By Jamison Cocklin
In November 2012 the International Energy Agency, a Paris-based adviser to 28 nations, said United States oil output is poised to surpass Saudi Arabia, the world’s largest producer and exporter, within the next decade.
That assertion turned heads and had many wondering if it was even possible.
Long a competitor at the top of the energy business, the question in the U.S. has never been about energy production, but rather energy independence and what such a reality would mean for both the country’s economy and its geopolitical muscle around the world.
In recent years, new technology, mainly hydraulic fracturing, has created an increase in U.S. oil and natural-gas production and supplies, a trend that has helped reduce the country’s reliance on fossil fuel imports.
If estimates such as the IEA’s prove true, the wealth in states such as Ohio, Pennsylvania, Texas, North Dakota and Oklahoma — currently the hotbeds of the country’s shale boom — could grow to new heights.
The prospect has lawmakers envisioning a different future for the states they represent, and a push is on for a seat at the head of the table.
“Imagine if the U.S. were to become the OPEC of natural-gas exports and if Ohio were to lead the way in allowing the U.S. to become the dominate player in this energy sector,” said U.S. Rep. Bill Johnson of Marietta, R-6th, at a recent shale-energy forum in Boardman.
Johnson was referring to the Organization of Petroleum Exporting Countries, considered a pillar of global energy supply, where swing production in countries such as Saudi Arabia, Kuwait, Iran, Iraq and Venezuela mitigate crude-oil supplies and the prices set by them.
Formed in 1960, at a time when multinationals controlled the global energy market, OPEC sought to return control to countries with an abundance of oil and natural gas. Since then, oil windfalls in places such as Saudi Arabia and the United Arab Emirates have helped launch a new golden age for the gulf and the broader Middle East, with real-estate and financial markets booming in some parts of the region.
In Saudi Arabia alone, the world’s largest holder of crude-oil reserves, petroleum exports account for almost 90 percent of all its export revenues.
But Pioneering American oil and gas companies, developing hydraulic fracturing techniques, which use water, chemicals and sand to force out oil and gas trapped in the small pores of impermeable rock deep underground, now hang like a specter over OPEC and the future of its membership’s place in the global marketplace.
The Department of Energy expects net oil imports in the U.S. to account for just 32 percent of consumption next year, down from a high of 60 percent in 2005. Monthly crude-oil production here is expected to exceed the amount of U.S. crude-oil imports later this year for the first time since February 1995, while global fossil fuel consumption outpaced production in January and February.
Furthermore, rising U.S. oil supply could serve to cap global prices, even if OPEC cuts its own output.
For the U.S. economy, the boom could mean more exports. For the Mahoning Valley and Ohio, where drilling operations are growing more intense by the day, a new economic reality is conceivable, but it still remains out of sight — leaving pundits, lawmakers and the public here to guess what’s next for the state and the country.
In order to capitalize on potential exports, the U.S. will have to continue diversifying its energy sources, drawing from both new oil and gas supplies and renewable energy such as wind and solar power, said Mousa Kassis, an international trade adviser at Youngstown State University’s Williamson College of Business.
Kassis said the trade deficit, the difference in goods and supplies exported and imported, cuts into U.S. Gross Domestic Product by 5 percent. More oil and gas production, and any surplus, means “at the very least we break even — we could add 5 percent to the GDP,” he said.
“It would be a total and complete shift in creating a trade surplus, which is important because that creates more jobs,” Kassis said.
The question of how much fossil fuel the world will require in the coming decades also remains. According to the IEA, in a report released in March, 13 countries generated more than 30 percent of their electricity from renewables in 2011.
Still, fossil fuel likely is to remain an important part of the world’s energy mix, as renewables such as wind and solar cannot always be relied upon to generate the ever-increasing energy demands of developing countries.
As the U.S. shifts its foreign policy focus from grueling wars in the Middle East to the burgeoning economies of the Asia-Pacific, it will be increasingly important to develop balanced trade policies there.
“China, India, Southeast Asia is where the growth will be for the next 20 or 30 years,” Kassis added. “They will need more fossil fuels. China surpassed the U.S. in oil imports in February. The power and balance will be shifting toward the far east. The U.S. needs a smart policy in dealing with energy exports to those countries.”
Excess oil and gas in the U.S. creates lower export prices, giving the country a leg-up in positioning itself in Asia, where OPEC undoubtedly will be competing, Kassis said.
Trying to decipher Ohio’s place in any export boom becomes difficult, experts say. For the most part, the amount of resources the Utica Shale formation holds is largely unknown. The U.S. Geological Survey has estimated that the Utica holds about 940 million barrels of oil resources and about 208 million barrels of natural-gas liquids. Other estimates vary widely.
Not only that, but small and large companies, anxious to make more bets, are aggressively seeking out new options, increasingly making plays in all corners of the country.
A search for oil and gas is underway in the south, where a formation known as the Conasauga shale field covers a swath of farm and forest that runs from Alabama across Georgia and into Tennessee.
Furthermore, talk of drilling operations in North Carolina, California and Mississippi, among others, could pose domestic competition for the Utica play in the long-run, while vast international reserves of shale gas also await drilling in Russia, Europe and Saudi Arabia.
Eric Planey, vice president of international business attraction at the Youngstown/Warren Regional Chamber, said although he recognizes the possibility of a boom and bust cycle in Ohio, it’s important to understand that drilling operations create economic waves with growth in supply chains, drilling and service jobs and lower energy prices that help attract other industries to the region.
“The benefit in terms of wealth is the manufacturing supply chain improving — we need to think about that,” Planey said. “If we can do that sufficiently, it doesn’t just benefit the Marcellus and Utica, it benefits the global market, which helps mitigate the possibility of a local bust by trying to advance the Valley and make it a global manufacturing center for the oil and gas industry.”
