IN THE RECENTLY RELEASED FILM PROMISED LAND, MATT
DAMON plays a smooth-talking salesman for a natural-gas
company who plays down concerns about the environmental impact
of hydraulic fracturing, or fracking, to buy cheap drilling
rights from farmers in a depressed area of Pennsylvania.
Damons character sours on his job when he discovers the
actions the company is willing to take to win, but he never
really turns against fracking, as the potential bonanza of
natural gas may offer the last chance of economic revival for
this rural area.
Off the silver screen that message is resounding more than
ever. Fracking has reinvigorated the U.S. oil and gas industry
and brought the nations economy to the cusp of a historic
transformation. The drilling technique is extracting massive
new supplies of natural gas and sizable amounts of oil from
shale rock formations, also known as plays, from Pennsylvania
to North Dakota. Energy imports have declined so much over the
past six years that the idea of U.S. energy independence
a pipe dream of presidents since the days of Richard Nixon
is suddenly a distinct possibility. The gas revolution
also has the potential to spark a broader economic surge,
creating millions of jobs and lighting a fuse under U.S.
Cheap, abundant energy generated by fracking will bring a
new American century, contends Philip Verleger, an
economist and former director of the U.S. Treasurys
Office of Energy Policy who runs his own energy and commodity
consulting firm. He predicts that the U.S. energy boom will
create 3 million jobs and boost economic growth by 1 to
1.5 percentage points a year between now and 2020.
We can clean the clock of competitors who dont
have access to natural gas, and that overrides cheap labor
abroad, says Verleger, who served in the Carter
administration. Our trade deficit may go way down;
well have lower-cost energy; the Fed wont have to
tighten monetary policy; the dollar will be more competitive.
And itll work no matter who is president. We will be
energy independent in ten years.
Verlegers prediction is certainly ambitious, but there
are several obstacles on the path to potential independence.
First, the fracking industry must overcome its critics and
demonstrate that it can continue to ramp up production without
causing serious environmental damage. New York State, home to a
potent antifracking movement, has imposed a moratorium on the
practice pending review of an environmental study; Governor
Andrew Cuomo is expected to decide by late this month whether
to allow drilling to proceed. Scores of local governments
across the country have banned it. Environmental concerns
can influence policymakers and can lead to lower
investments and slow things down when were trying to
generate energy and create jobs, says John Felmy, chief
economist at the American Petroleum Institute, a
Washington-based trade organization. There are legitimate
issues that have to be properly addressed, especially when
fracking is often misrepresented.
The industry must also grapple with a spirited political
debate about whether growing supplies of natural gas and oil
should be kept at home or exported to world markets, helping to
narrow the U.S. trade deficit. Manufacturers are eager to see
new gas supplies directed at the domestic market to keep their
energy costs down. Export advocates, however, are brandishing
support from a long-awaited U.S. government study, released in
December, that concluded that shipping natural gas abroad would
provide a net economic benefit.
Notwithstanding these issues, however, the broader trend of
cheaper, more abundant U.S. energy appears undeniable. Total
dry production of natural gas increased by 18.9 percent between
2007 and 2011, to 22.9 trillion cubic feet, according to
the U.S. Energy Information Administration. The agency projects
that output will grow by roughly 50 percent by 2040 and that
the U.S., which now produces 95 percent of the gas it consumes,
will become a net exporter by 2020.
Crude oil production has also risen strongly, reflecting
both the impact of fracking and that of offshore oil drilling.
In September, U.S. petroleum production hit 6.5 million
barrels a day, the highest level in nearly 15 years. The EIA
projects that output will increase from an average of
6.4 million barrels a day in 2012 to 7.3 million this
year and 7.9 million in 2014. Although oil production is
forecast to decline after 2019, the agency expects output to
remain above 6 million barrels a day through 2040. Tight
oil, which is mostly generated by fracking, will account for 51
percent of total onshore production in the lower 48 states in
2040, up from 33 percent in 2011.
