US drilling boom boosting family incomes by $1,200 a year, report finds

The surge in domestic drilling that has transformed parts of North Dakota, Arkansas and Pennsylvania into modern-day boomtowns is causing ripple effects across the entire U.S. economy, spurring investments in new chemical plants and trimming household bills, according to a report released Wednesday.

The new IHS study, funded by the American Petroleum Institute, American Chemistry Council and other groups, credits today’s technology-driven oil and gas boom with unleashing new capital spending on U.S. fertilizer plants, assembly lines, and natural gas processing equipment.

“The unconventional oil and gas revolution is not only an energy story, it also is a very big economic story that flows throughout the U.S. economy in a way that is only now becoming apparent,” said IHS vice chairman Daniel Yergin.

IHS projects that from 2012 to 2025, companies will invest $346 billion in pipelines, processing facilities and other infrastructure to transform natural gas and natural gas liquids into olefins, methanol, ammonia and a host of other energy-related chemicals.

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The IHS analysts anticipate that by 2025, as much as $100 billion will have been invested in new chemical, plastics and related derivative manufacturing facilities in the United States.

Retired plants are being restarted, and entirely new facilities will be built from scratch. Chevron Phillips Chemical Co., ExxonMobil Chemical Co., Formosa, Shell Chemical, the Dow Chemical Co., and others already have announced plans to construct U.S. facilities to produce ethylene, a building block used in an array of consumer goods, from diapers to tires. Canada’s Methanex Corp. is spending $1.1 billion to relocate two methanol plants from Chile to Geismar, La.

And IHS predicts that the expected returns on investment are high enough to justify building new fertilizer plants on the Gulf Coast, even though 40 percent of the United States’ fertilizer capacity was shut down between 1999 and 2006. “We’re talking about hundreds of manufacturing projects. The capital investments are in the hundreds of billions of dollars. It’s pretty extraordinary,” said Greg Bertelsen, director of energy and resources policy for the National Association of Manufacturers, which helped fund the study.

“While there’s been significant benefits realized to date, the report shows that particularly for manufacturing, the greatest benefits are yet to come.” About three quarters of the cost of producing petrochemicals and plastics is tied to the cost of energy-derived raw materials. The relatively low cost for natural gas today — about $3.60 per million British thermal units — has made the U.S. “one of the world’s lowest-cost petrochemical producers,” IHS said.

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Many new facilities will be built near oil and gas plays or existing infrastructure, such as Shell’s planned Pennsylvania ethane cracker to produce ethylene, and CHS Inc.’s planned fertilizer facility in North Dakota. But study author John Larson, IHS’ vice president of economics and public sector consulting, said that may change as new pipelines are built to transport gas and natural gas liquids around the country.

The study also documents pocketbook impacts of the domestic drilling boom, including lower costs for electricity, heat and various goods and services. Disposable income effectively increased by an average of $1,200 per U.S. household last year as a result of both higher household wages and lower energy costs, the report found. According to IHS, the per-household savings could climb to more than $3,500 in 2025.

“Individuals today are facing significantly lower energy costs, both indirectly and directly,” Larson said. In particular, without the surge in domestic oil and gas production, “food costs would have been much higher, because of all the refrigeration required, and the electricity required in processing food and then the food input itself, which is lower because fertilizer costs have gone down.”

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IHS’ economic modeling was pegged to the organization’s current outlook for unconventional oil and natural gas production and operating expenses in the U.S.

The scenario also included a possibly conservative assumption that the U.S. would export 5.5 billion cubic feet of natural gas per day. The Energy Department has so far approved companies to export as much as 5.6 billion cubic feet of gas per day to Japan and other countries that aren’t free-trade partners with the United States.

But with 19 export applications still pending, the Energy Department appears likely to approve more, even as some heavy industrial users of natural gas warn that unfettered exports could chip away at the domestic pricing advantage that has inspired them to move plants and assembly lines to the United States.

Kyle Isakower, vice president for policy and economic analysis at the American Petroleum Institute, said the report offers a cautionary tale. “You see that under a ‘do no harm’ scenario, so to speak, we can realize tremendous economic and energy security benefits — not just for the oil and gas sector itself,” Isakower said.

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