Report: Shale Oil & Gas Revolution: A Manufacturing Renaissance

September 2013

America’s New Energy Future:The Unconventional Oil and Gas Revolution and the US Economy

Volume 3: A Manufacturing Renaissance - Executive Summary

An IHS Report

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ii September 2013

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy

About IHS (ihs.com)

IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’s business land-scape. Businesses and governments in more than 165 countries around the globe rely on the comprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impact decisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Ex-change in 2005. Headquartered in Englewood, Colorado, USA, IHS is committed to sustainable, profitable growth and em-ploys approximately 8,000 people in 31 countries around the world.

For more information, contact:Richard F. Fullenbaum

Vice President, Economics and Public Sector Consulting, IHS [email protected]

John W. LarsonVice President, Economics and Public Sector Consulting, IHS

[email protected]

For press information, contact:Jim Dorsey

Senior Manager Media Relations, [email protected]

Jeff MarnSenior Manager, Public Relations, IHS

[email protected]

COPYRIGHT NOTICE AND LEGAL DISCLAIMER

© 2013 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information con-tained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement contained herein. For more information, please contact IHS at [email protected], +1 800 IHS CARE (from North American locations), or +44 (0) 1344 328 300 (from outside North America). All products, company names or other marks appearing in this publication are the trademarks and property of IHS or their respective owners.

Volume 3: A Manufacturing Renaissance—Executive Summary

IHS iii

Project Directors

• John W. Larson, Vice President, Economics and Public Sector Consulting

• Richard Fullenbaum, Vice President, Economics and Public Sector Consulting

Project Team

• Tabitha M. Bailey, Director, Economics and Public Sector Consulting

• Mohsen Bonakdarpour, Managing Director, Economics and Public Sector Consulting

• James Fallon, Director, Downstream Consulting

• Russell Heinen, Senior Director, Chemicals Research

• Bob Ineson, Senior Director, Energy Research

• Andrew Slaughter, Vice President, Energy Insight

• Mark Wegenka, Managing Director, Chemical Consulting

Key Contributors

• Patty DiOrio, Senior Research Manager; Coal, Gas, Power and Renewables Research

• Bob Flanagan, Director, Economics and Public Sector Consulting

• Mark Griffith, Research Director; Coal, Gas, Power and Renewables Research

• Patrick Thomson, Senior Consultant, Economics and Public Sector Consulting

Acknowledgments

We extend our appreciation to our internal Advisory Board, which consists of IHS Vice Chairman Daniel Yergin, IHS Senior Vice President James Rosenfield, and IHS Chief Economist Nariman Behravesh. They offered critical insight, guidance and support in reviewing the methodologies and findings from this study.

We would also like to thank the subject matter experts, technical experts, industry experts and analysts who also contributed to this study: Sam Andrus, John Anton, Miguel Goncalves, Daniel Lichtenstein, Kenneth Kremar, Charlie McCarren, Mike Montgomery, John Mothersole, Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, Mihaela Solcan, and Tom Runiewicz.

This report offers an independent assessment of the importance of unconventional oil and gas to the US economy. This research was supported by the American Chemistry Council, America’s Natural Gas Alliance, the American Petroleum Institute, the Fertilizer Institute, the US Chamber of Commerce – Institute for 21st Century Energy, the National Association of Manufacturers, the Natural Gas Supply Association, Rio Tinto, and the Society of the Plastics Industry. IHS is exclusively responsible for this report and all of the analysis and content contained herein. The analysis and metrics developed during the course of this research represent the independent views of IHS and are intended to contribute to the dialogue on the role of the unconventional oil and gas production in promoting employment, economic growth, and energy security.

iv September 2013


Table of Contents

Executive Summary ............................................................................................................................ 1How Will the Unconventional Oil and Natural Gas Value Chain and Energy-Related Chemicals Strengthen the US Economy? ....................................................................................................... 1Unconventional Oil and Natural Gas Value-Chain Contributions ..................................................... 3

$189 Billion in Annual Capital Expenditures In 2020 ..........................................................................43.3 Million American Jobs in 2020 ....................................................................................................4$468 Billion in Annual Contribution to US GDP In 2020 .....................................................................5$125 Billion in Annual Tax Revenues to Federal and State Treasuries By 2020 .................................5

Macroeconomic Impact Assessment: the Base Case .................................................................... 6Gross Domestic Product ..................................................................................................................7Net Trade .........................................................................................................................................7Disposable Household Income .........................................................................................................9

Manufacturing Renaissance ........................................................................................................... 9Risks to the Projected Economic Contributions ............................................................................ 12

Low Production Case Implications ..................................................................................................13Conclusion ................................................................................................................................... 15


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Executive SummaryA revolution is under way in the production of unconventional oil and natural gas that is transforming America’s energy future and strengthening its overall economy. In our companion study, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy— Volume 1: National Economic Contributions, we examined the economic contributions associated with upstream unconventional oil and natural gas production. In the current study we expand the analysis to consider a broader set of opportunities associated with the midstream, downstream, and energy-related chemicals aspects of this unconventional revolution. This study expands on our initial study through an examination and quantification of three critical areas:

• the full set of value chains—upstream, midstream, downstream, and energy-related chemical industries—necessary to unlock unconventional oil and natural gas resources;

• the broader macroeconomic implications for the US economy; and,

• the manufacturing renaissance being driven by this new, abundant and affordable source of domestic energy.

In 2012, the full unconventional value chain—from upstream energy through energy-related chemicals—that is associated with the revolution in unconventional oil and natural gas supported 2.1 million jobs, generated nearly $75 billion in federal and state tax revenues, and contributed $283 billion to US gross domestic product (GDP). By 2020, IHS projects these economic contributions will grow to 3.3 million jobs, more than $125 billion in federal and state tax revenues, and more than $468 billion in annual contributions to GDP.1

Fueling these economic contributions are massive capital investments across the full unconventional value chain.

1 Our second report, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, Volume 2: State Economic Contributions, presented the following detailed estimates of the contributions of upstream unconventional oil and natural gas: In 2012, over 1.7 million jobs, $63 billion in federal and state taxes, and nearly $238 billion in value added to GDP; and, in 2020, 3.0 million jobs, $113 bil-lion in federal and state taxes, and over $416 billion of value added.

How Will the Unconventional Oil and Natural Gas Value Chain and Energy-Related Chemicals Strengthen the US Economy?

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Change in Employment

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Change in Disposable Income per Household

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Source: IHS Model of the US Economy

2 September 2013


Between 2012 and 2025, IHS projects a cumulative investment of nearly $346 billion across the midstream and downstream energy and energy-related chemicals value chains. Close to $216 billion of this will come in the midstream and downstream segments of the unconventional value chain, roughly half of which will be directed toward over 47,000 miles of new or modified pipeline infrastructure. The remaining midstream and downstream investments will be distributed across other critical midstream and downstream infrastructure, such as natural gas liquids (NGL) fractionation facilities, natural gas processing facilities, and natural gas liquefaction projects.

Major investments are also taking place within the energy-related chemical industries, which are also benefitting from the revolution in unconventional oil and natural gas production. More than $31 billion in new capital investments will drive the addition of more than 16 million tons of chemical capacity by 2016. Cumulative investment will grow to more than $129 billion to support nearly 89 million tons of capacity by 2025. These investments will take place in new chemical, plastics, and related derivative manufacturing facilities across the United States.

The economic benefits do not end with capital investments. The unconventional revolution is also contributing to a shift in global competitiveness for the United States by unlocking new production cost advantages for US industries benefitting from lower prices for raw materials and the energy they use. IHS has leveraged its US Macroeconomic Model to capture the benefits of lower natural gas prices and accompanying lower electricity prices on the general economy. Our analysis demonstrates that this manufacturing renaissance will increase industrial production by 3.5% by the end of this decade and by 3.9% by 2025. Output by the manufacturing sector will increase by $258 billion in 2020 and $328 billion in 2025. The US competitive advantage is particularly pronounced in energy-intensive industries, such as energy-related chemicals which in the coming years will be a primary beneficiary of lower prices for energy and feedstock. Industries such as organic chemicals, resins, agricultural chemicals, petroleum refining, metals such as iron and steel, and machinery are among the top-ranked sectors benefiting from this revolution. These sectors are expected to benefit from lower energy prices (for those that use oil and natural gas as feedstocks), lower electricity prices, and increased demand for their products as growth in overall GDP spurs domestic consumption.

And increased industrial production and exports of products to global markets will help to improve the US trade position. The benefits to US trade of the unconventional revolution will increase steadily through 2022, before plateauing at a new, higher level of $180 billion per year in additional real net trade that is above what would occur in a US trade regime that had excluded this new unconventional activity.2

The benefits of this unconventional oil and natural gas revolution are also reaching more than 120 million American households across the country whose incomes and consumption are rising. In 2012, average real disposable income per household increased by more than $1,200 as a result of the unconventional revolution—an aggregate financial boost to all US households of $163 billion. Real disposable income will continue to increase through the end of the forecast period, with the unconventional revolution’s annual contribution to the average household growing to just over $2,700 in 2020 and to more than $3,500 by 2025.

This impact is particularly significant when it is examined against the backdrop of a historically slow economic recovery and stubbornly high unemployment. The positive forces associated with unconventional oil and natural gas activity, and the second-order gains by economic sectors that benefit from the unconventional revolution, will help the US economy to make progress in the face of steady economic headwinds.

The remaining sections of the Executive Summary present various contributions of the oil and natural gas revolution to a range of energy producers and manufacturers, as well as the US economy, from reduced

2 Real net trade is defined as the real value (inflation-adjusted) of total exports less the real value of total imports.


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energy and feedstock prices. We also present the potential risks and corresponding costs associated with realizing these economic opportunities.

Unconventional Oil and Natural Gas Value-Chain Contributions

The value chain’s contributions derive from the capital expenditures associated with the incremental increases in capacity required to support the growth in unconventional oil and natural gas production in a given year. The following three sets of energy-related activities are increasing their capital investments:

• Upstream energy will see continued growth in capital expenditures, as significant activity is required simply to find and replace every barrel of oil or billion cubic feet of natural gas extracted and maintain production at current levels. To increase production above current levels, significant additional capital expenditures will be required throughout the forecast horizon.

• Midstream and downstream energy activities, unlike the upstream activity, are built out in anticipation of peak production levels. The rise in production unlocked by the unconventional revolution has created considerable near-term capacity requirements—pipelines, refineries, and other infrastructure—that the industry must meet. In the near term, the midstream and downstream energy segments of the value chain will undergo significant expansion to create the necessary capacity to support production both today and in the future. Once this capital expansion is complete, lower levels of incremental capital expansion will sustain the longer term incremental increases in production expected in the later years of the forecast horizon.

• Energy-related chemicals are also built out in anticipation of peak production. However, there is some delay, because significant capital expansion cannot take place until the midstream and downstream energy expansion has been sufficiently completed and is able to supply energy-related chemicals with the necessary feedstock. As a result, capital expenditures by energy-related chemicals start modestly and expand only as the midstream and downstream energy infrastructure is completed. In the medium term, as the energy-related chemicals sector takes full advantage of the oil and natural gas resources being brought to market, capital expenditures will rise significantly to expand capacity.

The terms midstream and downstream can have varying definitions within the oil and gas industry. For the purposes of this report, Midstream and Downstream Energy activities involve converting raw crude oil and natural gas liquids into finished products and bringing those products to market. Midstream refers to the transport and logistics functions of oil and gas, encompassing marine, truck, rail, and pipeline movements, as well as the dedicated storage of intermediate and finished products. Downstream refers to the processing or upgrading of NGLs and crude oil into higher value intermediate and finished products. This report will also cover liquefied natural gas facilities which are not typically considered part of midstream and downstream; however, they have been included as they constitute the additional processing of natural gas into liquid form. For the remainder of this report, midstream and downstream energy encompasses the following seven segments: Liquefied Natural Gas (LNG) Processing; Natural Gas (NG) Processing; NG Logistics (Pipelines); Natural Gas Liquids (NGL) Processing; NGL Logistics (Marine, Pipelines, and Storage); Crude Oil Processing (Refining); Crude Oil Logistics (Marine, Pipelines, Rail and Storage).

Energy-Related Chemicals refers to processing and transforming natural gas and gas liquids into chemical raw material products. These products include the major commodity petrochemicals that use natural gas and gas liquids as feedstock, such as olefins, methanol, and ammonia.

4 September 2013


$189 Billion in Annual Capital Expenditures In 20203

As unconventional oil and natural gas producers expand their upstream operations over the next 25 years, the midstream, downstream, and energy-related chemical sectors will increasingly invest in infrastructure and processing capacity.

• The $87 billion in upstream capital expenditures during 2012 was accompanied by an additional $34 billion in capital expenditures from midstream and downstream energy and energy-related chemicals as these sectors rapidly expand capacity and reshore some production facilities to the United States. In total, just over $121 billion in capital expenditures occurred in 2012.

