November 18, 2012 / 12:00 PM / in 5 years

HOW TO PLAY IT-Predicted US oil glut a boon to those who move it

* Railroads, new pipelines vital to keep crude flowing to market

* Refining exports thrive on abundant U.S. oil, natgas

* Top investor sees 800,000 U.S. jobs from energy boom

* Cheaper fuel poses challenges for nascent clean tech industry

By Braden Reddall

Nov 18 (Reuters) - Railroads, pipeline companies and refiners stand to do especially well from a U.S. drilling bonanza that is upending the energy trade balance for the world’s largest economy.

An anticipated surge in U.S. oil output to the highest levels in the world would give a boost to those who move crude to where it can be turned into finished products and even shipped abroad.

Shares of pipeline companies Kinder Morgan, Williams Cos Inc and Energy Transfer Equity have slipped in recent weeks. But all three are up sharply since Kinder struck a deal to buy rival El Paso in October 2011, which underlined the importance of their pipes to the U.S. shale boom.

The International Energy Agency (IEA) made a stir last week by saying U.S. oil output could top that of Saudi Arabia and Russia by 2017, raising the prospect of e n ergy self-sufficiency for the biggest oil consumer on the planet.

The United States is already plentifully supplied with natural gas, providing a cheap raw material for chemical and fertilizer makers and inspiring talk of a manufacturing renaissance based on the clear competitive advantage of cheaper power and steady supply.

Billionaire investor Wilber Ross responded to the IEA forecast with a prediction of 800,000 new U.S. jobs over the next few years as a result. He tallied the inevitable increase in oil and gas extraction that will benefit companies such as Halliburton N> and Baker Hughes, as well as growth in manufacturing.

“In recent years the chemical companies and plastics people mainly have been investing overseas,” Ross told Reuters last week. “Now people like that are getting ready to do plants here. So that’s a big deal and part of the 800,000 jobs as well.”

Last month, energy consultant IHS said shale drillers alone currently support 1.7 million high-wage U.S. jobs, a figure that is expected to grow to 2.5 million over the next three years. Towns like Midland, Texas, located in the Permian Basin or Williston, North Dakota, in the Bakken formation should benefit from that growth as workers in those areas spend on housing, entertainment and food.

Such a dramatic shift in economic activity can cause severe problems in communities, however, as witnessed in the housing shortages and crime wave gripping North Dakota. An influx of tens of thousands of oil workers away from their families has overwhelmed police forces.

The IEA projections do not seem to allow for the dearth of engineers and skilled labor that the U.S. oil industry is already struggling to address.

While staffing providers like ManpowerGroup are diversified, local or more specialized employment services companies could help companies fill this gap.

One is, a website specializing in professional job listings in the energy sector. Dice Holdings Inc bought Rigzone in 2010, later combining it with WorldwideWorker, another 2010 acquisition that helped Dice triple its energy revenues in 2011 and grow by double digits so far in 2012.

On Assignment Inc, TrueBlue Inc, CDI Corp and Aerotek, a unit of privately held Allegis, are staffing providers that also are likely to provide workers to the energy sector.


An energy boom is not automatically good news for oil and gas producers; a burst o f new supply can push prices down and cut into margins.

The gas glut has already cut into profit at Exxon Corp and Chesapeake Energy, which both made large bets on U.S. natural gas and are still waiting for prices to recover from the effects of oversupply.

That’s why many investors see opportunity in oil service companies. Shares of Colfax Corp, which makes pumps used for pipelines and refineries, are up 26 percent so far this year. Graco Inc, a maker of pumps and metering devices for wellheads, has increased by 12 percent in value in 2012.

Xylem Inc is a supplier of pumps and analytical equipment to fracking sites as well as to the state and local authorities monitoring them, and its chief executive, Gretchen McClain, sees plenty of room to grow if regulators allow it.

The outlook for fracking depends on “decisions that are made in terms of how aggressively we’ll go after natural gas,” she said. “The technology is there to be able to do it correctly.”

But the controversy around the safety of fracking has made some investors think twice about the IEA prediction.

That prediction assumes that the Environmental Protection Agency rules on fracking and technology don’t change, said Mario Gabelli, chairman and CEO of GAMCO Investors Inc. A progress report on an EPA investigation into the risks of fracking for drinking water is expected late this year.


Since pipelines are not built overnight, analysts point to the vital role played by railroads such as Union Pacific and Canadian Pacific. Crude shipments by rail have surged to 340,000 barrels per day (bpd) this year from 11,000 in 2007, according to the Association of American Railroads.

“Railroads offer the shippers of crude flexibility you just can’t get with a pipeline because you have the ability to divert to the exact destination you wish, where the market’s the best,”

said Keith Schoonmaker, a Morningstar analyst in Chicago.

“Also, it’s much less capital-intensive to hire a rail to haul than to build a pipeline, in the short- and mid-term.”

EOG Resources CEO Mark Papa estimates the time lag on getting pipelines built at five to eight years. “Crude-by-rail is not just a stop-gap measure,” Papa said.

Schoonmaker also highlighted the role railroads play in moving steel pipes to drilling sites along with the mountains of sand pumped into wells during hydraulic fracturing.

Meanwhile, the U.S. gas glut already has given a big lift to fertilizer makers Rentech Inc and Agrium Inc. Rentech noted its nitrogen fertilizer margins reached as high as 65 percent in the second quarter, thanks to cheaper gas.

U.S. chemical companies Dow Chemical and DuPont have made clear that the gas boom has totally altered the way they operate, unveiling plans in the past few years to build plants at home.

Increased U.S. crude and natural gas output is a clear win for refiners, particularly those with plants near the most prolific plays in Texas and North Dakota, since buying crude from inland basins is far cheaper than shipping it from abroad. Plus, they can use the cheap natural gas to run their plants.

Bill Klesse, CEO of refiner Valero Energy Corp, expects U.S. shale oil to displace light-sweet crude imports to the Gulf Coast altogether within two or three years.

While U.S. gasoline demand is flat and sending excess crude abroad would require government permission, U.S. refiners can export the gasoline and diesel they produce. Just last year the United States became a net exporter of refined products for the first time in 62 years.

That export demand was a key factor in Marathon Petroleum Corp’s decision to buy BP Plc’s 400,780-bpd refinery in Texas City, Texas. Marathon intends to start exporting from there after the $2.5 billion deal closes early next year.


Yet what’s good for refiners is rarely good for the clean technology sector, from advanced batteries to alternative fuels. Solar companies have already taken a hit from low natural gas prices, which make for an affordable alternative to coal.

Even high-profile green cars from major global vehicle manufacturers, such as the battery-powered Nissan Leaf and hybrid gasoline-electric Chevrolet Volt, could see sales dwindle if fuel supplies become abundant. Sales of larger vehicles could benefit, including a new generation of full-size pickup trucks and utility vehicles that General Motors will launch in 2013.

David Fann, who runs TorreyCove Capital Partners, a San Diego, California, private equity consulting firm, put the blame for a recent de-emphasis of clean tech squarely on fracking.

“Clean technology only works when people expect that we are going to be constrained on the energy side,” he said. “The idea now that we have 100 years’ supply of natural fuel sources is in many ways a game-changer in how we are going to think about the energy industry.”

“The urgency to adopt clean tech has changed,” he added. “Its costs relative to other sources make it harder for us to adopt.”

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