IHS Forum: US Unconventionals – Huge impact, but the story isn't complete

The rapid expansion of US oil and gas production from unconventional resources in the last 10 years is well known. IHS studies over the last few years have been looking beyond supply side analysis and into a holistic review of impacts on the US. These studies, including a recent one just released, have continued to shed light on impacts across the entire value chain, including:

• Upstream assumptions - well spacing, technology application, performance improvement, and available markets to better understand the investment profile and supply potential. Careful monitoring of supply capacity and profitability of incremental resources is required to understand future production potential. In addition, supply shocks due to regulation or water shortages could have considerable consequences.
• Demand side assumptions - while natural gas vehicles (NGV) and liquefied natural gas (LNG) make headlines, power generation remains the key demand driver in the US. Understanding demand is vital to understanding potential future pricing as supply and demand continue balance regionally and locally during coal plant shuttering and natural gas power plant expansion.
• Power costs - reduction and the resulting US advantage in terms of input cost relative to competing industrialized economies. Generative capacity has rapidly moved towards natural gas, while fuel prices fall or remain steady. This is led to significant reductions in US electrical costs, that settled at roughly half those in Germany and Japan. This provides an advantage to American industry, but the reduction in supply diversity requires a sustained low price gas supply in order to retain the overall economic advantage.
• Petrochemicals price advantages - natural gas is both a fuel and feedstock for the petrochemical industry. Natural gas liquids (NGL) such as ethane, propane, and butane are feedstock for the petrochemical and plastics industry. Domestic ethylene, methanol, and ammonia production have rapidly expanded with price advantages in the US. Feedstock prices in the US are the lowest in the world as a result of the Shale Gale, and this price advantage has disrupted the international supply chain.
• Direct benefit and secondary industries - together total jobs impact because of unconventional expansion in the US is 1.7 million jobs. The value chain impact is broad and deep, in fact New York State, which has an ongoing fracking ban, even benefits from 44,000 additional jobs in supportive industries such as finance and insurance.

While this amalgamation of economic benefits of domestic oil and gas production expansion is remarkable, it is not without consequence. The fate and advantage of the US economy is tied to a volatile fuel cost. Export capacity is accounted for to some extent, but a quick expansion could increase gas prices. While we have experienced volatile energy costs in the past, the US is increasingly reliant on a single fuel. Water constraints or regulatory changes could disrupt supply.

In addition, carbon emissions remain an issue, despite a lower footprint from natural gas. Finally, natural gas is an easy investment today, while other nations push for increasing renewable power from wind and solar, which could provide them advantage over the US over a long term horizon. Just how far the petrochemical expansion will go in terms of reinvigorating the US plastics and manufacturing industries offshored years ago remains uncertain. Taking the unconventional revolution and resulting lowered gas and NGL pricing in the US for granted is easy to do. However the prudent observer, planner, or investor will be sure to monitor the delicate balance that has placed the US in this position, and react to trends that may impact this large and vital global value chain.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.