• In 2020, total capital expenditures are estimated to reach nearly $189 billion. Upstream will invest close to $173 billion. However, by this point, midstream and downstream energy and energy-related chemicals will have transitioned to incremental capacity expansion, thereby moderating their capital expenditures to almost $7 billion and over $9 billion, respectively.

• By 2025, annual capital expenditures are estimated to exceed $240 billion: $228 billion from upstream, over $5 billion in midstream and downstream, and over $7 billion in chemicals.

Over the entire forecast period 2012-2025, capital expenditures for the upstream will reach over $2.4 trillion. Midstream and downstream energy will generate over $216 billion and energy-related chemicals will add more than $129 billion.

3.3 Million American Jobs in 2020

There are three sources of economic contribution, in terms of jobs, from increased activity in the unconventional oil and natural gas value chains and in energy-related chemicals: (1) the direct contribution from the unconventional oil and natural gas value chains and energy-related chemicals activity, (2) the indirect contribution from suppliers to the unconventional oil and natural gas value chains and energy-related chemicals , and (3) the induced contribution throughout the economy as workers spend their incomes on consumer goods and services.

These employment opportunities have particular resonance at a time that reigniting job growth is one of the dominant priorities on the national agenda. A striking number of jobs will be created from unconventional oil and natural gas value chains and energy-related chemicals activities and industries that will benefit from their growth:

• In 2012, the unconventional oil and natural gas value chain and energy-related chemicals activity supported more than 2.1 million jobs in the US lower 48 states—500,000 of these were direct jobs; almost 640,000 were indirect jobs in supplying industries; and just under 1 million were induced

3 Estimates of the capital expenditures required to support upstream activity were discussed in detail in volume one of this report series, America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, Volume 1: National Economic Contributions.

Employment Contribution due to the Unconventional Activity Value Chain: Base Case*(Number of workers)

2012 2020 2025

Upstream Energy Activity 1,748,604 2,985,168 3,498,678

Midstream and Downstream Energy Activity 323,648 73,530 56,989

Energy-Related Chemicals Activity 53,252 277,356 318,748

Total Activity 2,125,504 3,336,055 3,874,415

NOTES: Numbers may not sum due to rounding.

*The unconventional activity value chain represents the sum of unconventional oil and natu-ral gas value chains and energy-related chemicals.

Source: IHS Economics


IHS 5

jobs. Midstream and downstream energy and energy-related chemicals activity accounted for nearly 377,000 of these jobs.

• By 2020, we forecast that the unconventional oil and natural gas value chain and energy-related chemicals activity will support over 3.3 million jobs: nearly 685,000 direct, more than 1 million indirect, and over 1.6 million induced jobs. Midstream and downstream energy and energy-related chemicals activity will contribute nearly 351,000 of these jobs.

• By 2025, unconventional oil and natural gas value chain and energy-related chemicals activity will support almost 3.9 million jobs: over 800,000 direct, more than 1.2 million indirect, and over 1.8 million induced jobs. Midstream and downstream energy and energy-related chemicals activity will jointly contribute nearly 376,000 of these jobs.

$468 Billion in Annual Contribution to US GDP In 2020

The value-added contribution to GDP from the unconventional oil and natural gas value chain and energy-related chemicals activity totaled nearly $284 billion in 2012 alone.

• In 2012, total GDP contributions reached nearly $284 billion: the $238 billion upstream contribution to 2012 GDP was accompanied by an additional $39 billion in the midstream and downstream while energy-related chemicals sectors contributed nearly $7 billon.

• In 2020, total GDP contributions are estimated to reach $468 billion: nearly $417 billion from upstream, $9 billion in midstream and downstream, and about $43 billion in energy-related chemicals.

• And by 2025 total contributions to GDP are estimated to approach $533 billion: about $475 billion from upstream, almost $7 billion in midstream and downstream, and over $51 billion in chemicals.

$125 Billion in Annual Tax Revenues to Federal and State Treasuries By 20204

At a time when government budgets are also of great concern, the unconventional oil and natural gas revolution at all levels—upstream, midstream, downstream, and energy-related chemicals—is having a positive impact on federal, state and local government budgets. In 2012, the full value chain of industrial activity and employment associated with unconventional oil and natural gas contributed a total of more than $74 billion in tax receipts. Tax receipts will climb to more than $125 billion annually by the end of the decade and, by 2025, will reach $138 billion annually.

4 These revenues include personal and corporate tax payments by the supply chain of industries, as well as tax revenues from income earned by direct and indirect employment associated with the unconventional revolution. Tax revenue includes: (1) federal corporate and personal income taxes; (2) state and local corporate and personal income taxes, state severance taxes, and state ad valorem levies; and (3) federal royalty payment for exploration on federal lands. In addition to government taxes and revenues, lease payments to private landown-ers are also reported.

Value Added Contribution due to the Unconventional Activity Value Chain: Base Case*(2012 $M)

2012 2020 2025

Upstream Energy Activity 237,684 416,551 474,985

Midstream and Downstream Energy Activity 39,327 8,927 6,857

Energy-Related Chemicals Activity 6,766 42,949 51,041

Total Activity 283,777 468,427 532,884


*The unconventional activity value chain represents the sum of unconventional oil and natu-ral gas value chains and energy-related chemicals.


6 September 2013


Contribution to US Lower 48 Government Revenue due to the Unconventional Activity Value Chain: Base Case*(2012 $M)

2012 2020 2025 2012-2025**

Contribution by Type***

Federal Taxes 35,598 57,702 64,030 750,696

Federal Royalty Payments 1,964 3,204 2,994 39,664

Federal Bonus Payments 148 150 138 2,139

State and Local Taxes 36,732 64,484 71,233 822,137

Total Government Revenue 74,443 125,540 138,395 1,614,636

Lease Payments to Private Landowners 504 915 1,103 11,696

Contribution by Activity

Upstream Energy Activity 63,015 112,943 124,335 1,436,294

Midstream and Downstream Energy Activity 9,750 2,168 1,665 63,133

Energy-Related Chemicals Activity 1,677 10,429 12,395 115,209

Total Government Revenue 74,443 125,540 138,395 1,614,636

Lease Payments to Private Landowners 504 915 1,103 11,696


*The unconventional activity value chain represents the sum of unconventional oil and natural gas value chains and energy-related chemicals.

**2012-2025 represents the total for all years including those years not reported.

***Federal royalty payments, federal bonus payments, and lease payments to private landowners only apply to the up-stream energy activity where land is leased from private households for drilling.


On a cumulative basis over the entire forecast period, the tax contribution will surpass $1.6 trillion, with over $1.4 trillion generated by upstream activities, $63 billion by the midstream and downstream activities, and $115 billion by energy-related chemicals activities taking place.

Despite the fact that nearly 90% of this unconventional activity is taking place on state or private lands, rather than federal lands, there are significant fiscal implications for the federal government, as corporations and individuals pay federal taxes on earnings generated by this activity. Federal tax revenues and royalties alone currently total nearly $38 billion, with the vast majority of that—$35 billion—coming from those corporate and individual income taxes. Similarly, state and local governments are also recognizing significant tax revenues—almost $37 billion in 2012—from this activity. By 2020, total annual taxes from the full unconventional oil and natural gas value chain and energy-related activity will grow to just over $61 billion for the federal government and $64 billion for state and local governments.

Over the entire forecast period, the cumulative contribution will be $1.6 trillion, more than $792 billion being recognized by the federal government and $822 billion generated for state and local governments.

Macroeconomic Impact Assessment: the Base Case

Natural gas prices continue to remain lower than they were prior to the start of the unconventional oil and natural gas revolution in the United States and continue to trend lower than prices elsewhere in the world. The projected price for natural gas over the forecast horizon is between $4 and $5 per Mcf, which is approximately a third of the likely natural gas price faced by the United States if forced to import on a


IHS 7

global LNG market to meet domestic demand. These lower prices are boosting disposable income, GDP and employment—all positive forces during a period of economic uncertainty and slow growth. Over the longer term, we expect a compositional shift in the economy toward increased manufacturing due to an improvement in US international competitiveness. Lower energy and feedstock costs will lead to more manufacturing sector investment and employment, particularly in energy-related chemicals.

Three distinct first-order impacts from the unconventional revolution were incorporated into the IHS models under a Base Case analysis of 21 major unconventional oil and natural gas plays. The following explains how IHS incorporated these impacts:

• Additional domestic energy production was changed to reflect increased investment and capacity expansion in the oil and natural gas industry;

• The resulting lower natural gas prices estimated by IHS Energy Insight were incorporated into the US Macroeconomic Model;

• The increased upstream investments in capacity expansion were incorporated into the US Macroeconomic Model as part of the overall investment outlook and then, utilizing the model relationships, the model estimated investment changes in midstream and downstream energy, along with energy-related chemicals.

However, there are also less direct measures that will impact the broader economy and, due to its dynamic nature, the US Macroeconomic Model allows IHS to examine changes in industrial and consumer outlooks as a result of those initial first-order impacts. One important example that illustrates the nature of the model is that of electricity prices. Natural gas and oil are important inputs in the generation of electricity, so reductions in the price of natural gas will result in reductions in the price of electricity. Producers and consumers will then benefit from lower electricity bills.

The impacts are analyzed using three standard macroeconomic metrics: GDP, the net trade balance, and disposable household income.

Gross Domestic Product

The incremental boost from the unconventional oil and natural gas value chain and energy-related chemicals is expected to add 2 to 3.2% to the value of all goods and services produced in the United States. That is forecast to increase rapidly and peak in the early years. Over the short term, the impact of the unconventional oil and natural gas value chains and energy-related chemicals on the level of GDP peaks at 3.2% by 2016. In the context of a $13-15 trillion US economy, this equates to an increase in GDP of $500 to $600 billion.

Net Trade

The unconventional revolution will also substantially improve the US net trade balance for several reasons. First, the increase in domestic energy production will allow the United States to export significant quantities of intermediate and refined

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Change in Gross Domestic Product due to the Unconventional Activity Value Chain: Base Case*

Note: *The unconventional activity value chain represents the sum of unconventional oil and natural gas value chains and energy-related chemicals.


8 September 2013


energy products such as liquefied petroleum gases and liquefied natural gas. Second, for energy products in which the United States is a large net importer, namely crude oil, each barrel of increased production cancels out an equivalent imported barrel. Third, reduced energy costs, specifically for electricity and natural gas, improve the global competiveness of energy-intensive manufacturing industries.

Despite declining domestic demand, this new competiveness will enable petroleum refiners to continue operating at high utilization rates, meeting lower domestic demand and then exporting surplus production to Latin America and Europe. The impact on US trade of the unconventional revolution is projected to increase steadily through 2022 before plateauing at a new, higher level of $180 billion per year in additional real net trade relative to a US trade regime in which there was no unconventional activity.

This trade impact is particularly relevant for the chemical manufacturing sector. In the years immediately preceding the global recession of 2009, the chemical industry underwent an expansion in net exports.5 This export expansion was largely driven by the widening spread between natural gas derived energy-related chemicals in the US and oil derived energy-related chemicals in other parts of the world. Over this period, while natural gas prices held relatively constant, oil experienced a rapid rise as the Brent Spot Price shot up from $54.57 in 2005 rising to $96.94 at its peak in 2008.6 As a result, net exports as a percent of total production expanded for energy-related chemicals in the US reliant on the now relatively more affordable natural gas based feedstock.

The unconventional oil and natural gas revolution is now positioning US based energy-related chemical producers to further accelerate their net export position. Historically high oil derived feedstock prices—with oil projected to average $98 per barrel throughout the forecast horizon—will

5 Net exports defined as the industries total exports minus the value of its total imports6 EIA Europe Brent Spot Price FOB (Dollar per Barrel).

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continue to place significant cost pressures on many global chemical competitors. Simultaneously, relatively affordable and abundant natural gas derived feedstock unlocked by the unconventional revolution in the US will continue to benefit natural gas based energy-related chemical producers here domestically. The chemical manufacturing industry currently stands as one of America’s largest exporting industries with $198 billion in annual exports that accounted for 13% of all US merchandise exports in 2012.7 IHS expects this export trend to continue through the forecast period as the industry continues to enjoy cost advantages relative to international competitors.

Disposable Household Income

Finally—and most tangibly for American families—household disposable income will rise due to increased activity in the US unconventional oil and natural gas value chain and in energy-related chemicals . This is the cumulative impact of increasing household wages and decreasing costs for energy and energy-intensive products. Specifically, these factors work through three primary avenues of economic growth:

• Direct consumption costs are reduced as natural gas used to heat homes and water becomes less expensive.

• Input costs for manufacturers of various consumer goods, including electricity prices, decline, reducing indirect costs for consumers.

