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Shale oil find fuels boom in U.S. business

- The Washington Times - Thursday, April 11, 2013

To John LaRue, the renaissance in U.S. manufacturing is no dream. It's already here.

As executive director of the Port of Corpus Christi, Texas, his business is booming and he has aggressive plans to expand and take advantage of the trend. He expects the local economy to double maybe triple in size within a few years as U.S. industries flock to the area, joined by foreign companies as far afield as Italy, Austria and China, all racing to take advantage of the cheap and plentiful oil and natural gas.

To Mr. LaRue, it all started with a major oil find a few years ago in the Eagle Ford shale deposits 60 miles up the road. That oil had been locked up for millions of years in deep underground bedrock and suddenly came available because of technologies developed by U.S. oil companies to extract oil from shale.

While the Eagle Ford gusher was the initial big draw in a world where oil-thirsty consumers have driven prices to $100 a barrel, the field also proved to have plenty of natural gas that became a powerful attraction for industries that use gas as a feedstock and to power factories.

U.S. and foreign manufacturers have announced plans to open plants in Corpus Christi for making steel and plastic products as well as building pipes needed to transport the oil and gas. Cheniere Energy Inc., a Houston gas transport firm, has asked the Energy Department for approval to invest $10 billion into building a massive facility for liquefying and exporting some of the Eagle Ford gas.

All of that comes on top of the port's vital role in shipping the Eagle Ford crude oil to Gulf Coast and East Coast refineries that desperately need new sources of light, sweet crude to satisfy demand for highly refined gasoline in the most populous region of the country. Getting the oil out of the area was not easy at first because not enough U.S.-made vessels were available to ship all the crude to meet East Coast demand. But shippers are making do with barges while a shipyard in Philadelphia is building more tanker vessels to accommodate the stream of oil coming to market, he said.

Mr. LaRue estimates the port's oil- and gas-fed manufacturing boom to create 350,000 factory jobs paying $60,000 to $80,000 a year, with thousands more jobs in construction and other industries that feed into and service the manufacturing plants.

"Unemployment is down to 6 percent. It had been as high as 8.5 percent, 9 percent" during the recession, he said. "I attribute most of the reduction to Eagle Ford."

Shale boom fuels renaissance

Corpus Christi's experience is repeated in areas across the country. North Dakota's prolific Bakken Shale formation has turned the state into the nation's second-largest oil producer. Pennsylvania refineries and shipbuilders are mobilizing to tap into the shale boom. Railroads and chemical industries are being transformed and strengthened as they take advantage of business opportunities stemming from the rising flow and falling costs of oil and gas. Economists foresee a potential rebirth of manufacturing including such basic industries as steel and plastics that had gone overseas and that many Americans thought they would never see again.

General Electric Co. chief executive Jeff Immelt is one captain of industry who is convinced that American manufacturing can rise again, thanks to the shale revolution. He announced plans last week to build a research facility in Oklahoma City to develop state-of-the-art technologies for the oil and gas companies that are pioneering in the field of energy extraction from shale.

"The availability of shale in the United States and around the world has to be one of the biggest game-changers I've seen in my career," he said, but technologies still are needed to ensure that the gas and oil can continue to be extracted at low cost and without serious harm to the environment.

"Can we develop the technologies to extract it sustainably? If we do, we'll have cheaper energy. We will power a manufacturing renewal" and even possibly achieve energy independence in North America once again, he said.

Other businessmen and economists agree. Nariman Behravesh, chief economist at IHS Global Insight, said the shale revolution is causing a "tectonic shift" in manufacturing that promises to revive a swath of American industries, transform the global industrial landscape and dramatically reduce chronic U.S. trade deficits.

"This development is improving the manufacturing competitiveness of the United States" by attracting "energy-intensive investment" from Europe, Latin America and Asia and encouraging U.S. producers to keep jobs and plants at home rather than ship them overseas, he said.

"The boom in nonconventional gas and the resulting big drop in prices have lowered feedstock costs for the petrochemicals and other industries, as well as electricity costs for steel, aluminum and glass" as U.S. electric utilities increasingly switch to inexpensive gas to run their plants and pass the savings on to customers, he said.

IHS estimates that the shale oil and gas boom already has created 1.7 million jobs and attracted nearly $100 billion in manufacturing investments.

Foreign firms flock to Texas

More than $20 billion of new investment was announced just in the past year in the Corpus Christi area, thanks to Eagle Ford, which has become the largest oil and gas development project worldwide, according to a report from the University of Texas at San Antonio.

In addition to the Cheniere gas-liquification plant, manufacturing firms from three foreign countries announced plans to build facilities in Corpus Christi. M&G Group, an Italian plastic packaging manufacturer, will spend $900 million building a factory to make soft drink bottles and other products for the U.S. market.

Austrian steel company Voestalpine AG will spend $700 million to build a plant fueled by Eagle Ford gas to make specialized steel briquettes that it will sell both in the U.S. and abroad. And the Chinese pipe company Tianjin Pipe Corp. is spending $1 billion on a plant to build seamless pipe for transporting oil and gas, generating 2,000 construction jobs and 800 permanent jobs.

According to a study by the Aspen Institute, much lower energy prices in places like Corpus Christi are a particular draw for European firms. Natural gas prices in Europe and Japan are about triple the U.S. average, while wholesale electricity prices in Germany are about double those in the U.S.

With such price advantages, U.S. industries like plastics, rubber and chemicals have the opportunity to grow at double-digit rates in coming years, it found.

The Aspen Institute's Thomas J. Duesterberg, a specialist on manufacturing trends, noted that the U.S. advantages don't just stem from cheap oil and gas. U.S. wage costs have remained tame compared to the country's top international competitors in recent years, while productivity and innovation have soared and the dollar has declined all adding to the growing competitive edge for U.S. industries.

