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Complete Story


Shale Oil & Gas Drive Opportunities for NAHAD Members

Distributors benefit from recent growth in domestic oil & gas markets

For Houston-based NAHAD member GHX Industrial Inc., a recent boom in the U.S. oil and gas market that got its start in its backyard offered a perfect opportunity. The petrochemical market has always been a key focus for the distributor in Texas, but when a new technology to extract gas from shale in the U.S. emerged, the company aggressively expanded its industrial hose and gasket business into new geographic markets.

Many distributors like GHX Industrial have benefited from a surge in shale exploration and production in the U.S. and Canada.

"We're very bullish on the opportunity for a long-term robust market," said Dan Ahuero, chairman of GHX's board of directors. "Short of any kind of government intervention that could affect us negatively, we think we have a long-term positive outlook for this type of business."

NAHAD member Tipco Technologies, Owings Mills, MD, is also watching developments in shale gas production in his region closely. Tipco has already benefited from shale gas developments nearby, offsetting some of the distributor’s declines in sales to the military. Tipco has opened two new branches in the past two years – the company has plans to open a ninth location in West Virginia to focus on shale projects when they open up there.

The Shale Gas Opportunity
Of the gas consumed in the U.S. alone in 2009, 87 percent was produced domestically, according to an energy outlook report for the U.S. Energy Information Administration. The U.S. has 2,552 trillion cubic feet of potential natural gas, 827 trillion cubic feet from shale resources.

Shale gas production is attractive due to its abundance and relatively low cost. New ways of extracting this gas have led to increased interest in several areas of the country, primary among those the Marcellus Shale formation that covers parts of Pennsylvania, New York, Ohio and West Virginia. This relatively shallow formation is located next to the Devonian or Ohio and Utica formations, which hold deeper reservoirs of natural gas.

Newer assessments from the EIA and U.S. Geological Survey have that only 3 percent of the potential shale gas reserves in the U.S. have been tapped. Marcellus has 10,622 square miles of leased land but 84,271 miles of land with natural gas potential has yet to be leased to business interests, the EIA reported.

The EIA has also found potential for gas extraction from the Chattanooga Shale in Tennessee, Alabama, Kentucky and Georgia. Researchers also found Haynesville in Louisiana, Texas and Arkansas to have potential with its 5,426 square miles of land that has yet to be leased.

Others include Collingwood Shale in northern Michigan, Barnett Shale in Texas and Cumnock in North Carolina.

Around 2007, GHX began acquiring businesses that had locations near the major shale plays. They purchased All Hose and Specialty in Louisiana, and Robsco Inc. and McCarty Equipment Company in Texas, Ahuero said. “That gave us immediate access to the shale activity,” he says. They also expanded their product line to meet the unique needs of these markets.

More recently, the supply of natural gas has risen and gas prices have hit a low point, which is great for consumers, said Eric Smith, associate director of the Tulane Energy Institute, a part of Tulane University in New Orleans, LA. But this means that drilling for gas is slowing down at the Marcellus Shale and other plays in the U.S.

The attention has recently shifted to oil. “The bad news is with low gas prices and high oil prices, they won’t be drilling for gas,” Smith said. “They’re drilling for oil.”

The Oil Opportunity
According to a USGS report, 56 trillion cubic feet of shale oil and gas is left undiscovered, amounting to 23.9 billion barrels of oil in the U.S. Oil shale plays, identified by a solid bituminous material called kerogen, is found in Ohio, Indiana, Kentucky, Colorado, Wyoming, Utah and California.

The largest shale play is in the Monterey Shale in southern California, which is estimated to hold 15.3 billion barrels of technically recoverable oil, or 64 percent of estimated undeveloped shale oil resources as of January 2009, according to EIA.

Other sources point to the Bakken and Eagle Ford shales, assessed to hold some 3.6 billion barrels and 3.4 billion barrels of oil, respectively. The Bakken Shale in North Dakota, Montana and Alberta, Canada, ushered in a boom in those areas.

The Alberta resource—also called the Athabasca oil sands—is heating up this year as a hot spot. These sands are made of sandstone that’s saturated with a dense form of petroleum called bitumen. Already it serves as America’s biggest oil supplier, and has the potential to limit imports from the Middle East.

The EIA projected that oil from Alberta alone will rise from 1.7 million barrels a day in 2009 to 4.8 million barrels in 2035. (Planned oil sands projects in Canada are outlined by the EIA here.)

A rise in oil prices has encouraged further exploration of oil in The Devonian-Mississippian Shale where 98 percent of near-surface mineable resources are in Kentucky, Ohio, Indiana and Tennessee. Not only does the shale have oil potential but gas potential, as well, according to the U.S. Geological Survey.

Environmental & Regulatory Concerns
Distributors say ongoing conversation about the safety of extracting oil and gas using new technologies creates uncertainty in these growing markets.

Fracking – the method used to extract oil and gas from shale resources – continues to be a target of environmentalists, who say it may contaminate groundwater and even cause earthquakes. Just this month, Vermont announced it may be the first state to outlaw the practice, even though it has very little in terms of energy reserves. It’s unknown how that move will affect other states. Other states, including New York and Maryland have moratoriums on the practice while its impacts are studied.

Concerns about environmental impacts will prevent oil exploration in the near future at some sites, including the Green River Basin Shale, found in Colorado, Wyoming and Utah. Federal bans restrict oil exploration of this shale, which is estimated to hold the largest deposit in the world, as much as 1.4 trillion barrels of oil, according to USGS. Some reports say that while there’s not exploration, permits to drill for testing have been issued. (Learn more from the USGS.)

A federal ban on drilling in ANWAR—the Alaska National Wildlife Reserve—will likely continue.

Some concern arose over the transportation of crude oil from Alaska to parts of the U.S. when further phases of the Keystone XL Pipeline were halted by government officials to complete more detailed environmental impact testing. Already built pipelines draw oil from the Athabasca Oil Sands in Canada to refineries in Illinois. Further expansions were proposed to bring oil to Montana and Cushing, OK. Get the latest on the Keystone XL Pipeline Project here.

Smith said despite government setbacks in building out these subsequent phases, distributors should have confidence that the pipeline will move forward.

In the meantime, industry groups continue to track regulatory developments closely.

“The shale revolution is changing the face of American energy development,” the American Petroleum Institute’s President and CEO Jack Gerard said recently in a news release. API represents more than 500 oil and natural gas companies. “It’s boosting domestic oil and natural gas production, putting hundreds of thousands of people to work, and delivering added billions in revenue to state and federal government.

“How much more will depend in part on government regulations.”

Tipco Technologies President Rob Lyons says that while there is some unpredictability in these markets, because of the region he serves – with a history of ups and downs in markets like steel, automotive and construction – “we can turn pretty quickly and redirect our efforts” when needed. One way he maintains that flexibility: giving his eight branches the autonomy to meet the needs in their markets. “They choose what to focus on,” he says, finding the best opportunities for growth.

Going Forward
Still, while shale oil and gas markets may have some unknowns, they are growing faster than other end-markets for many distributors – which makes them an attractive opportunity.

The boom in these markets has also changed the look of the supply chain for distributors that serve them – because of the different types of products required in these settings, the chain has seen some hiccups and price increases as plants sell out of certain products. Overall, supply chain interruptions have smoothed out, Lyons says, as suppliers and distributors work together to ensure customers’ needs in all segments are met.

Experts like Smith see natural gas markets as having the most potential for growth right now; the search for oil shale will continue however as prices remain high, but Smith does not expect supply to be strong for shale oil in the near future.

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