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Shale will reduce US deficit by a third in a decade

A new report says unconventional oil and gas production will bring long-term benefits to the manufacturing and energy sectors in addition to reducing the country's deficit

Soaring production of unconventional oil and gas in the US will cut the country's deficit by a third over the next decade by boosting its manufacturing and energy sectors, says a new report.

The report, America's New Energy Future: The Unconventional Oil and Gas Revolution and the Economy: A Manufacturing Renaissance, is the final section of a three-part IHS study looking at the economic impact of US unconventional energy across the country's oil, gas and petrochemicals sectors as well as the manufacturing industry.

Economic boost

Development of unconventional oil and gas will continue to boost the US' trade revenue because it will slash energy imports and increased manufacturing output, the study said. 

The International Energy Agency (IEA) said the US will become the largest producer of crude oil in the world in the next five years as its unconventional oil output soars.

The IEA said US tight-oil production could reach 4 million barrels per day (b/d) by 2020, up from 1.5m b/d last year.

Net US gas imports fell 23% to around 1.5 trillion cubic feet (cf) in 2012, the lowest level since 1990, according to the US Energy Information Administration. Last year alone US gas output increased by around 5%, reaching 24.06 trillion cf.

The benefits of rising unconventional oil and gas production to US trade will increase steadily over the next decade, IHS said, reaching $180 billion per year in additional real net trade revenue by 2022.

Falling US oil demand will also be a boon for domestic refiners, which will continue operating facilities at high utilisation rates so they can export surplus products to Latin America and Europe.

IHS said the growth in unconventional oil and gas output will boost total industrial production by 3.9% by 2025, compared to 2012. Revenue from manufacturing output will increase by $258 billion in 2020 and $328bn in 2025. IHS said industries such as organic chemicals, resins, agricultural chemicals, oil refining, and metals, such as iron and steel will benefit most from cheap oil and gas feedstocks, lower electricity prices and increased demand for their products.

This manufacturing boost, as well as a stronger export position for these industries, will reduce the US' trade deficit by more than $164bn by 2020, IHS said. The US trade deficit was $39.1bn in July, according to government figures.

Total US exports hit the second-highest monthly level on record in July 2013, at $189.4bn, according to the US Department of Commerce. This was boosted by exports of services and oil products, the government said.

Unconventional oil and gas and petrochemicals development is expected to add between 2% and 3.2% to the value of all goods and services produced in the US by 2025, the report said. Unconventional oil and gas development increased the disposable income per US household by around $1,200 in 2012, the report claims, because of savings from lower oil and gas prices being passed onto consumers through reduced energy bills. This saving will increase to over $2,700 per household in 2020 and to more than $3,500 per household by 2025.

Last year unconventional oil and gas production supported 2.1m US jobs, generated nearly $75bn in federal and state tax revenues and contributed $283bn to US GDP, IHS said. By 2020 the industry will create 3.3m jobs, contribute more than $125bn in federal and state tax revenues, and boost annual GDP by $468bn, the report said.

Petrochemicals revitalised

Petrochemicals and other energy-intensive industries such as oil refining, aluminium, glass, cement, and the food industry will all benefit from unconventional energy production as cheep feedstock from lower-cost oil and gas supplies emerged. Raw materials and energy feedstocks comprise around 70% of the cost of producing petrochemicals such as olefins, methanol and ammonia.

There will also be major investments in the petrochemical industries. More than $31bn in new capital spending will trigger a capacity ramp-up of more than 16m tonnes by 2016, IHS said. Total investment in petrochemicals will reach more than $129bn by 2025 and capacity will reach almost 89m tonnes. These investments will be in new chemical, plastics, and related derivative manufacturing facilities across the US.

"The availability of a long-term supply of low-cost feedstock derived from unconventional resources is revitalising the petrochemical industry in North America," said Mark Wegenka, who heads IHS's petrochemicals consulting practice. "Prior to the recent expansion of unconventional gas, the outlook for the industry was bleak... we've witnessed a complete turnaround."

The chemical manufacturing industry comprised 13% of total US merchandise exports, around $198bn, in 2012, IHS said. This is up from $152bn in 2007. 

This growth is expected to continue as energy-intensive industries make use of lower domestic oil, gas and electricity prices and increased demand for their products, IHS said.

Energy Investment

Between 2012 and 2025, IHS expects total investment of nearly $346bn across the midstream and downstream energy and petrochemicals sectors, driven by the rise in unconventional oil and gas development. Almost $216bn of this will be invested in the midstream and downstream unconventional energy sectors, half of which will be invested in over 47,000 miles of new or modified pipeline infrastructure, IHS said.

The remaining investments will be spread across other midstream and downstream infrastructure, such as natural gas liquids (NGL) fractionation facilities, natural gas processing facilities, and natural gas liquefaction projects.

Limited growth scenario

The report says, however, that increased regulation to unconventional oil and gas production across the US could curtail the economic benefits the industry could bring by 2025.

One gloomier scenario from the firm says 1.4m fewer jobs would be created by 2015 and nearly 2.8m less by 2025 if the regulatory environment became stricter. This could reduce cost-competitiveness of producing unconventional oil and gas in the US and cut output.

Under the lower-production scenario there would be $127bn less in contributions to US GDP in 2015 and $300bn less by 2025, IHS said. On average, disposable income per household would be $1,730 less per year.

Findings of the IHS report 

- Unconventional oil and gas development contributed more than $74bn in federal and state government revenues in 2012. This will rise to more than $125bn per year by 2020 and reach $138bn by 2025;

- US employees' income from all unconventional energy and chemicals activity was nearly $150bn in 2012.This will rise to $207bn in 2015 and reach almost $269bn by 2025;

- Industrial production revenue increases because of cheaper feedstock will be $58bn, an increase of 3.5%, by 2020. This will rise to $328bn, a 3.9% increase, by 2025;

- Between 2012 and 2025, IHS projects total investment of nearly $346bn across the midstream and downstream energy and energy-related chemicals sectors. Almost $216m of this will be in the midstream and downstream segments, including 47,000 miles of new or modified pipeline infrastructure;

- More than $31bn in new capital investments will drive the addition of more than 16m tons of chemical capacity by 2016. Total investment will reach more than $129bn and capacity will reach 89m tons by 2025;

- In 2020, total capital expenditures will reach nearly $189bn. The upstream sector will invest almost $173bn;

- By 2025, capital spending will reach $240bn per year: $228bn from upstream, over $5bn in midstream and downstream, and over $7bn in chemicals;

- Over the entire forecast period 2012-2025, upstream capital spending will reach over $2.4 trillion. Midstream and downstream energy will generate over $216bn and petrochemicals will add more than $129bn in revenue; and

- Unconventional oil and gas and petrochemicals contributed nearly $284bn to US GDP in 2012. By 2025 this will reach $533bn: $475 billion from upstream, almost $7bn in midstream and downstream, and over $51bn in chemicals.

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