Foreign firms such as BMW, Michelin and Toyota are now using their manufacturing plants located in the U.S. as bases for exporting abroad rather than just serving the U.S. market, he noted. "This speaks to the attraction of the United States as a production platform."

The sudden arrival of diverse foreign companies has kept the Corpus Christi port busy, enlarging facilities to accommodate these new industries as well as the eventual flow of 1.1 million barrels a day of crude oil through five private terminals.

The University of Texas study estimates that all the projects combined will create 360,000 jobs and increase the region's economic output by more than $150 billion between 2011 and 2022.

Obstacles from Washington

But while the shale development is giving a big boost to the local economy, not all of the changes have been easy or smooth. Businesses are struggling with arcane elements of federal law and regulation, while policy gridlock in Washington not only prevents the export of some of the Eagle Ford gas without going through a highly politicized approval process, but even prevents shipment of the crude oil to other U.S. cities unless the oil is carried in U.S.-made vessels.

Since most of the port activity until the Eagle Ford find involved importing oil, gas and other products, not enough U.S.-made ships were available to send the crude to refineries on the East Coast, as required by the federal Jones Act, even though those refineries badly needed the crude, Mr. LaRue said.

Two Philadelphia-area refineries last year nearly went out of business as they didn't have access to the premium crude from Texas and North Dakota and were losing money importing more expensive crude from Nigeria. Their financial prospects revived when investors rescued the refineries and found a way to ship light crude from North Dakota by rail through an arduous inland route.

To accommodate the oil coming from Eagle Ford, a Philadelphia shipyard is building new tanker vessels. But the Corpus Christi port is having to make do in the meantime by expanding its barge docks and using barges to ship the oil mostly to refineries on the Gulf Coast, which already are glutted with oil.

The oil potentially could be shipped as far as Pittsburgh by barge, Mr. LaRue said, but that would require extensive dredging of the Mississippi River and Intercoastal Waterway to accommodate deep-draft barges. The federal government has been unwilling to authorize or pay for such dredging, even though barge operators have offered to pay higher taxes to fund it, he said.

"The Intercoastal Waterway, like a lot of infrastructure in the U.S. today, needs a lot of work," but Congress and the administration have not been able to agree on how to pay for it, he said.

"It doesn't make any sense. It's inefficient and we're losing productivity" having to use small barges to ship the oil, he said. But even with the much higher transportation costs that result, it's still cheaper for refineries to use the Eagle Ford oil than to import crude at much higher prices, he said.

President Obama has been pushing for more investment in infrastructure to support the revival in manufacturing and generate more construction jobs, but that's gone nowhere in a gridlocked Congress. Rather than approve new funding for roads, ports and bridges, most infrastructure programs took a hit under the $85 billion in across-the-board budget cuts that took effect on March 1.

Both parties say they want to promote the manufacturing revival, with Republicans favoring tax reform and tax breaks. Manufacturers embrace all such proposed reforms. But Mr. Behravesh said the boom is occurring largely as a result of private initiative and the compelling marketplace advantages of having cheap energy, rather than government design.

"This is primarily a story of market forces and entrepreneurship, not government incentives or intervention," he said, although he and other analysts say the government should work to ensure the trend continues. The biggest job for the government, said Mr. Behravesh, will be "nurturing the energy boom while protecting the environment" a task which requires a delicate balancing of the nation's priorities.

Challenge to China

Economists say the revival of the U.S. competitive edge in vital industries like steel and plastics has put nations like China, which had been siphoning manufacturing plants and jobs from the U.S., on the defensive for the first time in decades. Some foreign companies, like the ones locating in Corpus Christi, are deciding that rather than try to beat the U.S. competition, it's better to join them. An added bonus is easy access to the vast U.S. consumer market, which has been the final destination of the much of the goods manufactured around the world in any case.

"We believe the U.S. is poised to lead the next manufacturing renaissance," said Helmuth Ludwig, chief executive of the German company Siemens' North American division, which has spent $25 billion in recent years establishing plants in Atlanta and elsewhere to manufacture drives for use in transportation, mining and other industries.

"Increased competitiveness and the 'shale revolution' point to the possibility of a manufacturing renaissance in the U.S. economy" that will jeopardize China's success at attracting the world's industries to its shores, said Manoj Pradhan, economist with Morgan Stanley.

"Should the U.S. return to sustainable growth [in manufacturing], it will likely return as a competitor for emerging markets, and not as a consumer," draining business away from China, he said.

But Alan Tonelson, research fellow at the U.S. Business and Industrial Council, whose members compete with Chinese manufacturers, said "claims of a U.S. manufacturing renaissance are overblown."

Despite falling energy costs, rising Chinese wages and the appeal to foreign manufacturers of locating close to customers, the revival has barely shown up in trade data, he said.

In the past few months the U.S. petroleum trade deficit has shrunk dramatically while the manufacturing deficit and trade gap with China have both declined modestly, according to Commerce Department statistics. But Mr. Tonelson pointed out that over the past year, the manufacturing deficit and China trade gap nevertheless are still up by 3 percent. The only area that's seen significant improvement, he said, is advanced technology, where the trade gap has fallen by nearly 4 percent.

The Aspen Institute's Mr. Duesterberg said the manufacturing resurgence is just beginning, but it could accelerate significantly if Washington steps up its support the shale boom and other market-enhancing policies such as improving science and math education, and working to open more foreign markets, reduce regulation and reform the corporate tax code.

For U.S. industries that are the biggest users of energy, he said, the nation's oil and gas boom is a "huge wind at their back."

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