• Wages increase as the manufacturing renaissance increases industrial activity.

In 2012, the increase in real disposable income per household as a result of the unconventional oil and gas revolution was more than $1,200. With nearly 120 million households in the country, this equates to total annual savings to American households of $163 billion. These benefits are expected to continue to grow: real disposable income per household will steadily increase over the entire forecast period, from just over $2,000 per household per year in 2015 to more than $3,500 by 2025.

These economic contributions are more significant when viewed against the backdrop of a struggling US economy, with slow growth, and an unemployment rate that hovers above 7.5%, with 12 million individuals out of work and seeking employment. IHS expects the unemployment rate to fall to 6.5% in late 2015 and reach a long-run equilibrium of 5.2% by 2025. IHS projects that the United States will experience a long, laborious recovery, with 1.8% GDP growth in 2013 and 2.9% growth in 2014.

Manufacturing Renaissance

A variety of factors have encouraged the manufacturing renaissance currently under way in the United States, including productivity gains for US workers, significant technological advances, and slower growth in hourly compensation relative to our global competitors. These factors have already helped US manufacturing rebound since the trough of the recession in 2009. Manufacturing is continuing to make important contributions to economic growth. Manufacturing’s overall real value added—its contribution

7 United States Department of Commerce, Bureau of the Census, Foreign Trade Division

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10 September 2013


to GDP—increased 6.2% in 2012, after increasing 2.5% in 2011. This growth was led by durable-goods manufacturing, which was the largest contributor to US growth overall in 2012. The durable goods manufacturing sector has experienced significant growth for three consecutive years: 13.3% in 2010, 6.8% in 2011, and 9.1% in 2012.8

These factors, in combination with the profound impacts of increasing unconventional oil and natural gas production, are revitalizing critical segments of the US manufacturing base. To provide a comprehensive analysis of the economic contribution, it is critical to examine the unconventional revolution’s impact on major manufacturing industries. US manufacturers are benefitting from the availability of a secure supply of low-cost natural gas, especially manufacturers in energy-intensive industries. Energy-related chemicals, petroleum refining, aluminum, steel, glass, cement, and the food industry—these are key energy-intensive sectors that are expected to invest and increase their US operations in response to declining prices for their energy inputs.

The impact of the unconventional oil and natural gas revolution in the forecast period is pronounced among energy-intensive industries. In 2012, many energy-intensive manufacturing industries outperformed the total manufacturing index average growth of 1.3%. Subsectors such as Iron and Steel Product Manufacturing and Basic Organic Chemical Manufacturing are way out in front of the overall manufacturing average in both 2020 and 2025. The same can be said for Resins and Synthetic Material Manufacturing (6.0% in 2020 and 8.1% in 2025) and Agricultural Chemical Manufacturing (6.9% in 2020 and 7.7% in 2025).

Percent Increase to Selected Industrial Production Indices due to the Unconventional Activity Value Chain

8 http://www.bea.gov/newsreleases/industry/gdpindustry/2013/gdpind12_adv.htm

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Iron and Steel Product Manufacturing

Resins and Synthetic Material Manufacturing

Basic Organic Chemical Manufacturing

Plastics and Rubber Products Manufacturing

Fabricated Metal Product Manufacturing

Agricultural Chemical Manufacturing

Nonmetallic Mineral Product Manufacturing

Petroleum and Coal Products Manufacturing

Machinery Manufacturing

Total Manufacturing Average

2012



IHS 11

Beyond the unconventional oil and natural gas revolution contributions, there are a number of factors contributing to the resurgence in manufacturing placing the United States in a strong position to further expand its manufacturing base. These factors include:

• improvements in technology and in the efficiency of manufacturing processes that have shifted the balance away from the importance of low-cost labor and toward a higher skilled workforce;

• relatively higher productivity levels in the United States;

• relatively higher growth in global manufacturing compensation than that of the United States;

• improved manufacturing efficiencies in the use of energy; and

• shortened supply and logistics chains due to research and development resources and end markets that are geographically closer to manufacturing locations.

As a result, the broad manufacturing renaissance is not purely a function of the unconventional oil and natural gas revolution. However, while it is important to recognize that these and other factors are contributing to a broad manufacturing renaissance in the US, they were not in the purview or scope of this study. The results presented in this study reflect the critical role that affordable and abundant energy is playing in the manufacturing renaissance—holding these other contributing factors constant.

The unconventional revolution’s impact on US industrial production indices is captured in two ways. In what we call first-order impacts, lower natural gas prices, increased energy investment and production, and falling electricity prices have direct ramifications for many manufacturing industries that are major users of energy feedstock or are intense energy users. Major non-durable manufacturing sectors that will benefit include organic chemicals, fertilizers, resins, and plastics. Durable goods manufacturing sectors that will benefit include primary and fabricated metals, machinery and some non-metallic minerals products.

Second-order effects are captured across all manufacturing industries as the US economy continues to benefit from the unconventional oil and natural gas revolution. These effects include expansions in iron- and steel-product manufacturing and in fabricated metal-product manufacturing. Over the forecast period 2012-2025, improving cost competitiveness for domestic manufacturers will lead to increased US industrial production. The manufacturing industrial production index will be 2.8% higher in 2015 and is expected to be 3.5% higher in 2020 and 3.9% higher in 2025. In terms of value of output for the manufacturing sector, this increase is the equivalent of $258 billion in 2020 and $328 billion in 2025.

Reductions in natural gas prices, increases in energy investment and production, and falling electricity prices have direct ramifications for many manufacturing industries that are major users of energy feedstock or are intense energy users. Major non-durable manufacturing sectors that will benefit include organic chemicals, fertilizers, resins, and plastics. Durable goods manufacturing sectors that will benefit include primary and fabricated metals, machinery and some of the nonmetallic mineral products.

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2012 2014 2016 2018 2020 2022 2024

Change in Industrial Production Index due to the Unconventional Activity Value Chain: Base Case*



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The dual effects of increases in aggregate demand (for example, consumers spending their higher disposable incomes on US-made products) and reductions in imports (for example, US petrochemical manufacturers increasing production) will drive increases in industrial production to a broad range of energy-intensive manufacturing industries such as organic chemicals, resins, agricultural chemicals, petroleum refining, metals, and machinery.

Risks to the Projected Economic Contributions

This study is based on a set of bottom-up resource build-outs that represent IHS Economics’ current outlook for unconventional oil and natural gas production, capital expenditures, and operating expenses. It is consistent with the Base Case analysis presented in the first two volumes of this research series. The Base Case estimates the economic contributions associated with unconventional oil and natural gas activity from the 21 most significant existing or emerging unconventional oil and natural gas plays and includes both private and federal lands where drilling and extraction is taking place. However, one of the unique aspects of this unconventional revolution has been how it has unfolded predominately on state and private lands. In fact, federal lands comprise only about 10% of the resource assessment in these 21 existing or emerging unconventional oil and natural gas plays. Additional recoverable unconventional resources may exist in other onshore federal lands areas, but the inability to access a large portion of it for oil and natural gas drilling, make it impossible to fully and accurately characterize the resources base on these federal lands. It is also important to note that the analysis and resource projections assume the status quo with regard to existing policies and the regulatory framework—at a federal, state, and local level—governing unconventional oil and natural gas drilling and production.

However, there are risks as to whether the economic contributions associated with the Base Case developed for these studies will be realized. Production could be lower if regulatory or legislative changes are made to restrict unconventional oil and natural gas activity. This is particularly true despite the fact that the vast majority of this activity currently takes place on non-federal lands. Regulation at any level of oversight—by federal, state or local governments—has the potential to fundamentally alter the break-even economics of extraction, pace of development, or access to these energy resources. Therefore, to assess the potential downside risks associated with such a regulatory change, IHS developed an alternative Low Production Case. The Low Production Case estimates and then compares the broader impacts from more restrictive policies and regulatory frameworks that significantly reduce future unconventional production to the projected Base Case economic contributions.

This Low Production Case analysis is patterned after the National Petroleum Council’s Severe Restricted Supply Scenario, as described in the topic papers of the 2011 US National Petroleum Council (NPC) study on Prudent Development of North American Oil and Gas Resources. In the NPC scenario, “supply is reduced such as may occur with severe restrictions on fracture stimulation,” also known as hydraulic fracturing. Specifically, the NPC assumed that “67% of shale gas/tight gas/CBM supply is eliminated.” The Low Production Case in IHS’ study is based on the assumption, consistent with the NPC study, that some combination of regulatory restrictions would impose significant restrictions on fracture stimulation, which would reduce the ability of the exploration and production industry to access and develop unconventional hydrocarbon resources in the United States. The ramifications of such policy and regulations will also change the outlook for the LNG market, shifting it to a more import-dependent market. Additionally, industrial- and power-sector demand for natural gas will experience a downward trajectory. As a result of both higher LNG imports and lower domestic production, natural gas prices are projected to peak in 2020 at over $16 per Mcf before dropping to over $14 per Mcf. The implications for capital expenditure requirements stemming from lower unconventional oil and natural gas production, due to the restrictive policy and regulations, will mean a much lower capital expenditure path over the next decade than would play out in the Base Case, resulting in smaller economic contributions.


IHS 13

Low Production Case Implications

A contraction in production as a result of a Low Production Case would curtail capital expenditures and operating spending in the upstream industries. This, in turn, would flow through the entire unconventional oil and natural gas value chain, dampening its effects throughout the economy and slowing or reversing the manufacturing renaissance described in IHS’ comprehensive analysis. Below we present the corresponding implications associated with a Low Production Case outcome relative to the Base Case.

The employment implications of regulatory or legislative restrictions are profound. IHS estimates that annual forgone employment—the result of moving from the Base Case to the Low Production Case—would mean more than 2.1 million fewer jobs in 2020. This reduction in employment would reach nearly 2.8 million in 2025. This would represent a 64% and 72% reduction in employment due to the unconventional oil and gas value chains and energy-related chemicals in 2020 and 2025, respectively, compared with the Base Case’s employment forecasts for those years.

US Lower 48 Economic Contribution Summary due to the Unconventional Activity Value Chain: Dif-ference between Base Case and Low Production Case*

Employment

(Number of workers)

2015 2020 2025 2012-2025**

Low Production Case 1,471,343 1,209,353 1,100,904 NA

Base Case 2,888,218 3,336,055 3,874,415 NA

Difference (1,416,875) (2,126,702) (2,773,511) NA

Value Added

(2012 $M)Low Production Case 269,170 292,647 232,260 NA

Base Case 396,999 468,427 532,884 NA

Difference (127,829) (175,779) (300,624) NA

Government Revenue

(2012 $M)Low Production Case 74,642 84,512 66,024 1,080,608

Base Case 104,551 125,540 138,395 1,614,636

Difference (29,909) (41,028) (72,371) (534,028)

NOTES: *The unconventional activity value chain represents the sum of unconventional oil and natural gas value chains and energy-related chemicals.



IHS estimates that annual government revenues forgone by moving from the Base Case to the Low Production Case would be more than $41 billion in 2020 and over $72 billion in 2025. Over the entire forecast, governmental bodies would forgo more than $534 billion in cumulative revenues—or approximately 33% of the Base Case cumulative tax revenues. While the majority of these forgone revenues are the result of a decline in upstream activity, the cumulative forgone revenue from midstream and downstream energy activity is expected to exceed $30 billion; for the chemicals industry, forgone revenue is expected to reach $99 billion.

14 September 2013


Similarly, the contribution of unconventional oil and natural gas activity to the overall economy would also contract if the Low Production Case played out. In the Base Case, the contributions to GDP peak around 3.3%, whereas under the Low Production Case contributions will not exceed 1.9%. Additionally, although the net trade benefits under the Base Case peak at $183 billion in 2022, the benefit from the Low Production Case, will peak at $92 billion—approximately half of the Base Case. While the contribution of unconventional oil and natural gas to the US industrial production index in the Base Case ranges from 1.5% to 5.0%, the Low Production Case’s contribution will, at its peak, reach only 1.5%.

Finally, the impact on annual household disposable income is profound. Over the entire forecast interval, the average annual contribution to disposable income per household under the Base Case is roughly $2,600, whereas the average under the Low Production Case is $800—representing just 31% of the Base Case. By the end of the forecast interval in 2025, the impact on disposable income will become less pronounced as the broader economy begins to equilibrate under the new reality of the Low Production Case. Nevertheless, IHS still estimates that average annual household disposable income under the Low Production Case would be only 54% of the Base Case—$1,900 per year under the Low Production Case, versus $3,500 per year under the Base Case

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2015 2017 2019 2021 2023 2025

Base Case Low Production Case

Change in Gross Domestic Product due to the Unconventional Activity Value Chain: Base Case versus Low Production Case*



-1.0%

0.0%

1.0%

2.0%

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2013 2015 2017 2019 2021 2023 2025


Change in Industrial Production Index due to the Unconventional Activity Value Chain: Base Case versus Low Production Case*



0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2013 2015 2017 2019 2021 2023 2025


Change in Disposable Income per Household due to the Unconventional Activity Value Chain: Base Case versus Low Production Case*2012 $




IHS 15

Conclusion

Unconventional oil and natural gas activity is reshaping America’s energy future and bringing significant benefits to the US economy in terms of jobs, government revenues, and GDP. This study provides the foundation for a dialogue focused on the still-evolving but transformative economic effects of this unconventional revolution. It extends our original economic assessment to include the full value-chain associated with the unconventional revolution—IHS has added the benefits from midstream, downstream, and energy-related chemicals activities to the prior upstream analysis—and explores how these profound developments are reshaping our macroeconomic outlook and contributing to a manufacturing renaissance brought about by improving US competitiveness in world markets.

