Estimated Range of Marginal Cost of Production 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Natural Gas Source: Map: American Petroleum Institute; Remaining and undeveloped reserves by Advanced Resources International, Inc. http://www.adv res.com/pdf/a_eia_ari_2013%20world%20shale%20gas%20and%20shale%20oil%20resource%20assessment.pdf Marginal cost of production supports a continued period of low prices 6 3
Energy Markets / Factors that Could Increase Prices 2018-2020 2014-2017 DEMAND: Increased load due to industrial reshoring (e.g., petrochemical plants) Offset by policy shift to energy efficiency and demand response programs 2015-2017 SUPPLY: Coal plant retirements Offset by renewables, excess gas fired generation capacity and transmission investment FUEL INPUTS: Increased exports into world markets Offset by increased production Natural gas price impacts are likely to be locational 7 Energy Markets / International Investment in U.S. Shale Billion Dollars International Joint Venture Investment In U.S. Shale Plays (2008 2012) Source: US Energy Information Administration, April 8, 2013, http://www.eia.gov/todayinenergy/detail.cfm?id=10711 International players are looking to learn and apply 8 4
CAPITAL EXPENDITURE 9 CAPEX / Projected Shale Gas Investment U.S. Five Year Cumulative Totals of Capital Expenditure in Shale Gas ($Millions) Source: IHS Global Insight, The Economic and Employment Contributions of Shale Gas in the United States, Prepared for America s Natural Gas Alliance, December 2011, http://fuelfix.com/blog/2012/06/13/shale boom to fuel 1 4 million jobs by 2015 study says/ More than $3.2 trillion in investment projected for shale 10 5
CAPEX / Manufacturing Orders Tied to Energy National Distribution of Manufacturing Technology Orders To Energy Related Industries (2012) Woodford 77 TCF Utica 111 TCF Marcellus 369 TCF Barnett 72 TCF Antrim 5 TCF Eagle Ford 119 TCF Haynesville 161 TCF Source: AMT The Association for Manufacturing Technology, Prepared by Eric LeMasters, October 3, 2013, SIC Codes 33313 (Mining and Oil and Gas Field Machinery Mfg) and 33361 99 (Engine, Turbine, and Power Transmission Equipment Mfg) 2012 energy related manufacturing orders were 10% of market share 11 CAPEX / Chemical Industry Investment Shale related US Chemical Industry Investment Total Expected Investment 2010 2020: $71.7 billion Capital Investment Break out 16,000 14,000 Building construction, 10% Non residential construction, 38% Investment (Billions of 2012 Dollars) 12,000 10,000 8,000 6,000 4,000 2,000 Electrical, 4% Instrumentation, 8% Piping & valves, 5% Engineering services, 9% 0 2010-12 2013 2014 2015 2016 2017 2018 2019 2020 Process equipment, 26% Source: American Chemistry Council. Shale Gas, Competitiveness, and New US Chemical Investment: An analysis based on Announced Projects, May 2013 Chemical industry investment to accelerate in next few years 12 6
CAPEX / Chemical Industry Job Creation Source: American Chemistry Council. Shale Gas, Competitiveness, and New US Chemical Investment: An analysis based on Announced Projects, May 2013 Plus another 300,000 permanent payroll positions by 2020 13 CAPEX / Natural Gas Power Plants Capital Investment in Natural Gas Combined Cycle Power Plants Natural Gas Combined Cycle Capacity 2013 2020 Anticipated Coal Plant Retirements 2012 2017 194 Installed capacity (GW) 192 190 188 186 184 182 New capacity to replace announced coal plant retirements New capacity to meet load requirements 180 2013 2014 2015 2016 2017 2018 2019 2020 Source: US Energy Information Administration Source: Institute for Energy Research, http://www.instituteforenergyresearch.org/2011/10/07/ier identifiescoal fired power plants likely to close as result of epa regulations/ Limited combined cycle investment in the near term 14 7
CAPEX / Other Industries Direct Output Gain in Manufacturing Industries Due to Shale Gas 100 70.0% Output Gain $Billions 90 80 70 60 50 40 30 20 10 Output gain Share of output gain 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Share Output Gain 0 0.0% Chemicals Paper Plastic and Rubber Glass Iron and Steel Aluminium Foundries Fabricated metal Source: Resources for the Future. Sector Effects of the Shale Gas Revolution in the United States, July 2013 Chemicals and plastics are the sectors benefitting most from shale gas 15 CAPEX / Other Sectors Aluminum/Steel Increased demand for drilling equipment Lower energy costs Fertilizers U.S. is the fourth largest producer of ammonia in the world, despite 40% reduction in capacity after 2000 About 70 percent to 90 percent of the estimated production cost by nitrogenbased fertilizer producers (Pirog and Ratner 2012) Rail Already serving as pipelines on wheels Provide near term flexiblity to bring product to market Replacing lost capacity from reduced coal fired generation Natural gas vehicles Fleets and heavy duty trucks Requires significant infrastructure Impact on other sectors could be muted by offsetting forces 16 8
