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Oil, Gas Drilling Tied to Recovery

Mon June 27, 2011 - Southeast Edition
Pete Sigmund

The construction industry is reaping rewards from oil and gas drilling as one of the keys to recovery.

The oil and gas industry is closely tied to the U.S. economy — and construction. It supports an estimated 9.2-million jobs and contributes 7.5 percent of total gross domestic product (GDP). The United States is the third largest producer of crude oil, about 5,380,000 barrels per day (b/d). (Russia is first; Saudi Arabia is second.) It’s also the top consumer of oil (followed by China, Japan, India and Russia).

More drilling for oil and gas in this vital area of the economy stimulates recovery of the U.S. economy, including many areas of construction — pipelines, industrial facilities, wastewater plants, consumer spending, housing and other sectors.

Impacts Economy

Increased supplies of crude would lower the price of gasoline, giving consumers more money to spend and therefore lifting the economy. Crude oil accounts for about 68 percent of each dollar spent at the pump.

More production also increases demand for equipment.

“Drilling, particularly on-shore, often requires at least rough roadbuilding and site preparation equipment,” said Ken Simonson, chief economist of the Associated General Contractors of America (AGC). “You have to create a pad, support buildings, storage tanks and so forth. You need excavating equipment to level the ground. You certainly need trenching equipment for pipelines. The oil supply side benefits the whole construction industry and the whole economy.

“The best example is the Bakken under North Dakota and Montana, which has led to demand for a range of other structures, including hotels and housing because workers are moving into an area, which historically has had very little accommodations. Oil drilling is now big in certain geographical areas where not much was happening before — like Western North Dakota and parts of Texas, Oklahoma and Louisiana. In natural gas, the Marcellus Shale in western Pennsylvania, and gas drilling in Texas, Louisiana and Arkansas, are also spurring construction.”

New oil fields, which also are spurring construction, include the Eagle Ford under South Texas, the Niobrara under Wyoming, Colorado, Nebraska and Kansas; the Leonard in New Mexico and Texas; and the Monterey in California. Production in the Bakken has surpassed pipeline capacity; oil is going to refineries by rail and truck. Drilling companies had had to erect camps to house workers.

Bakken and Eagle Ford are each expected to produce 4 billion barrels of oil, making them the fifth and sixth largest oil fields ever discovered in the United States (The top four are Prudhoe Bay in Alaska, Spraberry Trend in West Texas, the East Texas Oilfield and the Kuparuk Field in Alaska.) Within five years, the new fields are expected to produce one million to two million barrels per day, according to some estimates, boosting U.S. production 20 percent to 40 percent.

Affects Construction Prices

More crude oil would lower the price of petroleum products used in construction.

“Our industry is a major user of diesel fuel and, of course, of asphalt,” Simonson said. “The price of this fuel tracks very closely with the price of crude oil, which has recently ranged between $97 and $102 per barrel. We’re very much in favor of drilling, both to increase the supply and hold down the price of crude and products from it.”

Offshore Drilling

On Oct. 1, 2008, Congress lifted the federal ban on offshore drilling, which had kept 75 percent of U.S. coastal waters in the lower 48 states off limits to development for nearly three decades.

Then, the BP-(British Petroleum) owned $560-million Deepwater Horizon Macondo drilling rig shot up in flames on April 20, 2010, spilling 4.9-million barrels of oil into the Gulf of Mexico. This led the Obama Administration to declare a six-month moratorium on offshore drilling in the Gulf. As the recovery struggled slowly forward, the Administration lifted the moratorium this past October and gave oil and gas companies an extra year to develop deep water leases to make up for delays. The Administration also put new safety regulations in place and is requiring a strong permitting process through the Department of the Interior.

Critics charge that unnecessary bureaucracy in the permitting process is delaying new drilling.

“Gulf sites are back in play; the moratorium has been lifted, but permitting is still functioning the way a moratorium would, holding things up,” said Reid Porter, media relations representative of the American Petroleum Institute (API) in Washington, D.C.

Eric Milito, API’s group director for upstream and industry operations, said in a Washington teleconference: “We have seen dozens of exploration projects get recycled [in the regulatory and permitting process] on an average of four to five times … Oil and natural gas development on U.S. public lands and federal offshore waters remains on a very slow track … What the industry needs is not a checklist, but clarity on the level of information that is required to meet the expectations of the regulator and to ultimately gain approval. The checklist still does not address the continued ping-ponging that occurs with plans and permits … The approval process has taken more than six months, in many cases close to a year.”

The Obama Administration has given oil and gas companies an extra year to apply for extensions of deep water leases expiring before 2015. New leases are not happening, according to critics who say 2011 may be the first year without a Gulf lease sale since 1969 and the first year without a federal offshore lease sale since 1957.

Despite the go-ahead in the Gulf, an estimated 85 percent of potential offshore drilling sites remains off limits. Industry is not allowed access to many sites in the outer continental shelf, including many in the Atlantic Ocean off Virginia, North Carolina and Florida.

(The moratorium after the Deepwater Horizon accident cost an estimated 19,000 jobs worth $1.1 billion in lost wages, according to a Louisiana State University study. It also cost BP more than $40 billion.)

