Capitalists, not just greens, are now questioning how significant the benefits of shale gas and oil will be for America. The new sceptics are missing the big picture

IN A new book, “The Frackers”, Gregory Zuckerman says of the late George Mitchell, a pioneer of the technique of hydraulic fracturing to tap “unconventional” reserves of oil and gas, that “his impact eventually might even approach that of Henry Ford and Alexander Graham Bell.” Yet of late doubters have been making themselves heard too. In October Peter Voser said that one of his biggest regrets as boss of Shell is the $24 billion his firm has invested in North America’s shale beds. This summer, the firm took a big writedown on this investment and slashed its production targets. Also last month BHP Billiton, which spent around $20 billion in 2011 in a bet on shale, said it would auction half of its oil and gas acreage in Texas and New Mexico.

It is not just the biggest energy companies that have turned sceptical on shale. More than a dozen chief executives of smaller firms specialising in unconventional gas and oil have lost their jobs this year, as the firms’ troubles have made them the targets of activist investors.

Adding to the general air of negativity, last month economists at Goldman Sachs put out a report arguing that even at its current cheap price, shale gas would provide only a “modest boost” to the American economy as a whole. It argued that the energy industry is itself a fairly small part of the economy and creates relatively few jobs; and it was doubtful about the pace of innovation in fracking, and the extent to which cheap energy will prompt other industries to invest more.

No one disputes that the new technology has transformed America’s prospects as a hydrocarbons producer. Gas output has risen by one-third since its most recent trough in 2005, and oil production has risen by 30% since its recent low in 2008 (see chart). This year America is expected to overtake Russia and Saudi Arabia to become the world’s largest producer of oil and gas combined. Jobs in energy have nearly doubled in America since 2005; since the end of the recent recession they have grown at a faster rate than in any other big industry. North Dakota, which sits on the huge Bakken oil and gas field (pictured), now boasts an unemployment rate of just 3%, the lowest among all the states.

Some pessimists worry about the speed at which shale-bed wells run dry. David Hughes, a geologist at the Post Carbon Institute, a greenish think-tank, says the combination of gas’s low price and the heavy spending needed to keep it flowing casts doubt on whether the exploitable reserves of unconventional oil and gas are as big as they are fracked up to be. Optimists argue that the fast decline rate has come as no surprise, and that the technology, and the industry’s experience in deploying it efficiently, are improving fast enough to mitigate much of the effect of weak prices. “Each stage of fracking is significantly evolving,” says Rick Grafton, an oil and gas veteran at Grafton Asset Management, an investment firm. Yet he concedes that while gas prices remain at historic lows, it will remain unattractive to invest in wells that produce only gas—as opposed to ones that produce oil or a mix of gas and “natural-gas liquids” (NGLs) such as butane and propane. As new gas has flooded onto the American market since 2008, its price has fallen by two-thirds to less than $4 per million British thermal units (BTU). The average price needed to cover all the costs over a well’s life cycle is around $6, says Mr Grafton. He expects it to stay below that level for three to five years, if not longer. As a result, gas exploration in America is increasingly being determined by the prices of oil and NGLs. If they are high enough, energy firms will drill for these, treating the gas as a by-product. In North Dakota, the infrastructure to get much of this gas to market affordably is lacking, so the gas is burned, generating an intense light that can be seen at night from space. Roughly speaking, fracking for oil and NGLs is profitable when oil is trading on American exchanges at above $80 a barrel, as it has mostly done for the past four years. As long as energy firms expect this to continue, there will be lots of drilling, and thus lots of gas as well as oil and NGLs.

The market consensus is that the problems of Shell, BHP Billiton and some other big firms mostly reflect a combination of coming late to the party, paying top dollar for drilling sites and choosing some that turned out less productive than expected. Firms that made better, timelier choices are still doing well. Until Twitter went public earlier this month, the year’s hottest American IPO was of shares in Antero Resources, whose wells in the Appalachians are expected to increase their output by 76% in 2014 and 47% the year after.

There is a danger that something—an unexpected slide in oil prices, say—might make investors turn cold on shale firms. Many of them are “master limited partnerships” or similar corporate structures that enjoy tax advantages but in exchange must return their entire profits to investors each year. That means the firms, which require vast amounts of capital, must constantly raise it afresh, making them exceptionally vulnerable to sentiment among investors. However, no such freeze is in sight.