The full economic contribution from the unconventional oil and natural gas value chain and energy-related chemical manufacturing has added 2.1 million jobs in 2012, and that contribution will increase to almost 3.3 million by the end of the decade and almost 3.9 million by 2025. Annual GDP contributions will nearly double, from almost $284 billion in 2012 to almost $533 billion in 2025. Government revenues will average $115 billion annually and will grow by a total of more than $1.6 trillion over the 2012 to 2025 time frame.

The revolution is also benefitting households across the country. In 2012, real household disposable income increased by more than $1,200. With 120 million households in the country, this equates to an aggregate annual boost of $163 billion. The benefits to US workers will continue to rise over the forecast horizon, from just over $2,000 per year in 2015 to more than $3,500 per year by 2025.

Equally impressive is the contribution to the manufacturing sector brought about by this unconventional oil and natural gas activity. A rapidly evolving energy landscape is unlocking in a new era of affordable and abundant energy for the US creating significant competitive advantages for both energy-intensive industries and industries that rely on natural gas derivatives as critical feedstock in production. And while a variety of factors have encouraged the renaissance under way in US manufacturing, the contributions quantified by our macroeconomic modeling demonstrate the significant role that the unconventional oil and natural gas revolution is playing in supporting this manufacturing renaissance today and in the future.

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Volume 3: A Manufacturing Renaissance - Main Report

An IHS Report

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3PB

ii September 2013


About IHS (ihs.com)





[email protected]




[email protected]



Volume 3: A Manufacturing Renaissance

IHS iii

Project Directors



Project Team




• Russell Heinen, Senior Director, Chemicals Research




Key Contributors





Acknowledgments


We would also like to thank the subject matter experts, technical experts, industry experts and analysts who also contributed to this study: Sam Andrus, John Anton, Miguel Goncalves, Daniel Lichtenstein, Kenneth Kremar, Charlie McCarren, Mike Montgomery, John Mothersole, Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, Mihaela Solcan, and Tom Runiewicz.

This report offers an independent assessment of the importance of unconventional oil and gas to the US economy. This research was supported by the American Chemistry Council, America’s Natural Gas Alliance, the American Petroleum Institute, the Fertilizer Institute, the US Chamber of Commerce–Institute for 21st Century Energy, the National Association of Manufacturers, the Natural Gas Supply Association, Rio Tinto, and the Society of the Plastics Industry. IHS is exclusively responsible for this report and all of the analysis and content contained herein. The analysis and metrics developed during the course of this research represent the independent views of IHS and are intended to contribute to the dialogue on the role of unconventional oil and gas production in promoting employment, economic growth, and energy security.

iv September 2013


Table of Contents

Introduction ........................................................................................................................................ 1Report Structure ............................................................................................................................ 2

Midstream and Downstream Energy and Energy-Related Chemicals .................................................. 6Midstream and Downstream Energy .............................................................................................. 6

Midstream and Downstream Economic Contribution .......................................................................6US Trends across Midstream and Downstream Segments .............................................................10Midstream and Downstream Segment Specific Themes .................................................................11

Energy-Related Chemicals ........................................................................................................... 20

Establishing the Base Case .............................................................................................................. 32Land Coverage ............................................................................................................................ 32Crude Oil ..................................................................................................................................... 33Natural Gas.................................................................................................................................. 33Federal Lands .............................................................................................................................. 33

Economic Contribution Assessment– Base Case.............................................................................. 36Approach and Methodology......................................................................................................... 36

Defining the Economic Contribution ................................................................................................36Underlying Assumptions .............................................................................................................. 37Methodology ................................................................................................................................ 38Measuring the Economic Contributions—Base Case ................................................................... 40Employment Contribution—Base Case ....................................................................................... 42Manufacturing Employment Contribution ..................................................................................... 43Value Added and Labor Income Contribution .............................................................................. 46Government Revenues and Taxes ............................................................................................... 50

The Macroeconomic Impact of Unconventional Oil and Gas ............................................................. 52Methodology ................................................................................................................................ 52Broad Impact on the Economy .................................................................................................... 53Industrial Production Indices ........................................................................................................ 55

Low Production Case ....................................................................................................................... 59Formulation of the Low Production Path ..................................................................................... 59

Defining the Low Production Case .................................................................................................59Output Assumptions—Low Production Case ............................................................................... 61Capital Expenditure Assumptions—Low Production Case ........................................................... 62A Comparative Analysis: Base Case versus Low Production Case ............................................... 64

Comparison of Economic Contribution Results ...............................................................................64Comparison of Macroeconomic Results .........................................................................................67

Conclusion ....................................................................................................................................... 69


IHS 1

IntroductionThis is the third volume in a three-part series on the effects of unconventional oil and natural gas on the US economy. The first volume detailed the effects of upstream unconventional oil and gas development on the national economy, and the second volume presented the role of upstream unconventional oil and natural gas on each of the lower 48 states. In this volume, we extend the work undertaken in the first two volumes by examining three critical ways in which this unconventional revolution is impacting the US economy.

First, we look at the unconventional oil and natural gas value chain and assess the economic contributions associated with the capital and operational expenditures required to build out the midstream and downstream energy and the energy-related chemicals industrial base to support this unconventional oil and gas expansion. This growth in the unconventional oil and natural gas value chain will make significant contributions to the broader economy throughout the study period, increasing gross domestic product (GDP), employment, tax revenues.

• GDP: In 2012, total GDP contributions reached nearly $284 billion: the $238 billion upstream energy contribution to 2012 GDP was accompanied by an additional $39 billion from midstream and downstream energy while energy-related chemicals contributed nearly $7 billon. By 2025, total contributions to GDP are estimated to approach $533 billion: about $475 billion from upstream energy, almost $7 billion from midstream and downstream energy, and over $51 billion from energy-related chemicals.

• Employment: The unconventional oil and natural gas value chain and energy-related chemicals activity together supported more than 2.1 million jobs in 2012. Midstream and downstream energy and energy-related chemicals activity accounted for nearly 377,000 of these jobs. By 2025, the unconventional oil and natural gas value chain and energy-related chemicals activity will support almost 3.9 million jobs, of which nearly 376,000 will derive from midstream and downstream energy and energy-related chemicals activity.

• Tax Revenues: Government revenue will exceed $1.6 trillion from 2012 through 2025. Upstream energy activity will contribute more than $1.4 trillion, midstream and downstream energy activity will add more than $63 billion, and government revenue from energy-related chemicals is expected to reach more than $115 billion over the same period.

Second, we examine the macroeconomic implications of the newfound abundance of affordable unconventional oil and natural gas resources, with a particular emphasis on natural gas and natural gas liquids.

• Trade: The impact on US net trade of the unconventional revolution is expected to increase steadily before plateauing at a new, higher level of roughly $180 billion in 2022.

• Household Income: Savings from lower natural gas prices will add just over $2,700 to disposable household income in 2020. This would increase to more than $3,500 per household in 2025.

Third, we conclude with an examination of the resurgence that US manufacturing is enjoying as a result of affordable and abundant new resources that are being unlocked through unconventional extraction techniques.

Overall, the United States has added over 500,000 manufacturing jobs, and the industrial production index for the US manufacturing sector has increased 4.8% since the trough of the recession in 2009. As a result, manufacturing has become an important contributor to growth during these economically challenging times. Manufacturing added 6.2% to the value of all goods and services produced in this

2 September 2013


country in 2012, after adding 2.5% in 2011. This growth was led by durable-goods manufacturing, the largest contributor to overall growth in the economy for a third consecutive year. The value of durable goods manufacturing surged by 9.1% in 2012, after increasing 6.8% in 2011 and 13.3% in 2010.1

To provide a comprehensive analysis of the economic contribution of the unconventional oil and natural gas revolution, it is critical that this report examine its impact on major manufacturing industries. IHS has quantified and assessed this economic contribution using macroeconomic modeling and has found that this contribution is highly significant.

US manufacturers are benefitting from the availability of a secure supply of low-cost natural gas, especially for manufacturers in energy-intensive industries. Energy-intensive sectors like energy-related chemicals, petroleum refining, aluminum, glass, cement, and the food industry are expected to invest and expand their US operations in response to declining domestic prices for their energy inputs. This study quantifies these contributions to the US manufacturing sectors, including:

• By 2015, lower natural gas prices and higher activity will result in an impact of 2.8% higher industrial production. By 2025, industrial production will be 3.9% higher.

• Energy-intensive subsectors in manufacturing—iron and steel products, machinery, basic organic chemicals, resins and synthetic materials manufacturing, and agricultural chemicals manufacturing—will outperform the overall US industrial economy.

Other factors, beyond the contributions from the unconventional oil and natural gas revolution, are also contributing to the resurgence in manufacturing that places the United States in a strong position. These factors include:

• improvements in technology and in the efficiency of manufacturing processes that have shifted the balance away from the importance of low-cost labor and toward a higher-skilled workforce;

• relatively higher worker productivity in the United States;

• relatively higher growth in global manufacturing compensation than that of the United States;

• improved manufacturing efficiencies in the use of energy; and

• shortened supply and logistics chains due to research and development resources and end markets that are geographically closer to manufacturing locations.

While it is important to recognize these contributions to the US manufacturing renaissance, they were not within the purview of this study, which is focused on the impact of the revolution in unconventional oil and natural gas production. The results presented here highlight the critical role that affordable and abundant energy is playing in the manufacturing renaissance—independent of the potential effect of these other factors.

Report Structure

This report, Volume 3 in the America’s New Energy Future series, contains the following six sections:

• Midstream and Downstream Energy and Energy-Related Chemicals discusses the unconventional revolution’s implications for midstream and downstream energy activity and energy-related chemicals. The chapter will also discuss the details of an expected capacity expansion and the resulting production ramifications.

• Establishing the Resource Base identifies the specific oil and natural plays examined in this resource assessment.

1 http://www.bea.gov/newsreleases/industry/gdpindustry/gdpindnewsrelease.htm


IHS 3

• Economic Contribution Assessment—Base Case details the results of IHS’ economic contribution analyses of midstream and downstream energy and energy-related chemicals and then aggregates the results with the findings of the upstream assessments presented in Volume 1 to present a comprehensive picture of the economic contribution of the unconventional oil and gas revolution. It will also explore findings on the employment contribution of the manufacturing sector.

• The Macroeconomic Impact of Unconventional Oil and Gas quantifies the impact of the Base Case for unconventional oil and gas activities, which includes lower prices and higher production and investment activities. The discussion will focus on broad economic barometers, as well as details of manufacturing industry growth.

• Low Production Case presents a comparative analysis of manufacturing sector activity, employment and value-added contributions to GDP in the event that federal regulations and policy restrict unconventional oil and natural gas production over the forecast time horizon relative to estimates used in the Base Case.

• Conclusion provides the key conclusions of the report.

Several appendices are also provided to explain the methodologies, research, and data relied upon for our analysis. The appendices also present more detailed results from our study. These appendices are available at http://www.ihs.com/info/ecc/a/americas-new-energy-future-report-vol-3.aspx.

Key Definitions

Midstream and Downstream Energy

The terms midstream and downstream can have varying definitions inside the oil and gas industry. For the purposes of this report, midstream and downstream energy activities involve converting raw crude oil and natural gas liquids into finished products and bringing these products to market. Midstream specifically refers to the transport and logistics functions of oil and natural gas, encompassing marine, truck, rail, and pipeline movements, as well as the dedicated storage of intermediate and finished products. Downstream refers to the processing or upgrading of natural gas liquids and crude oil into higher value intermediate and finished products. This report will also cover liquefied natural gas facilities, which are not typically considered part of midstream and downstream; they have been included here, since they constitute the additional processing of natural gas into liquid form.

For the remainder of this report, midstream and downstream energy encompass the following seven segments:

• Liquefied natural gas processing (LNG)

• Natural gas processing

• Natural gas logistics (pipelines)

• Natural gas liquids (NGL) processing

• NGL logistics (marine, pipelines, and storage)

• Crude oil processing (refining)

• Crude oil logistics (marine, pipelines, rail and storage).

