Deep-sea drilling and fracking are helping to unearth abundant supplies of oil and gas. The coming energy renaissance could be just the elixir the U.S. economy needs.
Thursday night in South Texas, and the parking lot at the Texas Roadhouse, on Highway 287 outside Port Arthur, is jammed. Big-shouldered Sierra trucks jostle with shiny Rams, F-150s, and Tundras, with a pearl-white, freshly polished Dodge Challenger sports sedan thrown in for contrast. Inside, manager David Gonzalez copes with an overflowing crowd and counts his blessings. “Every week this year we’ve been up 6% to 12% over the same week last year,” he tells an out-of-state visitor. “It’s a good time!”
Les bon temps are roulant, not just in Port Arthur but all up and down the Gulf Coast, from Beaumont to Biloxi. A renewed surge in deepwater production in the Gulf of Mexico has led to one of those periodic booms that have marked the oil-rich region ever since the first well, at Spindletop, just south of Beaumont, blew its top in January 1901. At the same time, a surge in domestic natural-gas supplies, which has come mostly from hard-to-reach shale formations tapped by the controversial fracking process, has pushed domestic oil and gas output to its highest level since 1988. Increased overseas demand for refined products like gasoline and diesel has made America a net exporter of finished petroleum products, something not seen since 1949. And to meet that demand, the oil giants are building and expanding Gulf Coast refineries, the first major investments in such facilities in four decades.
Many of the pickup-driving diners at the Texas Roadhouse are oil-patch contractors currently employed at one of two massive expansions going on just outside Port Arthur: the $3 billion addition to Valero’s (VLO) Port Arthur refinery and, literally across the road, the $7 billion project to double the size of the refinery owned by Motiva Enterprises, a joint venture between Royal Dutch Shell and Saudi Aramco.
Along the coast it’s easy to spot the effects of America’s oil and gas renaissance in new hotels built in the past five years (many of them now populated by itinerant oilfield workers), in the multiplying numbers of overnight “shale-ionaires,” in rising home values, expanding car and truck dealerships, and effectively full employment.
What really excites experts is that these signs of prosperity in the gulf point to a larger trend. “We call it the great revival of the North American oil industry,” declares Daniel Yergin, head of Cambridge Energy Research Associates. “This is a turnaround not just for North America’s oil supply, but one with global impact. It’s certainly the biggest development in the world oil market of this century.”
That means the oil and gas boom could make America a major player again in the world energy market and help spur the entire U.S. economy. Already, both Texas and Louisiana have unemployment rates significantly below the national average, and according to the Bureau of Labor Statistics, the West South Central region — which includes Arkansas, Louisiana, Oklahoma, and Texas — has the second-lowest overall unemployment rate in the country, at 7.1%. The lowest? West North Central, which includes North Dakota (with a 3% unemployment rate), where gas producers in the supergiant Bakken formation can’t find enough workers to fill their shifts.
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On the East Coast, abundant natural gas flowing from the Marcellus Shale formation, which runs through New York, Pennsylvania, and Ohio, is enriching farmers who lease their lands to production companies and is estimated to have created 60,000 jobs in the region, with another 200,000 possible by 2015.
Cheap domestic energy is also good news for the manufacturing sector. “The discovery and development of North America’s shale resources has the potential to be the most remarkable source of economic growth and prosperity that any of us are likely to encounter in our lifetimes,” U.S. Steel CEO John Surma told the Congressional Steel Caucus in a late March hearing. It’s a virtuous cycle: More drilling requires more steel, and lower energy costs give U.S. steel producers a cost edge. This at a time when the Department of Energy reports that the energy intensity of U.S. steel companies is now among the lowest in the world.
In St. James Parish near Baton Rouge, ground was broken last year for a $3.4 billion steel plant being built by Nucor Steel (NUE), the first major facility built in the U.S. in decades. U.S. Steel is investing in a new facility in Lorain, Ohio, and V&M Star Steel (the North American subsidiary of the French pipemaker Vallourec) plans to spend $650 million on a small-diameter rolling mill in Youngstown, Ohio.
It’s not just Big Steel that will benefit. Feedstock made from cheap natural gas is a boon for the petrochemical industry. Citing “the improved outlook for U.S. natural-gas supply from shale,” Dow Chemical (DOW) says it will build an ethylene plant for startup in 2017. (Ethylene is used to make things like plastic bottles and toys.) Dow will also restart its ethylene plant near Hahnville, La. Shell, which is building a new petrochemical refinery in Pennsylvania, is also considering a $10 billion Louisiana plant to convert natural gas to diesel. “Low-cost natural gas is the elixir, the sweetness, the juice, the Viagra,” says Don Logan, president of the Louisiana Oil and Gas Association. “What it’s doing is changing the U.S. back into the industrial power of the day.”
It is ironic that only a few years ago the conventional wisdom was that America was running out of natural gas. Now becoming “the Saudi Arabia of natural gas,” as some industry promoters like to say, means that America will start exporting lots of the stuff. “We’re going from being a very large sinkhole for all hydrocarbon products,” says Charif Souki, CEO of Cheniere Energy (LNG), a natural-gas supplier, “to becoming the low-cost energy producer in the world.”
While the U.S. remains the world’s largest importer of crude oil (the nation still imports 45% of its oil) liquefied natural gas (LNG) may soon become a big export item, adding jobs and helping offset America’s trade deficit. Companies that built import terminals to bring in LNG in the early 2000s are now spending billions to remake them into export facilities. Cheniere Energy plans to break ground on the first new LNG processing unit at its Sabine Pass Terminal on the Louisiana coast this year and be exporting natural gas by 2015. Cheniere has signed contracts with four overseas customers including Spanish utility Gas Natural Fenosa. Besides Sabine Pass, at least three other LNG terminals, built as intake ports, have applied for export licenses. Essentially the infrastructure of the Gulf Coast oil and gas industry is being spun around to serve the new realities of the great petro-revival.
For all the ebullience in the industry these days, the boom times could change, and quickly. “Tight oil,” trapped in hard-to-exploit formations like oil sands and oil shale, is economical right now because of high crude prices, which could fall if Middle East tensions subside and new supplies flood the market. Some experts believe that world oil prices have to stay above $85 a barrel (current price: $105) for tight oil to remain profitable. A crackdown on environmentally risky fracking could stop the natural-gas boom in its tracks. Environmentalists cite concerns that fracking can despoil water supplies and contribute to air pollution. Another
Deepwater Horizon
accident could halt offshore production in the gulf for decades.
Even plans to export lots of cheap natural gas could hit market realities. American producers today, even with shipping costs, can sell gas into Asia, Europe, and South America for about 40% less than the price of gas in those markets. New supplies coming online over the next decade from Australia and China could drive prices down, crimping margins for U.S. exporters.
Could any or all of those factors stifle the Great Revival? That’s hard to say. As the regulars at the Texas Roadhouse can tell you, that’s the thing about booms. They eventually always turn to busts. In the meantime, let the good times roll.
—Richard Martin is the editorial director of Pike Research and author of SuperFuel: Thorium, the Green Energy Source for the Future.
Clarification: An earlier version of this story stated that Dow Chemical will build an ethylene plant in Louisiana for startup in 2017. The company says it plans to build it in the Gulf Coast, but it has not announced a specific location.
This story is from the April 30, 2012 issue of Fortune