Boosts Economies of States

Milito told Construction Equipment Guide that offshore drilling strongly impacts the economies, including construction, in states that are far away from the Gulf.

“Look at the industries, like construction, that support offshore drilling,” he said. “The amount spent [on related activities] in places like Illinois and Pennsylvania is in the hundreds of millions of dollars. Gulf production and exploration provides jobs across the country in industries like construction. Providing access in areas, which we have been unable to reach and produce resources, has the potential, over the next 20 to 30 years, to create hundreds of thousands of additional jobs as well as significant government revenues and domestic production. Ultimately, oil and natural gas generates revenues, GDP, everything that the country sorely needs.”

Polls indicate that 69 percent of U.S. citizens favor more offshore drilling.

New Keystone XL Pipeline

API Chief Executive Officer Jack Gerard recently said that the Keystone XL Pipeline — a proposed expanded “bullet” pipeline between the United States and Canada, which has been under review for 35 months — “is the largest shovel-ready job-creating program on the books; over time it will create over 465,000 jobs; it is huge.”

API’s Milito commented: “We believe that opening up public lands and federal offshore areas to oil and natural gas development, and approving the Keystone XL Pipeline, could provide secure liquid fuel supplies for 92 percent of the nation’s consumption in 2035.”

The proposed Keystone Gulf Coast Expansion Project is a 1,661-mi. (2,673 km) crude oil pipeline that would begin at Hardisty, Alberta, and extend southeast through Saskatchewan, Montana, South Dakota and Nebraska. It would incorporate a portion of the Keystone Pipeline (Phase 2) through Nebraska and Kansas to serve markets at Cushing, Okla., before delivering product near existing terminals in Nederland, Texas, serving the Port Arthur, Texas, marketplace.

The $13-billion Keystone pipeline system would significantly improve the efficiency and security of access to Canadian oil. The most technologically advanced pipeline in the world, it would be lined with hundreds of advanced sensors to instantly detect malfunctions.

Total Number of Rigs Increasing

Despite obstacles, the number of active drilling rigs in the U.S. increased from 1539 on June 17, 2010 to 1860 on June 17, 2011, including an increase in the number of oil rigs from 574 to 984. Though the number of natural gas rigs decreased from 953 to 870, this is attributed to pricing and profit margin factors and the lack of full information in the rush to develop new sites in areas like the Marcellus Shale. (The current 2011 figure also includes six “miscellaneous” sites.)

“From last year to this year, there has been a tremendous increase in the number of active [oil] rigs; in the Gulf of Mexico, the number jumped from 17 to 35,” said Raghavan Narayan, API’s senior economic analyst. “Things are coming back. The industry wants to produce more domestically so there has been an increased push. The top oil and gas producing states are New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas and Wyoming.”

The rig count peaked at 4,530 in 1981 because of the oil crisis at that time. A low of 488 was recorded in 1999.

The number of natural gas rigs could increase dramatically if Congress passes a new Alternative Transportation bill which would increase tax credits for companies converting heavy trucks and refueling stops from diesel to domestic natural gas. Conversion cost estimates are $100,000 per refueling station and $64,000 for an 18-wheeler.

The bill also would encourage the domestic production and purchase of vehicles fueled by natural gas and looks towards saving 2.5-million barrels of oil per day.

Natural Gas

Shale gas resources in the United States are far larger than oil resources, and a major impetus to drilling and construction. Drillers have unlocked decades worth of natural gas — a huge supply that may keep prices low for years. U.S. shale oil, on the other hand, would only be expected to supply one to two percent of world consumption by 2015, with a minimal effect on prices.

In 2010, oil and natural gas companies created 57,000 new jobs in Pennsylvania and West Virginia through natural gas development in the Marcellus Shale formation. Expansion of such drilling in the Northeast would create an estimated 280,000 new jobs by 2020.

Natural gas accounts for almost one quarter of all energy used in the United States. This is expected to grow, impacting construction, as the country builds toward a renewable energy future and looks to clean-burning fuels. The United States consumes about 13 percent more of this gas than it produces, so there’s a big need for more drilling, with expanded equipment expenditures.

The Marcellus Shale

The Marcellus Shale formation is causing a “Gold Rush” as one of the world’s largest natural gas areas. It covers a 600-mi. (966 km) area in the Northeast — mostly in Pennsylvania but also in New York, Ohio and West Virginia. Estimates say its shale deposits hold about 500-trillion cu. ft. of natural gas. This Appalachian formation is greatly accelerating new drilling activity and is creating numerous jobs, contributing to state economies. As drilling expands, new pipelines will have to be laid. Related construction also includes wastewater plants, expansion of landfills, stormwater runoffs and environmental mitigation.

Hosts of drilling companies have been acquiring mineral rights contracts to explore potential drilling areas. The drilling technique is called hydraulic fracturing (hydrofracing) — first drilling straight down and then horizontally.

Other major natural gas fields in the United States also are accelerating construction. The Haynesville Shale, in particular, is another ’Gold Rush’ formation and a top producing area. It underlies much of the Gulf Coast, including northwestern Louisiana, southwestern Arkansas and eastern Texas. The Barnett Shale of Texas, where the hydraulic fracturing technique was first mastered, is also an important field, as is the Fayetteville Shale in northern Arkansas. CEG

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