Wednesday, October 26, 2011

Marcellus Shale Gas Has Been Very Good for Pennsylvania's Labor Market and Overall Economy

The Pennsylvania Department of Labor and Industry recently issued a labor market report for the state's Marcellus Shale-producing region (which covers about 2/3 of the state, see map above), here are some highlights:

1. Employment in Pennsylvania's core shale-related industries increased by 114% between 2008 Q1 and 2011 Q1. 

2.  There were 214,000 employees working in Marcellus Shale related industries during the first quarter of 2011.
 

3. Marcellus Shale related industries had a total of 13,504 Pennsylvania establishments in 2011, which was a 63% increase, and a gain of more than 650 establishments, from 2008. 

4. The average wage in the core Marcellus industries was $76,036, compared to the average wage of $46,222 for all industries in Pennsylvania. The average wage in the ancillary shale gas industries was $62,581.

5. Total job postings for Marcellus Shale related industries were 62.3% higher in August 2011 than August 2010, compared to a 21.3% gain for all industries in Pennsylvania.

6. In 2011 Q2 there were 2,129 new hires in the Marcellus Shale related core industries, which was 138.1% higher than 2008 Q2. In 2011 Q2 there were 16,342 new hires in the Marcellus Shale related ancillary industries, which was 8.6% higher than 2008 Q2. Across all industries in Pennsylvania, total new hires in 2011Q2 were 8.3% lower than in
2008 Q2.

7. The number of Marcellus Shale wells drilled from January to August 2011 was 37.4% higher than over the same eight month period in 2010.

8. Five of the six state workforce areas with substantial Marcellus Shale drilling have experienced unemployment rate decreases from August 2009 to August 2011 greater than the average decrease for the whole state. 

15 Comments:

At 10/26/2011 8:00 PM, Blogger Tom said...

Anybody know how much federal money is financing the Marcellus Shale expoloration?

 
At 10/26/2011 8:27 PM, Blogger AIG said...

Those people have clearly never talked to VangeIV about this. He'll set them straight.

 
At 10/26/2011 8:53 PM, Blogger Mark J. Perry said...

And ConocoPhillips CEO James Mulva also obviously never talked to him before he wrote his editorial in today's WSJ, so the company's corporate strategy must be way off, and headed for complete disaster. Perhaps they need to hire VangeIV as a consultant to set them straight about nat gas.

 
At 10/26/2011 9:59 PM, Blogger VangelV said...

Why aren't you talking about the negative cash flows reported by the companies drilling for natural gas in Pennsylvania? Or the fact that the companies need $7.50 gas not to lose money? How is this different than the dot.com boom in the 1990s?

 
At 10/26/2011 10:01 PM, Blogger sethstorm said...

Now how much of those jobs are well-paying and willing to do OJT?

 
At 10/26/2011 10:10 PM, Blogger VangelV said...

Perhaps they need to hire VangeIV as a consultant to set them straight about nat gas.

The large producers are not going into shale to make a profit. They are simply using the new SEC rules to increase their reported proved undeveloped (PUD) reserves. It is a good way to hide from investors the depletion problem that is facing much of the industry. James Mulva of Conoco Phillips is using the same playbook that Aubrey McClendon used with Chesapeake. If you listen to the conference calls, as I do but you obviously don't, you will find that the company is now deemphasizing shale gas and transitioning towards shale liquids. That too will end once lenders and investors figure out the lousy economics.

My Netflix analogy is right. Like Netflix the shale players have been burning through cash and destroying capital. That did not matter for quite some time. After it began to matter the company shares got killed. The same will happen again in the shale gas space. The promoters will get rich and will get great compensation for a while. After the bubble burst they will walk away much wealthier than before. Investors will wind up holding the bag and will whine about how they could not have seen the bubble coming and argue that they should not have had to read the 10-K filings or paid attention to cash flows and statements on company conference calls.

 
At 10/26/2011 10:12 PM, Blogger Buddy R Pacifico said...

VangelV on the U.S. Liquified Natural Gas export deal announced by Cheniere Energy:

"The project is based on economic analysis that expects gas prices to stay low enough to pay for the depreciation, operational costs, and compression losses. But there is no indication that there will be sufficient gas at such low prices to make the project economic
."


So, Mr. V argues that gas prices will be too low and cause losses for producers, BUT there will not be sufficent gas at low prices for LNG exports? huh?

 
At 10/26/2011 11:54 PM, Blogger Benjamin said...

Vange-

No doubt gobs of capital is being thrown at natural gas. The world is awash in un-invested capital. We have capital gluts. Show investors some thigh, and they will propose marriage by money.

That said, there will be continuous efforts to become better and smarter at drilling for natural gas. This is the private sector, not some nattering nabobs at the Pentagon. Even after an industry shake-out, we likely will find huge and growing supplies of natural gas.

 
At 10/27/2011 7:41 AM, Blogger VangelV said...

So, Mr. V argues that gas prices will be too low and cause losses for producers, BUT there will not be sufficent gas at low prices for LNG exports? huh?

No I am not. I have written many times about how the 10-K filings show negative cash flows for producers and suggest that there is a huge bubble in shale gas. I have pointed out how the original players are now hyping shale oil instead. The reference also pointed out that the company did not have a source agreement with producers. Clearly it cannot get one at under $7.50 per MCF, which is what most shale producers need to break even if their costs do not go up. But as the shale production goes up drilling activity has to go up sharply as well because of the depletion rate and the need to further increase production volume. The shortages in skilled people and equipment will cause prices to go up even if environmental regulations allow companies to spend at current levels. (Which is unlikely.) And as energy prices go up due to an economic recovery the embedded costs will also go up. That means that shale gas is likely to always be just a little behind what is needed to make it profitable and this time around is not very different from the previous shale bubbles.