Renaissance men

As for the effects of fracking on the broader American economy, most of the forecasts that are bullish on this question assume that gas prices will remain at historic lows. “I can’t see any scenario, other than a widespread ban on drilling, that would push prices higher than $6,” says Scott Nyquist, one of the authors of a report by the McKinsey Global Institute which argues that unconventional oil and gas are set to provide a strong lift to American business.

The report reckons that between now and 2020, shale gas and oil will add $380 billion-690 billion, or two to four percentage points, to America’s annual GDP, creating 1.7m permanent jobs in the process. “America’s New Energy Future”, a recent report by IHS, another research outfit, talks of a manufacturing Renaissance and predicts a $533 billion boost to GDP by 2025, creating around 3.9m jobs.

At first, say both McKinsey and IHS, a lot of the action will be in the energy business itself: not just in drilling and pipelines but in roads and ports, and all the other activities needed to produce and distribute the fuels. Electricity production is being transformed too, with gas-fired power stations being built to replace dirtier coal-fired ones. This has contributed to a 10% fall in the greenhouse-gas emissions from American power generation between 2010 and 2012. IHS reckons gas-fired stations will be providing 33% of America’s electricity in 2020, compared with just 21% in 2008.

In the next few years the benefits of fracking will become more visible in other industries, especially those, such as chemicals firms, that consume a lot of energy or use raw materials derived from hydrocarbons. European industry pays around three times as much for its gas as its American counterpart, and Japanese firms pay more than four times as much. A report this week by the International Energy Agency, a think-tank backed by energy-consuming rich countries, predicts that by 2015 America’s energy-intensive firms will have a cost advantage of 5-25% over rivals in other developed countries.

Since 2011, 128 new energy-hungry industrial plants have been announced in the Gulf Coast region alone, with a combined value of $114 billion. Many are in petrochemicals. Methanex recently started advertising jobs in a methanol plant it has dismantled and shipped from Chile to Louisiana. A second plant will start up in 2016. In October Yara, a Norwegian fertiliser manufacturer, said it will join forces with BASF of Germany to build a “world scale” ammonia plant on the Gulf Coast.

The aluminium, iron and steel industries are also taking advantage of cheap gas supplies. Recently 19 new or expanded plants have been announced by firms including US Steel, Alcoa and ArcelorMittal. Nucor is rebuilding on a site in Louisiana, whose original plant was dismantled and shipped to Trinidad nearly a decade ago, when gas prices were rising in America. Makers of such things as cement and tyres are heavy consumers of energy, too, and thus stand to benefit from cheap gas.

Fracking the midnight oil Compressed or liquefied gas can also be used to power motor vehicles. American firms with big commercial fleets, such as FedEx and AT&T, are looking to cut costs by switching to gas power. GM, Ford and Chrysler have launched pickup trucks that can switch between petrol and gas. The growing supply of cheap shale gas has led to a wave of investment in converting terminals that were built to handle imports of gas into ones that can export it. Some, such as Andrew Liveris, the boss of Dow, a chemicals giant, worry that if too much of America’s gas is exported, prices will rise, robbing it of its competitive advantage. However, the new export facilities will come on stream slowly, especially if the government keeps dragging its feet over granting export licences. And even if all the currently planned facilities are opened, which would make America the world’s largest gas exporter, gas prices in America would still be some way below the world price—probably no more than $6 per BTU, says McKinsey. So America should be able to enjoy a boost to its trade balance while still preserving its manufacturers’ advantage over foreign rivals.

Look on the bright side

The argument over the impact on the job market is essentially over whether the glass is half-full or half-empty. The most that Goldman concedes in its sceptical report is that the long-term decline in jobs in energy-intensive industries has merely bottomed out. But even this would be worth celebrating. IHS is not the only forecaster to be much more cheerful. It predicts that unconventional energy, as well as providing jobs in its own right, will be supporting 400,000 jobs in manufacturing in 2015 and 500,000 jobs, or 4.2% of total manufacturing employment, in 2025.

The spending-power of those new workers, and the cut in businesses’ and households’ energy bills, should provide a broad boost to the economy. Goldman again puts a cautious spin on the numbers: shale energy’s overall effects will add just “a few tenths of a percentage point” to the annual growth rate, says Jan Hatzius, its chief economist. But although this sounds modest, if sustained for a decade or more, it would add up to something big. Not quite a revolution, perhaps, but a significant turnaround in America’s prospects.