Energy-Related Chemicals

Energy-related chemicals refers to processing and transforming natural gas and gas liquids into chemical raw material products. These products include the major commodity petrochemicals that use natural

4 September 2013


gas and gas liquids as feedstock, such as olefins, methanol, and ammonia. Over 70% of the cash cost of producing these chemicals is the cost of raw materials and energy from natural gas and NGLs.2 Nine specific chemical product value chains, shown in the following chart, are included in this study.

Energy-Related Chemicals CoverageChemical Type

Acrylics Acrylic acid and acrylonitrile

Aromatics chain Aniline and nitrobenzene

Nitrogen fertilizers Ammonia, ammonium nitrate, and urea

Chlor-alkali Chlorine and caustic

Olefins Ethylene, propylene (PGCG), hexene, octene, butene-1, and butadiene

Polyolefins High density PE, low density PE, linear low density PE, and polypropylene

Vinyls chain Ethylene dichloride, vinyl chloride monomer, and PVC

Glycols chain Ethylene oxide, proplylene oxide, monoethylene glycol, diethylene glycol, triethylene glycol, PEG, and ethoxylates

Methanol chain Methanol, formaldehyde, methyl methacrylate, MTBE, and MDI

Base Case

The Base Case consists of a set of bottom-up resource build-outs and regulatory frameworks that represent IHS’s current outlook for unconventional oil and natural gas production, capital expenditures, and operating expenses. It is consistent with the analysis presented in the first two volumes of this research series. Defined as the Base Case, this outlook includes 21 existing or emerging plays and covers private and federal lands for drilling and extractions within those plays, assuming that the status quo is maintained with regard to existing federal and state policies and regulatory frameworks such as the current moratoriums in states like New York. Average natural gas prices are assumed to be between $4 and $5 per thousand cubic feet (Mcf) and annual well completions in oil and natural gas plays are expected to average roughly 8,560 and 9,670, respectively, over the forecast period from 2012 through 2025. In the Base Case, unconventional oil production is assumed to average over 3.9 million barrels per day (mbd), and natural gas production will average 57.9 billion cubic feet (Bcf) per day. It also assumes that the United States will become a natural gas exporter, with LNG exports reaching 5.1 Bcf per day during the forecast period.3 All of the above assumptions of the Base Case are reflected in IHS’s baseline outlook in the US Macroeconomic Model.

Low Production Case

The Low Production Case estimates the broader economic impacts in the event that future unconventional oil and natural gas production is reduced by a significantly more restrictive policy and regulatory framework than the framework assumed in the Base Case. To forecast this, IHS derived a sequence of restrictions from a 2011 National Petroleum Council Study that, when applied, translates into our Low Production forecast. It reflects a continuous decline of production over the next decade, resulting in a 52% decrease in oil and natural gas production by 2025 relative to our Base Case. The ramifications of such policy and regulations will also change the outlook for the LNG market, shifting it to a more import-dependent market. Additionally, industrial- and power-sector demand for natural gas will experience a downward trajectory. As a result of both higher LNG imports and lower domestic production, natural gas prices are projected to peak in 2020 at over $16 per Mcf before dropping to over $14 per Mcf. The implications for capital expenditure requirements stemming from lower unconventional oil and natural gas production,

2 Cash cost is the total manufacturing cost excluding R&D, selling, and administrative expenses and depreciation.

3 LNG exports of 5.1 Bcf per day are based on 5.9 Bcf a day of LNG export capacity.


IHS 5

due to the restrictive policy and regulations, will mean a much lower capital expenditure path over the next decade than would play out in the Base Case, resulting in smaller economic contributions.

Counterfactual Case

To fully capture the vital role unconventional development plays in the US economy, IHS also considered a counterfactual case in which unconventional development was nonexistent. To do so, IHS ran its US Macroeconomic Model after removing any unconventional oil and natural gas activity and overlaying higher natural gas prices on the Base Case price path. This counterfactual scenario was then used as to make comparisons with both the Base Case and the Low Production Case.

To construct the counterfactual case, IHS introduced the following three exogenous shocks to the US Macroeconomic Model: 1) removed all domestic energy production attributable to unconventional oil and natural gas production; 2) removed from non-residential investment all capital expenditures attributable to unconventional oil and natural gas; and 3) substituted higher natural gas prices reflecting the requirement that the United States would enter the global LNG market to procure imports to meet domestic demand. The underlying price is equivalent to the European LNG price that ranges from $11 to nearly $14 per Mcf in the forecast period.

6 September 2013


Midstream and Downstream Energy and Energy-Related ChemicalsAbundant new supplies of oil and natural gas in the United States are reviving US midstream and downstream energy and chemicals manufacturing beyond what we would expect simply from increasing domestic demand and an expanding global economy.


Midstream and Downstream Economic Contribution

There are five primary ways in which the unconventional revolution in oil and natural gas will generate investments in midstream and downstream energy industries and contribute value added to US GDP.

• Oil and natural gas upgrading

• Feedstock cost reductions

• Trade arbitrage

• Net trade

• Direct capital investment

Oil and Natural Gas Upgrading

The most direct value added to US economic growth from midstream and downstream operations is the processing of crude oil and rich gas into higher-value refined and intermediate products.4 The industry’s upgrading ability to create value added is most evident in natural gas and natural gas liquids (NGL) processing. Gas processing, NGL processing, and the majority of NGL logistics projects are links in the value chain that convert unprocessed rich gas into lean natural gas and NGL.

A hypothetical example of the incremental value this creates is through a multi-step process that includes the transport of rich gas to gas processing plants, the extraction of residue or lean gas, the transport of unfractionated NGL to a fractionator, and the sale of the constituent components to end users, such as petrochemical operators, refiners, gasoline blenders, or consumers.

Integrating the various segments of the NGL value chain into this hypothetical example creates $1.30 per thousand cubic feet of additional value. Although this figure is relatively small on a per-unit basis, when it is translated across potential rich gas production of 22.5 Bcf per day, it adds $11 billion more annually in economic activity. The actual economic contribution will depend on the NGL composition of rich gas and on whether the lean gas being produced is further processed into Liquefied Natural Gas (LNG) for export.

4 Rich gas is produced natural gas which contains a significant amount of heavier components, natural gas liquids (NGLs), which increase the heating and monetary value of the natural gas.


IHS 7

Feedstock Cost Reductions

The second economic opportunity comes from reduced feedstock costs for oil and natural gas processors. The benefits are most evident in the crude oil refining and logistics segments, which are focused on reducing the delivered cost of crude oil. The cost to ship crude oil by marine tanker from overseas markets is typically in the $2-4 per barrel range. 5 This cost is typically borne by refiners and increases their manufacturing costs.6 A net $1 per barrel reduction in the cost of delivered crude oil to US refineries has a total economic value added of $6 billion annually. This savings, if realized, has the potential to be reinvested domestically in the form of refinery-sustaining capital reinvestment and capital dividends.

Trade Arbitrage

Trade arbitrage opportunities constitute a third economic activity that adds value to GDP. 7 This will be reflected in investments in LNG liquefaction and export facilities and in NGL marine export terminals. Although the economics of each LNG project vary, their common objective is to utilize surplus domestic natural gas as a liquefaction feedstock for export into markets that command a price premium. Driving the potential for US investment is the ability to liquefy and transport $5-6 per million British thermal units (MMBtu) of natural gas and sell this product into the European market at a price of $10-12 per MMBtu

5 The estimate for total freight cost is typical for the 2008—2012 time period and calculated by IHS using the following inputs: Worldscale 100 Rates for Bonny Light crude oil travelling from the Bonny Light terminal in Nigeria to Houston; Platt’s Market Rate Dirty VLCC West Af-rica to USGC Basis, inclusive of import duty, oil spill tax, OPLI (insurance), Texas-LA marine transfer fee, harbor maintenance fee, and lighter-ing.

6 Based on Refiner Acquisition Cost of Crude Oil, EIA, http://www.eia.gov/tools/glossary/index.cfm?id=R

7 Trade arbitrage is the use of trade to realize a higher net value for a given good or product.

Natural Gas$3.86 Natural Gas

$3.16

Rich Gas Increment

$1.74

Ethane$0.80

Propane$0.94

Iso-Butane$0.68

Normal Butane$0.62

Natural Gasoline$0.70

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Natural Gas Only(2015 Price Forecast)

NGLs and Residue Gas(2015 Price Forecast)

Natural Gas Liquids Value Addition: 2015 Price Basis

$5.60 / Mcf

$6.90 / Mcf$US per thousand cubic feet (Mcf)

Assumes 30% shrinkage for

Source: IHS Energy

http://www.eia.gov/tools/glossary/index.cfm?id=R

8 September 2013


or into the Asian market at $15-17 per MMBtu. A large part of these regional price differences will be absorbed in liquefaction and freight costs. A $2 per MMBtu net difference in US natural gas prices and delivered costs to a foreign market can generate $5 billion annually.8 This value added could be returned to the US economy in the form of capital dividends, reinvestment in facilities, and support for additional natural gas drilling and production.

Net Trade

The combination of low demand associated with the recession, government policy, increased efficiency standards, and increases in oil and natural gas production have reduced US imports of refined petroleum products by 1.2 mbd and increased exports by 1.4 mbd from 2007 to 2012.9 Since 2007, domestic demand for refined products has declined due to the recession and is projected to increase only moderately over the next five years. Refined product demand, defined as total refined product consumption in the United States, is expected to grow incrementally—by less than 700,000 bd—by 2020, demand will be 1.6 mbd less than the levels seen during the 2005-2007 period. This has freed capacity, which is being used to provide additional products for export.

The competitive position of US refiners has been improved by the dual benefits of low-cost natural gas—a large component of a refinery’s variable operating costs—and increased domestic crude oil production. US refineries are well-positioned to readily supply international markets on an ongoing basis since a large share of their refining capacity is located on the Gulf Coast with marine access and proximity to Latin America—our main refined products export partner. For US refiners, the alternative to supplying a small percentage of refined products to export markets is lower utilization rates, a contraction in capacity, job losses, reduced government revenue, and lower GDP.10

The larger economic effect of increasing US domestic production volumes will be in trade and import deficit reductions. Every incrementally produced barrel of crude oil will displace an equivalent imported barrel of crude oil. The incremental 2.5 mbd forecasted to be produced in 2025, over 2012 levels, will reduce crude oil imports by this volume at constant refinery capacity and utilization rates. At a $95 per barrel oil price, the net improvement on trade is approximately $87 billion annually.

Direct Capital Investment

Between 2012 and 2025, IHS projects over $216 billion in total will be invested in the midstream and downstream oil and gas industries. This has the potential to generate $25 billion in annual return on investments, with successful investment providing the seeds for future investment.

8 Assumes 5.1 billion cubic feet per day of liquefied natural gas exports.

9 History: EIA (2012 preliminary); forecast: IHS Energy.

10 For 2012, refined product net exports were 8.2% of total US refinery production.

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

2,000

2005 2010 2015 2020 2025

GasolineNaphtha

Jet Fuel + KeroseneDiesel

Residual Fuel Oil Other

US Refined Product Net ExportsThousand barrels per day

Source: EIA and IHS Energy


IHS 9

Midstream and Downstream Energy Incremental Capital Expenditures: United States

(Current $M)2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-25

LNG Processing

502 3,236 5,533 8,449 6,211 3,471 3,119 2,421 1,279 685 651 618 587 558 37,319

NG Processing

6,291 5,425 4,185 2,583 2,131 1,984 1,025 879 835 793 753 716 680 646 28,925

NG Logistics

8,871 9,148 7,222 5,084 3,069 4,295 5,065 3,545 2,244 3,608 3,560 4,045 3,994 2,315 66,065

NGL Processing

3,510 3,912 2,109 928 835 742 649 557 529 502 477 453 431 409 16,046

NGL Logistics

4,507 3,429 2,286 1,230 1,036 948 811 697 581 548 516 486 456 434 17,964

Crude Oil Processing

107 671 1,496 1,883 1,591 780 697 321 289 257 225 193 183 174 8,865

Crude Oil Logistics

5,199 7,590 8,272 5,960 2,742 2,635 1,812 1,519 1,206 1,046 885 834 785 746 41,233

Total 28,987 33,412 31,102 26,117 17,615 14,855 13,179 9,938 6,963 7,439 7,068 7,345 7,117 5,282 16,418

NOTE: Numbers may not sum due to rounding.