While energy companies jockey to make money in the new
energy era, investment bankers are enjoying an M&A boom as
oil giants such as Exxon Mobil Corp. snap up smaller players
with significant shale stakes. Pipeline operators have also
been merging at a rapid clip, with Kinder Morgan last year
buying El Paso Corp. for $21.1 billion in one of the
biggest-ever energy deals. Energy was the hottest M&A
sector last year, with 588 deals worth a total of
$151 billion, compared with 612 deals valued at
$136 billion in 2011, according to data provider
Investors are scrambling to identify the winners and losers
in this emerging new economy, betting on the stocks of oil
producers, suppliers and infrastructure firms, and pouring
money into partnership investments and energy sector funds.
Fracking is a game changer, says Mark Kiesel, a
senior member of the investment strategy and portfolio
management group at Pacific Investment Management Co. The
onshore natural-gas and oil industry is growing three times as
fast as the U.S. economy, he points out: about 6 percent a year
versus 2 percent. Its thriving and one of the true
bright spots for America, he adds.
The revolutionary implications of shale development in
the U.S. are dramatic, says Marc Lipschultz, global head
of energy and infrastructure at New Yorkbased investment
firm KKR & Co. Onshore in North America this
development ranks second only to the beginning of the oil and
gas industry in the U.S.
The numbers tell the story. In the past decade shale gas
rose from 2 percent of U.S. natural-gas production to 40
percent. The nation has proven and potential natural-gas
reserves of about 2,100 trillion cubic feet, according to
the Potential Gas Agency, an industry body. Some estimate that
is equal to about a 100-year supply. Developing this bonanza
will be a major undertaking. Experts predict that
unconventional gas production will attract a staggering
$2 trillion in investment capital between 2010 and
Fracking is a macroeconomic positive, says Barry
Bannister, equity investment strategist at St. Louis brokerage
Stifel, Nicolaus & Co. But making microeconomic investments
and not just piling into the obvious names will
require careful analysis. It will take a keen focus for
investors to pick the winners, says KKRs
Lipschultz. Oil and gas producers and refiners who either own
shale assets or participate in their development will be among
the biggest beneficiaries of the fracking boom. No wonder
investors have bid up stocks like Houston-based Cabot Oil &
Gas Corp., a natural-gas producer active in the Marcellus
Formation in Pennsylvania. Its stock rose 29 percent last year
after doubling in 2011. Though many of the smaller, more nimble
independents arrived early in the shale-rich regions, some big
energy companies have been slow to start drilling. Among them:
Apache Corp., BP, ConocoPhillips Co. and Hess Corp.
Businesses that use natural gas as a raw material
chemicals and agricultural companies, along with a wide range
of manufacturers will continue to benefit from
lower-cost energy. Dow Chemical Co., one of the countrys
biggest consumers of natural gas, plans to invest
$4 billion in new U.S. production facilities between 2012
and 2017 based on the promise of cheap energy. Dow projects
that the facilities will create thousands of new U.S.
Companies that supply products and services to drillers like
Halliburton Co., Schlumberger and Baker Hughes
everything from trucking to construction and steelmaking
also stand to benefit. We think fracking will bring a
manufacturing renaissance, says Donald Lindsey, chief
investment officer of George Washington Universitys
$1.33 billion endowment. The investment
opportunities are vast and across many industries. It rivals
the tech boom of the 1990s.
Coal producers like Peabody Energy Corp. and Arch Coal are
likely to be big losers as electric utilities and other energy
users burn less coal and more gas, an outcome cheered by
Private equity titans Blackstone Group and KKR are raising
multibillion-dollar energy funds to play the fracking game. Of
the $5 billion that Blackstone has committed to energy
investments, it is targeting more than $1 billion for
early-stage oil and gas projects, many of them fracking plays.
The entire North American economy will benefit from
fracking, especially manufacturing, with plastic and
petrochemicals refining making significant gains, says
David Foley, CEO of Blackstone Energy Partners.
Since 2009, KKR has invested more than $2.5 billion in
shale or shale-related businesses and put a further
$4 billion into other energy-related investments,
including energy infrastructure, housing for workers in the
Bakken Formation and conventional oil and gas assets. In 2011,
KKR and portfolio company Hilcorp Energy Co. sold properties in
the Eagle Ford shale play in south Texas to Marathon Oil Corp.
for $3.5 billion, three times what they paid only a year
earlier. Last July, KKR agreed to pay up to about
$200 million to take a one-third stake in Comstock
Resources holding in the Eagle Ford.