Evidence of that transformation is already beginning to show itself in the area, Planey said. The chamber estimates that about 1,500 jobs already have been created as the result of a growing supply chain, with expansions at V&M, U.S. Steel in Lorain and TMK/IPSCO in Brookfield to meet growing demand from the oil and gas industry.
If the shale boom is sustained in Ohio, Planey said, real-estate transactions would increase. Continued investment would drive economic activity and jobs growth, while a stronger tax base would generate a surplus for local government to make infrastructure and quality of life improvements.
A stable growth pattern would take time to notice, Planey said.
“We’re cognizant that this boom is not going to reinvigorate the Valley overnight,” he added. “It is slowly reinvigorating the Valley, and we’re proud of that growth, but right now there’s no telling what kind of impact it will have in the long run.”
Consider the United Arab Emirates, (though it might be a stretch to imagine), the country is somewhat similar in size to Ohio, covering 84,000 square kilometers, compared to Ohio’s 106,054. Since the discovery of oil in the UAE, the country has become a modern state with a high standard of living. It joined OPEC in 1967.
Ten years later, the country’s gross domestic product was barely $40 billion. According to the World Bank, by 2011, it had exceeded $350 billion — in a country of only 4.8 million people, where today 30 percent of the gross domestic product is created by oil and gas output.
In 2011, GDP in the United Arab Emirates grew by 4.9 percent. At the same time in Ohio, GDP grew by 1.1 percent, totaling $418.8 billion — in a state where 11.5 million people live and work.
The Ohio Oil and Gas Energy Education Program, in a 2011 report, estimated that at a substantial rate of development, investments in the Utica formation would increase economic output by more than $22 billion and wages by $12 billion by 2015.
But even with horizontal drilling and fracking, operators are only tapping into a small portion of the oil and gas underground, leaving about 75 percent behind. The costs of drilling a well and exploring resources are considered extremely high when compared to return rates.
Last year, major oil-field service firms — those that provide everything from research, exploration and fracking services, such as Baker Hughes and Halliburton — increased their research and development budgets by 24 percent from 2010, in an attempt to maximize the hydrocarbons extracted from a given formation.
Though such firms are not targeting the Utica specifically, the lessons they learn will be applied to every formation and every play.
“The bottom line is more production means more revenue from sales,” said Donald Fischbach, chair of the energy group at the Cleveland-based law firm Calfee, Halter & Griswold. “Anything that increases the rate of return can translate into more capital deployment in a given area.”
Despite having a longer production window than some offshore reserves, shale wells typically last a few years.
For instance, Arthur Berman, an oil analyst with Labyrinth Consulting Services, at a conference in January showed that production in North Dakota’s Bakken formation increased to 573,000 barrels per day last year from 4,784 barrels in the early days of the play about eight years ago, which sounds good, but with a 38 percent annual decline rate, the wells can’t keep producing forever.
Fischbach said it’s in the industry’s nature to go where the reserves are plentiful and easy to get to, but advancements in drilling technology could bode well for the Utica formation, he added, because of its geological consistency and the information that’s already been collected about its reserves.
“I’m optimistic that this is the real deal. There’s no glaring negative that I’m aware of,” Fischbach said. “There are some unanswered questions, but the Utica also has some innate advantages. Its proximity to population, consumers and a strong customer base helps the product and the market here. You also have manufacturing facilities and expertise within a close proximity to the asset base, and that’s why we’ve seen a lot of these infrastructure announcements.”
A surplus in shale gas has resulted in a transportation bottleneck that has led to a strong demand for midstream expansions in Ohio and Pennsylvania, where a slew of pipelines and processing facilities have been announced in recent months.
As operators await those infrastructure expansions and as wholesale prices of dry natural gas have remained low, Baker Hughes reported in March that the number of drilling rigs across the country stood at 431 at the end of the month, down 35 percent from a year earlier, in a signal that decreased production eventually could raise prices.
Additional capital, infrastructure and drilling operations on the ground in Ohio mean sustained increases in sales-tax gains and a boost in the labor force, but how long wealth runs into the state is a virtual unknown, which makes it difficult for local governments to make economic projections.
To Kassis, the cheaper energy for homeowners and manufacturers in Ohio would be a major boon for the state’s economy, helping to create a more diverse manufacturing base that could utilize growing exports to open up new markets across the globe.
Developing better technology to reach shale-gas reserves, he said, will prove beneficial to American companies who can export that knowledge to places such as Saudi Arabia, the United Kingdom and Germany, where fracking operations are expected to escalate in the coming year or so.
If Ohio wants in on that exchange, Kassis said, it will need to focus more seriously on developing and rebuilding its workforce with the oil and gas industry in mind, a point nearly all sources agreed on throughout the reporting of this story.
Fischbach stressed that projections from agencies such as the IEA and the U.S. Energy Information Administration are just that — educated guesses that are later adjusted to account for production records.
“In Ohio, if you lay the project time line of Utica development and exploration against the time it takes from pregnancy through college graduate, we really haven’t even given birth yet,” he said.
In a year end note to clients, Dan Pickering, chief investment officer of the energy investment firm Tudor, Pickering & Holt, reviewed the country’s growing energy sector with cautious optimism.
“Mistakenly, in our view, some pundits have extrapolated growing U.S. crude production into imminent U.S. energy independence,” Pickering wrote. “This is overly simplistic and optimistic, but does highlight how far the mature, 20+ year declining U.S. oilpatch has come with the advent of horizontal drilling and hydraulic fracturing technology.”