Source: IHS Energy

Midstream and Downstream Energy Cumulative Capital Expenditures: United States

(Current $M)2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

LNG Processing 502 3,738 9,271 17,720 23,931 27,402 30,521 32,941 34,220 34,905 35,556 36,174 36,761 37,319

NG Processing 6,291 11,716 15,901 18,484 20,615 22,599 23,624 24,503 25,337 26,130 26,884 27,600 28,279 28,925

NG Logistics 8,871 18,019 25,241 30,325 33,394 37,689 42,754 46,299 48,543 52,151 55,711 59,756 63,750 66,065

NGL Processing 3,510 7,423 9,532 10,460 11,295 12,037 12,687 13,244 13,772 14,275 14,752 15,206 15,636 16,046

NGL Logistics 4,507 7,936 10,222 11,452 12,487 13,435 14,246 14,943 15,524 16,072 16,588 17,074 17,530 17,964

Crude Oil Processing 107 778 2,273 4,156 5,747 6,527 7,225 7,546 7,834 8,091 8,316 8,509 8,692 8,865

Crude Oil Logistics 5,199 12,789 21,062 27,022 29,764 32,399 34,211 35,730 36,936 37,982 38,867 39,702 40,487 41,233

Total 28,987 62,399 93,501 119,618 137,233 152,088 165,267 175,204 182,167 189,606 196,674 204,019 211,136 216,418


Source: IHS Energy

In this section, five potential benefits associated with growth in the domestic midstream and downstream industries will be discussed: oil and gas upgrading, feedstock cost reduction, trade arbitrage, net trade improvement, and direct capital investment. The section also highlights the importance of integrating the upstream, midstream, and downstream value chains to maximize the economic potential from hydrocarbon production.

10 September 2013


US Trends across Midstream and Downstream Segments

The period between 2000 and the beginning of the global financial crisis in 2008 was characterized by an extended bull run in global commodities prices and negative growth in domestic oil and natural gas production due to aging reservoirs and low crude oil prices during the first half of the decade.11 With the exception of refining, investment stagnated and growth contracted as many integrated companies focused on international opportunities that offered higher returns.12

The global economic downturn that began in the final months of 2008 compounded this trend, and the future for the US midstream and downstream sectors seemed uncertain. Declining domestic natural gas and crude oil production forced these sectors to become increasingly dependent on higher priced imported feedstock. Dependence on imports steadily eroded the global competitiveness of the domestic gas processing, refining, and petrochemicals industries, and had additional impacts on the logistics operations that connected these industries. The US midstream and downstream sectors focused on operations and maintenance, as opposed to growth and investment.

The pessimistic outlook for the industry that existed at the end of 2008 proved to be premature. Four years after the recession, the midstream and downstream sectors are experiencing unprecedented growth and investment, as large and small companies add processing capacity and logistics capabilities that bring

11 US domestic natural gas production began to increase in 2007 due to unconventional production breakthroughs.

12 IHS Downstream Energy estimates that the US refining industry expended over $60 billion from 2000 to 2008 on regulatory, feedstock flexibility, and capacity growth projects.

Defining Midstream and Downstream

The terms midstream and downstream can have varying definitions inside the oil and gas industry. For the purposes of this report, midstream and downstream energy activities involve converting raw crude oil and natural gas liquids into finished products and bringing those products to market. Midstream refers to the transport and logistics functions of oil and natural gas, encompassing marine, truck, rail, and pipeline movements, as well as the dedicated storage of intermediate and finished products. Downstream refers to the processing or upgrading of Natural Gas Liquids (NGLs) and crude oil into higher value intermediate and finished products. This report will also cover liquefied natural gas (LNG) facilities, which are not typically considered part of midstream and downstream; they have been included here, since they constitute the additional processing of natural gas into liquid form.

For the remainder of this report, midstream and downstream energy encompasses the following segments:

• LNG processing

• Natural gas processing

• Natural gas logistics (pipelines)

• Natural gas liquids (NGL) processing

• NGL logistics (marine, pipelines, and storage)

• Crude oil processing (refining)

• Crude oil logistics (marine, pipelines, rail and storage)

To discern trends and gain critical insights into the unconventional oil and gas industry, these seven segments must be evaluated both individually and together. Development of the oil and natural gas value chain in each segment will allow the United States to realize the full benefit of the unconventional oil and gas revolution.


IHS 11

new products to market and maximize the economic benefits from the oil and gas value chain. These developments have been facilitated by technological advances in the upstream oil and natural gas sector, which have led and will continue to lead to significant increases in domestic oil and natural gas production.

A major trend that emerges from analyzing the industry’s investment forecast is that the highest percentage of midstream and downstream investment is allocated to natural gas, NGL, and crude oil pipelines. Approximately half of the more than $216 billion investment in midstream and downstream infrastructure, forecasted over a 14-year period, is directed to over 47,000 miles of new and modified pipelines. The high infrastructure allocation required by the production of large volumes of oil and gas is taking place in non-traditional producing regions. One example is the Bakken shale formation in North Dakota and Montana, which has gone from producing less than 50,000 bd in 2005 to what is forecasted to be greater than 1 mbd by 2015. A major need for pipeline infrastructure is also anticipated for other non-traditional basins, such as the Niobrara and Utica shales predominantly located in Colorado and Ohio, respectively. By contrast, the Permian Basin, a traditional producing region for West Texas Intermediate (WTI) and West Texas Sour (WTS) crude oil, is experiencing a large increase in production and will have less need to add major new pipeline infrastructure.

Midstream and Downstream Segment Specific Themes

LNG Processing

By the early 2000s, US natural gas production had stagnated and begun to decline, and liquefied natural gas imports became necessary to supplement US supplies of natural gas for electricity generation and large industrial operations. The industry widely assumed that North Africa, the Middle East, and West Africa would be the major suppliers of the US natural gas imports. The result was a construction wave of import facilities during the mid-2000s on the Atlantic and Gulf coasts to receive imports of LNG. By 2008, the United States had constructed 12 LNG import facilities with a total regasification capacity of 19 billion cubic feet (Bcf) per day, or enough to supply about one-third of US natural gas demand. But by the time the last domestic natural gas import terminal was completed, the revolution in unconventional oil and gas production had rendered the new LNG import facilities largely unnecessary.

0%

5%

10%

15%

20%

25%

30%

35%

0

3

6

9

11

14

17

1988 1992 1996 2000 2004 2008 2012

Total US Energy Demand Supplied by Imports

US Benchmark Crude Oil Price (WTI, Right Axis)

US Benchmark Natural Gas Price (HH, Right Axis)

US Energy Imports and Benchmark Oil and Gas Pricing$US per MMBtu (Right Axis)

Source: IHS Energy

US Lower 48 Midstream and Downstream Energy Growth and Investment: 2012-25Segment Capacity Added Total Investment ($B)

LNG Processing 5.9 Bcfd 37.3

Natural Gas Processing 22.5 Bcfd 28.9

Natural Gas Logistics 25.8 Bcfd 66.1

NGL Processing 2.7 mbd 16.1

NGL Logistics 3.4 mbd 18.0

Crude Oil Processing 0.5 mbd 8.9

Crude Oil Logistics 5.0 mbd 41.2Source: IHS Energy

12 September 2013


The unconventional oil and gas revolution has led many investors to actively pursue LNG export projects. IHS assumes that several of the LNG export projects now under development are likely to be completed. The expected total investment for these natural gas liquefaction projects over the 14-year forecast period (2012-2025) will be $37.3 billion dollars, based on the assumption of $550 per metric ton of annual capacity.

As of March 2012, there were 22 LNG projects—representing a total of 53 individual LNG production trains—under development in the United States, 20 of which are located in the US lower 48 and two in Alaska. If all of these proposed projects were to progress through permitting, funding, construction, and start-up, they would increase US natural gas liquefaction capacity to over 29 billion cubic feet per day, representing 35% of the projected US natural gas demand in 2025.

The IHS forecast for US LNG development takes a conservative approach, assuming that a total of five projects now under development will become operational. These projects represent 10 individual liquefaction trains with a total capacity of 5.9 Bcf per day. Based on natural gas producing regions and existing infrastructure, these LNG facilities are likely to be located in the US Gulf Coast and to involve the retrofitting of existing LNG import terminals into dual purpose import-export facilities. The approach of adding liquefaction trains to existing import terminals is a preferred strategy by developers as it reduces total project investment cost by reusing existing LNG storage tanks and marine facilities.

IHS is being conservative in its forecast because of on the significant development challenges still facing many LNG projects, including export license approvals, environmental impact reviews, local and state regulatory approvals, capital availability, cost escalation, competition from other global LNG developments (in areas such as Australia, East Africa, and British Columbia), costs, and standard construction and engineering challenges associated with projects of this scale. Successful execution of the LNG projects at the front of the export license approval queue could allow the industry to exceed the five projects that IHS forecasts to be completed. However, many key development checkpoints have yet to be crossed.

Proposed US Gulf Coast LNG Liquefaction Facility

Source: Cheniere Energy


IHS 13

Natural Gas and NGL Processing

The current pace of shale gas development is rapidly increasing domestic NGL production and keeping prices for US natural gas lower than prices in most overseas gas markets. Strong margins for NGL recovery, compared with the margins for natural gas, are further encouraging high NGL recovery levels. Since 2008, US NGL production from natural gas processing has already increased by over 500,000 bd, reaching about 1.8 mbd in 2012. Because of the ongoing development of shale gas and tight oil resources, NGL production is expected to continue expanding rapidly over the next decade. By 2020, total unconventional NGL production from natural gas processing is expected to reach about 3.8 mbd, which represents an increase of 100% over current levels.

Sixty of the 110 natural gas processing plants required to meet projected demand are already under development. These new plants are forecast to produce 17-19 Bcf per day of lean natural gas, of which 12-13 Bcf per day will be used to satisfy domestic demand growth and 5-6 Bcf per day will be used as feed gas for LNG facilities. IHS forecasts an investment of $28.9 billion in natural gas processing from 2012 through 2025, which represents 22.5 Bcf per day of gas processing capacity.13

13 Inlet or Rich Gas Processing Capacity

0

1,000

2,000

3,000

4,000

5,000

2008 2010 2012 2014 2016 2018 2020 2022 2024

Ethane Propane Normal Butane IsobutanePentanes Plus

US NGL Contained Production from Gas ProcessingThousand barrels per day


14 September 2013


(2) (7)

(2)

(3)

(4) (6)

(4) (5)

Announced New US Gas Processing Plants and NGL Fractionators

Natural gasprocessing plant

NGL fractionator

Source: IHS Energy30704-3

Natural Gas and NGL Processing

Natural Gas Liquids (NGLs) constitute a group of light hydrocarbons that are typically in liquid form when stored under pressure but become gaseous under ambient conditions. Examples include ethane, propane, butane, iso-butane, and pentanes, or simply NGLs when unseparated.14

The lighter molecules (ethane and propane) are typically used as feedstock for petrochemical steam cracking. The intermediate molecules (propane and butane) are used as either petrochemical feedstock or in heating applications. The heaviest molecules provide petrochemical feedstock or feedstock for

gasoline blending.

14 The heavier component of natural gas liquids are sometimes referred to as natural gasoline.

Announced New US Gas Processing Plants and NGL Fractionators


IHS 15

Since there is no end-use market for the raw mix of NGLs (typically referred to as Y-Grade), NGLs must be transported long distances to be fractionated into usable products. This most often takes place at large, centrally located merchant facilities typically located near large NGL markets. Mont Belvieu in East Texas and Conway, Kansas, are two large fractionation centers where local demand for NGLs is high, either from the residential and commercial sector or from large industrial users. A number of small fractionators at gas processing plants and refineries produce one or more purified NGLs for their local markets. These smaller plants are typically located further from the main fractionation and storage centers.

Over the forecast period 2012-2025, IHS projects an increase of 2.7 mbd of NGL fractionation capacity and capital investments of $16.1 billion. Two-thirds of this—or over 1.7 mbd — has been announced and is under development, with more than half of this capacity being added at Mont Belvieu.15

NG Logistics

To connect new natural gas supplies to the existing pipeline grid that delivers gas to growing consumer markets, over 10,000 miles of new pipelines will need to be constructed. Several factors are driving this pipeline expansion. Although North America already has an extensive network of natural gas pipelines, discoveries in new places are shifting supply from south to north and from west to east. Meanwhile, growing demand for natural gas used in power generation is highlighting pipeline constraints in all four corners of the United States. The retirement of coal capacity will also drive the need for additional pipeline capacity. In response to the Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS) rule, which takes effect April 2015, IHS Energy expects 55 gigawatts (GW) of coal capacity to be retired between 2010 and 2020, approximately 23 GW of that in 2015 alone. While this will ramp up the volume of natural gas demand for power generation during the summer, it will drive a larger increase for winter peak day pipeline capacity.

15 IHS’s typical estimating metric assumes $4,000-5,000 per barrel per day of capacity, along with typical IHS estimating methodology factors.