GLOBAL IMPACTS 17 Global Impacts / Worldwide Shale Basins Global Shale Gas and Oil Basins Source: Advanced Resources International, Inc., Prepared for the U.S. EIA, June 2013, http://www.adv-res.com/pdf/a_eia_ari_2013%20world%20shale%20gas%20and%20shale%20oil%20resource%20assessment.pdf The U.S. has a significant share of assessed shale gas and oil reserves 18 9
Global Impacts / Oil Prices Impacted by World Events Source: BP Statistical Review 2013 Volatility in global oil prices are driven by geopolitical events 19 Global Impacts / Oil and Gas Relationship Disrupted Prices of Natural Gas and Crude Oil in the U.S. 16 160 14 12 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Natural Gas Futures Contract (Dollars per Million BTU) Estimated Range of Marginal Cost of Production Natural Gas Crude Oil 140 120 100 80 60 40 20 0 Cushing, OK Crude Oil Future Contract (Dollars per Barrel) Source: EIA, Natural Gas Futures Contract 1, http://www.eia.gov/dnav/ng/hist/rngc1m.htm and NYMEX Futures Prices, http://www.eia.gov/dnav/pet/pet_pri_fut_s1_m.htm Shale plays have disrupted oil and gas price parity in the U.S. 20 10
Global Impacts / U.S. Drilling Response Natural Gas versus Oil Rig Count Source: Baker Hughes Rotary Rig Count, Reported in Natural Gas Intelligence Press, Inc., US Oil and Gas for the week ending October 4, 2013 http://intelligencepress.com/features/bakerhughes/ Rig count has responded to the bifurcated oil and gas markets 21 Global Impacts / Increasing Exports of NGLs U.S. Exports of NGLs and Derivatives 12,000 10,000 Thousands Barrels per Month 8,000 6,000 4,000 Liquified Petroleum Gases 2,000 0 Pentanes Plus Source: US Energy Information Administration, http://tonto.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=mppexus1&f=m and http://tonto.eia.gov/dnav/pet/hist/leafhandler.ashx?n=pet&s=mlpexus1&f=m The oversupply of NGLs are finding new markets overseas 22 11
Global Impacts / LNG Export Markets are Attractive World LNG Estimated October 2013 Landed Prices ($US/MMBtu) Source: Waterborne Energy, Inc. Updated September 5, 2013 LNG export markets create global demand for U.S. gas supplies 23 Global Impacts / LNG Export Terminals Being Approved Source: FERC, http://www.ferc.gov/industries/gas/indus act/lng/lng proposed potential.pdf 24 12
Key Takeaways on Energy Trends Energy markets are becoming increasingly inter related, disrupting traditional relationships and reforming new ones Shale plays are a potential game changer for the U.S. The country is poised to become the largest oil and gas producer in the world Estimated natural gas reserves are extensive Natural Gas Liquids already are in oversupply Impact of LNG exports under heavy discussion Capital expenditures are pouring into: Energy sector Petrochemical sector Global impacts could motivate greater investment, providing demand growth in the medium and long term Perception is reality 25 Key Questions to Ask Yourself Are you going to be reactive or proactive? To date, most companies have been reactive responding to shifting demand for their products and services Signs of a more strategic approach are emerging Engagement of strategic consultants Lobbying spend Independent economic studies More tactical decision making What can you do to defend your existing position and gain new market share? Market share is shifting with energy markets Lost market share in one sector can be recovered in others Domestic markets are expanding abroad and overseas jobs are coming back U.S. firms have a first mover advantage with respect to the rest of the world Who are your allies? Your partners? Your enablers? Your clients? Big business interests already are assessing their situation and staking their positions It is important to know how these positions impact you New business relationships can forge unlikely alliances How do I maximize my probability of success? Know your market, target your customers and grow 26 13
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