 
At 10/27/2011 8:03 AM, Blogger VangelV said...


No doubt gobs of capital is being thrown at natural gas. The world is awash in un-invested capital. We have capital gluts. Show investors some thigh, and they will propose marriage by money.


You are confused my friend. What we have a lot of is newly printed money that can be thrown around. That is not capital. Capital is pipelines, compressors, drilling rigs, holding tanks, etc. To produce that capital we need a healthy supply chain and manufacturing process. But if you talk to the companies you will find shortages of skilled people and inadequate processes to meet expansion plans without driving prices significantly higher. Mat Simmons talked about this when he was doing the research for his last book, Rust. Sadly, he died before he could put everything together and illustrate the big problem coming down the line. Most of the pipelines and refineries in the US were built decades ago and are past their engineered life. Replacing them requires economic calculations that depend on factors such as future volumes. Clearly you cannot replace the Alaskan pipeline with one the same size if production will fall below the volume that is required to make it viable. The same type of calculation will make companies shut down some of the refineries that are currently in operation.

It should be obvious that if the huge liquidity is used to increase investment in the shale sector the costs component will explode as input bottlenecks bid up prices just as they did in the tar sands. We saw wages in Wood Buffalo go up sharply as the tar sands players fought for employees. But the price increases did not end there. When a market that was in near equilibrium was hit by huge orders for specialty pipe, welding equipment, pumps, compressors, specialty fittings, etc., projects experienced massive cost overruns that increased total costs by more than 30-50% in some cases. That made the projects far less economic and reduced the cash flows of the producers. Fortunately, they did have a lot of cash around and very profitable legacy operations to ride out the volatility. The same is not true of the shale players, most of which are dependent on external financing and need price levels that are far higher than current market levels. They will go bankrupt and most of their operations will be idled.

That said, there will be continuous efforts to become better and smarter at drilling for natural gas. This is the private sector, not some nattering nabobs at the Pentagon. Even after an industry shake-out, we likely will find huge and growing supplies of natural gas.

As Simmons pointed out, you are not looking at a brand new technology. Horizontal drilling has been around for decades and we have used fracking for quite some time. The sector is not using new technology that is so inefficient that there are easy gains to be had. Costs can go down if you change formations but in most cases the best formations have already been exploited. No matter how much people like Mark wish and hope there is no free lunch.

 
At 10/27/2011 12:43 PM, Blogger Bill Moore said...

Shale is BOTH oil and gas. There are plenty of Shale plays that are making money. They burn cash because their CAPEX is significantly larger than their operating cash flows as they are drilling new wells faster than generating cash from existing wells. The operating cash flows at these companies is significant.

 
At 10/28/2011 7:37 AM, Blogger VangelV said...

Shale is BOTH oil and gas.

Correct.

There are plenty of Shale plays that are making money.

Also correct. If you are a company that is in the sweet spot of a decent formation you can make money. But the shale industry is not making money. And neither are the large producers that have broad holdings of leases because the average shale well is not profitable.

They burn cash because their CAPEX is significantly larger than their operating cash flows as they are drilling new wells faster than generating cash from existing wells.

True. But if you look at individual well production levels you will find that a very small percentage have the ultimate recovery that is necessary to make the operations profitable. What we are clearly seeing are accounting tricks in which assumptions of much higher than actual EURs allow companies to reduce their depreciation and make it look as if they are profitable. But that only works to a point because investors will expect the producers to generate sufficient cash flow to fiance drilling.

The operating cash flows at these companies is significant.

Of course. If you don't have to worry about the drilling costs the cash flows look impressive. But that assumes the free lunch hypothesis is valid. I have never found that to be the basis of sound investing.

 
At 10/28/2011 10:16 PM, Blogger Breaker Morant said...

VangeIV>>"If you listen to the conference calls, as I do but you obviously don't, you will find that the company is now deemphasizing shale gas and transitioning towards shale liquids."

EOG is way ahead CHK on transitioning to liquids. If you actually listen to many companies conference calls as I do-you would learn that the stated reasons for doing so supports the abundance of Nat Gas in the shales.

Basically, nat gas is a localized Nortn American market. The abundance of shale gas has basically wrecked that market and will keep gas cheap.

Oil is a world market and no matter how much oil the shale plays produce there is less potential for moving the needle on oil prices.

 
At 10/29/2011 8:41 AM, Blogger VangelV said...

EOG is way ahead CHK on transitioning to liquids. If you actually listen to many companies conference calls as I do-you would learn that the stated reasons for doing so supports the abundance of Nat Gas in the shales.

No. An abundance of gas is not a problem. The problem is the cost involved. For the average company shale gas is not economic at less than $7.50. The problem is the very low return on the energy invested particularly when the easiest targets have already been developed. The low return means that costs will rise along with prices and there won't be a decent return on investment unless there is a huge improvement in the methodology.

Basically, nat gas is a localized Nortn American market. The abundance of shale gas has basically wrecked that market and will keep gas cheap.

Nonsense. If the energy return on energy invested were 50 as it is with coal the natural gas producers would be swimming in cash.

Oil is a world market and no matter how much oil the shale plays produce there is less potential for moving the needle on oil prices.

It does not matter. What matters is the return on investment. Like shale gas, most shale liquids plays are not economic. The only way to show a profit is to assume depletion rates that are not supported by the actual production data but that can only work for a while. Eventually the company will chew through its cash and will have to get more financing. And that depends on finding a bigger fool. Given the comments here we have yet to run out of those.

 
At 11/03/2011 12:24 AM, Blogger Unknown said...

If the energy return on energy invested were 50 as it is with coal the natural gas producers would be swimming in cash.


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