Natural Gas Liquids (NGL) Production Chain


Residue gas

Utilities

Residential

Industrial

Raw NGL mix

Natural gasprocessing

and treatment

Gatheringand

compression

Residue gas andraw NGL mix

transportationNatural gasproduction

NATURAL GASGATHERINGANDPROCESSING

Chemicalplants

Refineries

Commercialdistributors

Ethane

Propane

Butanes

Pentanes+

NGLfractionation

Raw NGL mixtransportation

NGL storageand distribution

NATURALGAS LIQUIDSFRACTIONATIONANDDISTRIBUTION

Natural Gas Liquids Production Chain

16 September 2013


Coal Retirements

The retirement by 2020 of 55 gigawatts of US coal-fired electrical generating capacity will ramp up gas demand for use in power generation, driving the need for additional pipeline capacity to connect supplies to power generators.16

16 Renewables are also forecasted to replace a share of this retired coal-generating capacity.

Wood River, IL

Williston, ND

Guernsey, WY Chicago, IL

Houston / Beaumont / Port-Arthur, TX

Midland, TX

Cushing, OK

Patoka, IL

Erath (Henry Hub), LA

Natural GasCrude Oil

US Interstate Pipeline Network

Source: IHS Energy


IHS 17

Natural gas supply growth in the Marcellus basin, mainly situated in Pennsylvania, is driving the majority of interstate pipeline additions that connect resources to demand centers. Most of this capacity is and will continue to be focused on moving that natural gas east. As production increases in the Utica Shale play in Ohio over the remainder of this decade, most of the production initially will be consumed locally, displacing supplies from other sources. However, Utica production is expected to grow beyond local consumption and then will likely be used to meet incremental demand in adjacent demand centers along the Chicago to Ontario corridor. Southern Company, one of the largest consumers of Appalachian coal, with power generating facilities in Alabama, the Florida Panhandle, Georgia, and Mississippi, consumed over 20% of all of the natural gas used to displace coal for power generation in 2012. To comply with the MATS environmental rule, utility generators are choosing to invest in new natural gas-fired power generation as an alternative to capital-intensive retrofits of aging coal-fired generation. The mid-Atlantic and southeast regions will be major markets for this new gas-power generation.

Pipelines to transport NGLs must also be constructed. The bulk of the liquids pipelines to be constructed will gather natural gas with entrained liquids for processing from new or emerging tight oil plays, including Eagle Ford, Cotton Valley, Niobrara, and Granite Wash. Several pipeline projects will focus on the transport of ethane, particularly in liquids-rich regions in which the ethane content makes the Btu content of the gas too high for transport in the primary interstate gas pipelines.

NGL Logistics

The NGL logistics segment comprises several types of infrastructure, including pipelines, storage facilities, and marine export terminals.

The infrastructure projects necessary for NGL logistics now in development will add approximately 2.8 mbd of NGL pipeline-transport capacity. This will include roughly 5,000 miles of new NGL trunk lines within the United States and several conversion, expansion, and reversal projects. The largest reversal project currently under way is Enterprise Products’ ATEX project to construct 430 miles of new pipeline and convert 860 miles of former natural gas trunk lines, reversing the flow of surplus production to carry NGLs from the Midcontinent to growing demand centers in the southern United States. Once completed, this project will provide a key logistics link to transport ethane produced in the Marcellus play to ethylene steam crackers on the Gulf Coast. IHS forecasts total investment for this segment at $18 billion, with approximately 80% of it associated with large pipeline projects.

18 September 2013


Another large investment category for NGL logistics involves marine storage terminals for NGL (primarily liquefied petroleum gas, or LPG).17 These custom-designed storage and loading facilities, by enabling the export of surplus LPG production, will transform the United States from a net LPG importer as recently as 2010 into a net LPG exporter. Our forecast includes the potential for 400,000-600,000 bd of coastal export facilities, providing export trade support for surplus production.

The impact of this reversal in the trade balance from negative to positive will enable the United States by 2020 to overtake Saudi Arabia as the world’s third-largest exporter of LPG. The value of monetizing the trade arbitrage between the United States and northwestern Europe is estimated at $1.5 billion annually. However, we anticipate that as NGL domestic demand increases in the later years of the forecast period (2018-2025), in the form of additional petrochemical steam cracker capacity, the utilization of these marine export facilities will decrease to levels below their design capacity.

Crude Oil Processing

A large increase in US crude oil refining capacity is not anticipated. However, a revival in crude oil production has given a second life to several refineries that seemed destined for closure just two years ago. Nowhere has the tangible benefit of tight oil availability had more impact than on the East Coast. In 2008, 12 refineries with 1.7 mbd of crude oil processing capacity were located on the East Coast. The combination of low demand caused by the recession and an expensive crude oil feed slate, based on imports, jeopardized the long-term viability of these facilities. By 2011, half of these refineries had been shut down, and the largest refinery, Sunoco in Philadelphia, was on the verge of closure. The feedstock opportunities provided by the availability of tight oil resulted in restarting two of these refineries and the preservation of Sunoco’s Philadelphia Refinery, which saved thousands of jobs and maintained local economic output.

17 Liquefied Petroleum Gas, an NGL sub-category referring to just the un-fractionated propane and butane molecules.

Edmonton, AB

Conway, KS

Hobbs, TX

MontBelvieu,

TX

Geismar, LA

Houston, PA

Sarnia, ON

LPG productpipeline

NGL feedstockpipeline

Multipurposepipeline

Natural gasolinepipeline

LPG import/export terminal

NGL and LPGfractionation hub

US NGL and LPG Pipeline Infrastructure


US NGL and LPG Pipeline Infrastructure


IHS 19

A major economic impact on the refining sector of greater domestic crude oil production will be to reduce imports and increase the diversity of its crude oil supply. Every incrementally produced barrel of crude oil will displace an equivalent imported barrel of crude oil. The incremental 2.5 mbd forecasted to be produced domestically by 2025 (over 2012 levels) will reduce crude oil imports by this volume, assuming constant refinery capacity and utilization rates. At a $95 per barrel oil price, the net improvement on trade is approximately $87 billion annually.

Crude Oil Logistics

IHS assumes that the majority of unconventional oil will ultimately be moved through pipelines, which have proved the most efficient and cost-effective means of transporting volumes exceeding 50,000 bd of crude oil. The number of pipeline systems installed, expanded, or reversed will have a direct relationship to the amount of incremental storage capacity added. Many of the planned pipeline projects are intended to connect newly emerging producing regions to large, established pipeline intersections that already have significant storage in place. In addition to Houston, they include such locations as Cushing, Oklahoma; Guernsey, Wyoming; Patoka and Wood River, Illinois; and Saint James, Louisiana.

Between 2012 and 2025, IHS forecasts total capital investment of $41.2 billion in crude oil logistics facilities, with $28.3 billion of that—or approximately 70%—being invested in major pipeline projects.

Repurposing and Renovating Delaware River Refineries

Sunoco announced in September 2011 that it would leave the oil refining business and close its Marcus Hook, Pennsylvania, refinery and attempt to sell its Philadelphia refinery—the largest on the East Coast, with a capacity of 330,000 barrels per day.

This announcement, coming after recent closings of other refineries also located along the Delaware River by Valero, ConocoPhillips and others, mobilized state and local elected officials and economic development agencies in Delaware, New Jersey, and Pennsylvania to try to save the refineries. Their efforts included finding alternative uses for the growing supply of natural gas and NGLs coming from the Marcellus shale play and oil coming from the Bakken and Utica shale formations.

Sunoco had said it would be forced to shut down its Philadelphia refinery in the summer of 2012 if it could not find a buyer. Its Marcus Hook refinery, also near Philadelphia, was closed in early 2012. In late April 2012, Energy Transfer Partners, a Houston natural gas pipeline company, announced plans to purchase Sunoco for $5.3 billion, including the two refineries. In June 2012, Sunoco agreed to sell two-thirds of its interest in the Philadelphia refinery to the Carlyle Group. The Philadelphia Refinery will be operated by a joint venture between Energy Transfer Partners and Carlyle. The venture, Philadelphia Energy Solutions, is currently investing hundreds of millions of dollars in upgrades to the refinery, which it will operate at up to its capacity of 330,000 barrels per day, depending on market conditions.

While the Marcus Hook refinery remains closed, it is being redesigned to store and process NGL. Sunoco’s Logistics Mariner East pipeline project would bring NGL from the Marcellus and Utica shale formations to Marcus Hook, where they would be processed to produce propane and ethane.

Elsewhere along the Delaware River, Delta Airlines in May 2012 purchased the former Phillips 66 refinery in Trainer, Pennsylvania, and is using it to produce jet fuel and other refined products with the aim of reducing fuel costs. PBF, one of the largest independent refineries, operates refineries in Paulsboro, New Jersey, and Delaware City, Delaware, which it purchased from Valero in 2010.18 PBF reopened the shuttered Delaware City refinery in the fall of 2011.

18 PBF: Petroplus Blackstone First Reserve

20 September 2013


EMBA

RGO

ED

IHS estimates that almost 5 mbd of incremental pipeline capacity will be added over the next six years, almost 30% of total US refining capacity.19


The primary beneficiary of lower prices for energy and feedstock in coming years will be the energy-related chemical industries, which will gain a significant competitive advantage in world markets. Natural gas plays a key role, both as a feedstock in the production of several major petrochemical products, and as a major source of energy required to run various manufacturing sites. As chemical manufacturers expand their plants and infrastructure, their investments will generate value added to US GDP, while having the added benefit of reducing the nation’s trade deficit. Energy-related chemicals are the primary building blocks for a wide range of manufacturing and non-manufacturing industries, including automotive, agriculture, buildings and construction, pharmaceutical, transport, and textiles.

Natural gas liquids (NGL) produced from natural gas are also important feedstock for the chemical industry. America’s abundance of unconventional natural gas is driving dynamic growth in the production of plastics, pharmaceuticals, fertilizers and other petrochemicals. The lower cost of natural gas relative to crude oil has also given ethane a large advantage over naphtha as a petrochemical feedstock.20 We anticipate a production boom in ethylene, the primary building block for most plastics that is derived from cheap ethane (a natural gas liquid) instead of more costly naphtha (a crude oil derivative). Capacity expansion is also being planned by ammonia and methanol producers, which use natural gas directly as a feedstock.

19 This value does not include capacity associated with reversing the direction of existing pipeline systems.

20 Naptha is produced by petroleum refineries and is a hydrocarbon liquid that boils in the same range as gasoline, but does not meet fin-ished gasoline specifications.

Naturalgas liquids

(ethane, propane,butane, etc.)

Steam

Power

NaturalGas

Chlor–Alkali

Methanol

• Siding, pipe, flooring• Solvents, metal cleaning, electronics, polymers• Pipe, shower curtains• Dry cleaning, metal cleaning, degreasing• Coating, adhesives, printed circuit board• Toothpaste, cosmetics, food

• Food packaging, film, trash bags, diapers, toys, housewares• Crates, drums, food containers, bottles• Siding, window frames, swimming pool liners, pipes• Automotive antifreeze• Pantyhose, carpets, clothing• Bottles, film• Insulation, cups, models• Instrument lenses• Tires, footwear, sealants• Carpet backing, paper coatings

• Cleaner gasoline/heating oil• Fuel cells

• Fertilizer, feeds, explosives, chemicals• Carpet, home furnishings, apparel

• Gasoline• Plywood, particle board, insulation• Latex paints, other coatings, adhesives, textile finishing• Electronics, metal cleaning, paint remover, silicones, insulation• Glazing, signs, other acrylics

Ethyleneand

Propylene

Hydrogen(non refinery)

Ammonia

Everyday Connection to Natural Gas

Source: IHS Chemical30515-12

Everyday Connection to Natural Gas


IHS 21

With natural gas now available at a fraction of its oil-equivalent price, the United States has become one of the world’s lowest-cost petrochemical producers. About 75% of the cost of producing these petrochemicals, as well as plastics, is related to their cost of energy-derived raw materials, and the price of oil, versus natural gas, is playing a key role in determining where new petrochemical capacity is built and which feedstock is used. Right now, the United States has a clear competitive advantage, marking a dramatic turnaround from just a few years ago. The United States had been a major petrochemical producer up until the late 1990s, when it lost its competitiveness as a result of high oil and natural gas prices. This forced the closing of US chemical plants and the off-shoring of significant finished goods manufacturing, while at the same time attracting finished goods imports. Many US chemical plants closed down, even as new capacity arose in the ethane-rich Middle East and in demand-rich China. In the United States between 1999 and 2006, over 40% of its ammonia fertilizer capacity and 85% of its methanol capacity shut down, and the US became a large importer of both products. Several ethylene crackers were also shut down between 2003 and 2009.

