Hot stuff: U.S. energy market in overdrive as shale drilling booms

Even though the GOP ticket didn’t win the 2008 election, U.S. energy companies have heeded vice presidential candidate Sarah Palin’s admonition to “drill, baby, drill.” They’ve drilled so much that in 2013, the U.S. passed Russia as the world’s leading producer of oil and gas and became a net oil exporter for the first time in decades. This turnaround can be summed up in one word: shale.

Hydraulic fracturing, or fracking, in U.S. shale reserves has liberated vast amounts of oil and natural gas, providing a major boost to the U.S. economy and creating big opportunities for suppliers that serve the oil and gas industry, including machine shops and other part manufacturers.

Big Numbers

The numbers behind the shale boom are staggering. According to the U.S. Energy Information Administration, the U.S. has proven reserves of about 1,161 trillion cu. ft. (tcf) of natural gas, said Tanya Bodell, executive director of Boston energy consulting firm Energyzt during a presentation at the AMT Global Forecasting & Marketing Conference, held Oct. 14-16 in Cincinnati. “The U.S. uses about 25 tcf a year, which means we have about 45 to 48 years worth of gas in reserve,” she said. “But that’s just the tip of the iceberg. Underneath those reserves it’s estimated that we have about four times as much gas, which would mean there is 200 years’ worth of gas at our current usage levels.”

Investments being made to extract that gas are staggering as well. Englewood, Colo.-headquartered consultancy IHS Global Insight projects $3.2 trillion in total investment in the U.S. shale gas industry through 2035, which includes drilling, well completion, facilities and infrastructure capital expenditures.

The Marcellus shale play is representative of the industry. It is a large reserve located mainly in Pennsylvania and New York, but being drilled primarily in Pennsylvania because New York has in place a moratorium on drilling. According to reports by energy companies to the Pennsylvania Department of Environmental Protection, shale gas production in the Marcellus region increased to 3.1 tcf in 2013 from 1.6 tcf in 2012 and 1 tcf in 2011. The Marcellus will account for 25 percent of U.S. natural gas production by 2015, according to Morningstar Inc., Chicago, an investment research company. Total U.S. natural gas production is expected to increase by 4 percent this year and next.

Metalworking Opportunities

Part manufacturers will likely have a long-term opportunity to make components for fracking operations. In addition to drilling heads and assemblies, high-pressure fracking pumps require specialty machined parts, including ring groove seals, connectors, crosses, adapters, spools, pull plugs and ball droppers.

The drive to make fracking shale deposits and transporting natural gas safer and more environmentally acceptable will also propel demand for specialty parts. For example, the need for devices that monitor leaks and other drilling problems will grow, according the The Kiplinger Report. To help meet that demand, GE Energy makes “pigs,” devices that check pipeline interiors for cracks and other issues. Also, a boom in pipeline construction is expected to relieve some of the volume of oil increasingly being carried by trains and trucks, which should reduce the environmental impact of transportation. All told, about 10,000 miles of new pipelines will be laid this year, with more to come, according to Kiplinger.

In fracking, a well is drilled thousands of feet vertically into the ground and then horizontally into shale deposits. Explosive charges then perforate the well casing to put cracks in the shale. A water, sand and chemical mixture are then pumped, at high pressure, into wells to expand the fissures and enable oil and gas to pass through them. As the mixture is pumped out of the well, the oil and gas follows the pipeline to the wellhead on the surface.

Demand for reinforced railroad tanker cars to transport oil and natural gas liquids (NGLs), specifically propane and ethane, more safely is growing—particular after recent catastrophic tanker accidents in Quebec and North Dakota. One tank car maker, The Greenbrier Cos., is designing a new, safer tanker and studying how to strengthen existing cars through retrofits. Oil and gas firms may buy as many as 60,000 new cars in coming years, according to Kiplinger.

Also, manufacturers are investing in machine tools and accessories to make energy parts. About 10 percent of total U.S. manufacturing technology orders of $5.7 billion in 2012 went into energy parts manufacturing, according to AMT—The Association For Manufacturing Technology.

Plentiful and Cheap

The shale drilling boom has kept natural gas plentiful and relatively cheap in the U.S. For example, natural gas costs more than three times as much in China, France and Germany than in the U.S. and nearly four times as much in Japan.

However, the U.S. natural gas market has experienced major price spikes. In the 1990s, U.S. prices averaged about $2 per million Btu, according to figures from the American Petroleum Institute. In 2001, prices spiked above $8 mBtu, but returned to about $2 per mBtu in 2002. Prices began rising again, spiking close to $14 per mBtu in 2006 and $13 per mBtu in 2008, caused by unusually cold winter weather and growing demand from electrical power producers that had displaced coal-fired generating stations with natural gas ones. However, large increases in the natural gas supply dropped the price back to a range from $2 to $4 per mBtu from 2009 to 2013 as a result of shale production. Price spikes are now localized, created by pipeline constraints from legacy infrastructure that was not built to connect current shale sources to sinks, according to Bodell.

Abundant natural gas has changed the U.S. commercial electricity industry, which has gone from producing about 18 percent of its power from natural gas in the 1990s to about 30 percent in 2012. Natural gas reached parity with coal as an energy source for electricity the first time in April 2012, according to Bodell.

“Whereas electricity prices traditionally have been set by the price of natural gas, the price of natural gas now is being set to elicit the required demand from the electricity industry,” she said.