Today, however, unconventional gas-derived feedstock is available at a fraction of the cost of oil-based feedstock, shifting the balance in favor of US producers who can take advantage of higher natural gas

0

100

200

300

400

500

600

700

800

900

1,000

1,100

MDE - Ethane

Canada - Ethane

US - Ethane

US - Naphtha

Europe - Naphtha

MDE - Naphtha

SEA - Naphtha

NEA - Naphtha

MDE - LPG

Asia - LPG

Cost to Produce One Metric Ton of Ethylene: 2013

$US per metric ton

MDE = Middle East, NEA = Northeast Asia, SEA = Southeast Asia


0

5

10

15

20

25

30

35

40

45

1995 2000 2005 2010 2015 2020 2025

Ethylene Ammonia Methanol

US Chemical Plant CapacitiesMillion metric tons


22 September 2013


production and lower prices. New domestic capital investments, driven by these lower prices, are expected to reduce ammonia and methanol imports and expand exports of several ethylene derivatives, especially polyethylene and vinyls, as well as many other chemical products such as polypropylene. North America and the Middle East are major exporters due to advantaged feedstock positions, while northeastern Asia is expected to maintain its position as a major net importer of ethylene-based derivatives over the long term.

The rise in US net exports of energy-derived chemicals was first observed in the years immediately preceding the global recession of 2009.21 This export expansion was driven in part by the widening price spread between natural gas-derived chemicals in the United States and oil derived chemicals in other parts of the world. Over the pre-recession period, while natural gas prices held relatively constant, oil experienced a rapid rise as the Brent Spot Price shot up from $54.57 in 2005 to $96.94 at its peak in 2008.22 As a result, net exports as a percent of total production increased for energy-related chemicals in the United States, capitalizing on the industry’s now relatively more affordable natural gas-based feedstock.

The unconventional oil and natural gas revolution is continuing to accelerate the net export position of US-based energy-related chemical producers. With oil projected to average $98 per barrel throughout the forecast horizon, high prices for oil-derived feedstock will continue to place significant cost pressures on many global chemical competitors. Simultaneously, affordable and abundant natural gas-derived feedstock unlocked by the unconventional revolution will continue to benefit US natural gas based energy-related chemical producers. The chemical manufacturing industry is currently one of America’s largest exporting industries. Its $198 billion in annual exports accounted for 13% of all US merchandise exports in 2012.23 The industry currently employs 783,600 workers and roughly one-third are supported by exports.24 Exports of US-manufactured chemicals and plastics have increased by 11% since 2010.25

21 Net exports defined as the industries total exports minus the value of its total imports

22 EIA Europe Brent Spot Price FOB (Dollar per Barrel).

23 United States Department of Commerce, Bureau of the Census, Foreign Trade Division.

24 United States Department of Labor, Bureau of Labor Statistics, Current Employment Statistics.

25 United States Department of Commerce, Bureau of the Census, Foreign Trade Division.

0

2

4

6

8

10

12

5%

10%

15%

20%

25%

30%

35%

1990 1995 2000 2005 2010 2015 2020 2025

PolyethylenePolypropylene

VinylsPercent of Production (Right Axis)

US Net Exports for Selected ProductsMillion metric tons


The chemical manufacturing industry is currently one of America’s largest exporting industries. Its $198 billion in annual exports accounted for 13% of all US merchandise exports in 2012. The industry currently employs 783,600 workers and roughly one-third are supported by exports. Exports of US manufactured chemicals and plastics have increased by 11% since 2010.


IHS 23

Expanding US chemical capacity will require a continued commitment to the export market, as growth in North American domestic consumption is expected to remain moderate. Fueled by exports, basic chemicals and plastics production is forecast to increase at an average rate of about 5% per year from 2013 to 2020. Over the longer term, given expectations that North America will remain a low-cost energy and feedstock source for the chemical industry, the region could return to more downstream manufacturing of durable and non-durable goods based on these low-cost chemicals and plastics. The result will be stronger growth in domestic consumption of basic chemicals and plastics as a result of the “on-shoring” of the manufacturing of certain products produced from polyethylene.

The impact of the unconventional oil and natural gas revolution on the chemical industry is very broad, and many product chains will benefit directly. This impact, which is already becoming evident in manufacturing further downstream, is transformational for the United States. New capacity will return North America to historic production levels—or beyond—for many chemical products.

Chemical investment will be largely focused on the following nine value chains, which accounted for about 45% of US capacity in 2012:

• Acrylics—acrylic acid and acrylonitrile

• Aromatics chain—aniline, nitrobenzene

• Nitrogen fertilizers—ammonia, ammonium nitrate, and urea

• Chlor-alkali—chlorine and caustic

• Olefins—ethylene, propylene, hexene, octene, butene-1, and butadiene

• Polyolefins—high density polyethylene (PE), low density PE, linear low density PE, and polypropylene

• Vinyls chain—ethylene dichloride, vinyl chloride monomer, and polyvinyl chloride (PVC)

• Glycols chain—ethylene oxide, proplylene oxide, monoethylene glycol, diethylene glycol, triethylene glycol, polyethylene glycol, and ethoxylates

• Methanol chain—methanol, formaldehyde, methyl methacrylate, MTBE, and MDI

In the near term, through 2015, IHS expects more than 16 million tons of chemical capacity to be added, growing to nearly 89 million tons of new capacity by 2025. By 2025, IHS estimates that as much as $100 billion will have been invested in new chemical, plastics, and related derivative manufacturing facilities in the United States. While the unconventional revolution will affect all parts of the petrochemical industry, the impact will be most profound in the following four segments:

• Ethylene (olefins)

• Propylene (olefins)

• Methanol

• Nitrogen fertilizers (ammonia)

In our view, ethylene and polyethylene will be the major beneficiaries of the industry’s newfound competitiveness, adding a total of nearly 30 million metric tons of capacity by 2025. Other chemical products that will see significant growth include methanol and nitrogen fertilizers (ammonia).

24 September 2013


Announced or Anticipated US Chemical Plants

Chemical Plant

(10)(4)

(6)(3)

© IHS 2013 1

Source: IHS.

Announced or Anticipated US Chemical Plants

Sasol Plans New Ethane Cracker and Integrated Gas-to-Liquids Plant in Westlake, LA

In December 2012, Louisiana Governor Bobby Jindal and Sasol, a South African company, announced that the company is planning to invest between $16 billion and $21 billion to construct an integrated gas-to-liquids (GTL) and ethane cracker complex near Westlake, Louisiana. Sasol’s proposed complex is reported to be the largest single manufacturing investment in Louisiana history and one of the largest foreign direct investments in a manufacturing project in US history. According to the Louisiana Department of Economic Development, the total economic impact of the Sasol project over the next 20 years will be $46.2 billion, and it is expected to create roughly 7,000 construction jobs.

The GTL facility, the first of its kind in the United States, will produce transportation fuels, including GTL diesel and other high value-added chemical products. The project will consist of an integrated 96,000 bd GTL facility and an ethane cracker. The ethane cracker will produce 1.5 million tons annually of ethylene, which is used to make alcohol- and plastics-based products, such as solvents, surfactants and polymers.

Once the complex begins operating, it will create 1,253 direct jobs that pay an average salary, at full employment, of nearly $88,000, plus benefits. An additional 5,886 new indirect jobs would be generated, for a total employment increase of more than 7,000 jobs.



IHS 25

Chemical Feedstock

Several different feed stocks can be used to make petrochemicals. Natural gas is the most common feedstock used for ammonia and methanol production. Natural gas liquids (NGL) such as ethane, propane and butane, as well as naphtha refined from crude oil, are used to make olefins such as ethylene, propylene and butadiene, the basic building blocks for most plastics. The recent development of unconventional natural gas has increased the production of NGLs and has lowered their costs relative to naphtha and gas oil.26 This has shifted feedstock usage for ethylene production, and the share of ethylene produced from ethane in the United States has risen from less than 50% in 2005 to about 70% today.

Ethylene (Olefin)

Ethylene is the petrochemical with the largest production domestically and globally and is a key raw material for many polymers and other chemicals such as polyethylene (PE), polyvinyl chloride (PVC), and polyethylene terephthalate (PET). These products are used in a variety of industrial and consumer markets such as packaging, transportation, electronics, textiles, construction materials, consumer chemicals, coatings and adhesives. The production of ethylene in the United States is heavily dependent on NGLs, which account for 60% of production costs. Today, over 80% of the ethylene produced in North America is derived from these NGLs, while in the rest of the world (except for the Middle East) naphtha from crude oil is the key feedstock.

The price differentials between North American natural gas and global crude oil now provide the North American petrochemical industry with a profound and sustainable competitive advantage. This is expected to persist for decades, thanks to the abundant and low-cost US natural gas supply, of which NGLs are a byproduct. US-based ethylene producers earlier in the millennium were among the highest-cost producers on the global supply curve due to high natural gas prices. But today, with natural 26 Gas oil is produced by petroleum refineries and is a hydrocarbon liquid that boils in the same range as diesel and home heating oil, but does not meet finished product specifications.

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Ethane Propane Butane Naphtha Gas Oil

Monthly Ethylene Production By FeedstockWt produced from feedstock


0%

20%

40%

60%

80%

100%

Middle East

North America

Northeast Asia

Western Europe

Southeast Asia

Naphtha/Gas Oil NGL

Regional Ethylene Capacity by Type of Feedstock


26 September 2013


gas prices relatively low, US-based ethylene producers rank in the bottom third of all producers on the global supply curve in terms of cost. The estimated US weighted average cash cost of production is less than half the cost in Northeast Asia and Western Europe. The Middle East and Alberta ethane cash costs are the lowest in the world.27

Note that North America is the only significant ethane-consuming region in the world where feedstock prices are set in an open market. Governments set prices in every other major ethane-consuming country. This adds an element of additional risk to investment in US ethane-based units. Despite this risk, IHS anticipates that significant investments will be made across the industry over the next 10 to 20 years to capitalize on the US feedstock advantage. With 75% of US NGL consumption located on the Gulf Coast, most NGL roads will lead to the Gulf Coast by 2014. Currently over 2.8 mbd of NGL pipeline capacity projects are in development and 1.6 mbd of fractionation capacity projects are under way, which will provide feedstock for the expected increases in olefin capacity. To date, announcements have already been made to expand or build new ethylene production facilities in the United States capable of producing well over 9 million metric tons per year of ethylene, based on ethane feed.

Ethylene producers, confident of an extended period of low natural gas prices, have already signaled their intentions to increase capacity, reversing the trend of closing plants in the United States during the first decade of this century. Chevron Phillips Chemical Co., ExxonMobil Chemical Co., Formosa, Shell Chemical, the Dow Chemical Co. and others are building new US ethylene plants, and several producers are expanding or restarting their facilities, including Ineos, The Williams Companies, LyondellBasell, and Westlake Chemical.

Most of these US ethylene manufacturers’ expansion plans include provisions to export significant amounts of ethylene derivatives, based on expectations that their natural gas-based production will be extremely cost competitive with oil-based production in the rest of the world. Exports of US ethylene derivatives are projected to increase in the future, especially after the majority of the new capacity comes on stream after 2016, with most of the increase coming in the polyethylene and vinyl product lines.

27 Cash cost is the total manufacturing cost excluding R&D, selling, and administrative expenses and depreciation.

US Avg.MDE Avg.

Alberta Ethane

US EthaneMDE Ethane

WEP Avg.NEA Avg.

SEA Avg.

50

250

450

650

850

1,050

1,250

1,450

1,650

0 50 100 150

Ethylene Cash Cost Curve: 2012

MDE = Middle East, NEA = Northeast Asia, SEA = Southeast Asia, WEP = Western EuropeSource: IHS Chemicals

$US per metric ton

Cumulative Ethylene Capacity (Million tons)

Expanding Ethylene Production

To date, announcements have been made to expand or build new ethylene production facilities in the United States capable of producing a more than 9 million metric tons per year of ethylene, based on ethane feed.



IHS 27

Along with driving greater exports, investments in new ethylene capacity will also increase domestic production and potential exports of sophisticated high-value finished plastic products used in consumer goods such as cars, computers and medical devices. Today, the United States imports many of these end products.

Propylene (Olefin)

The US unconventional natural gas advantage does not benefit propylene as much as it does ethylene. Approximately half of the current production of propylene in the United States comes from petroleum refineries, and the other half is produced as a co-product in ethylene crackers. But ethane cracking results in very low production of propylene compared to the production from naphtha and gas oil cracking. Increases in ethane cracking in the United States have resulted in much lower production of propylene and other heavier co-products from steam crackers, which has changed propylene’s volume growth trends. As ethane cracking has increased, US propylene production has declined by about 15% in recent years, and it is not expected to return to 2007 levels until at least 2018.

The production of propylene from steam crackers will continue to decrease as more ethane feedstock is used in ethylene production. Propylene production from steam crackers declined from 49% of total propylene production in 2005 to 38% in 2012 and is expected to drop further to 31% by 2020. During the same period, the refinery-based capacity share is expected to decline from 45% to 36%.

However, IHS expects on-purpose propylene production from propane via the dehydrogenation process to become a larger component of propylene supply, which will offset the lost cracker production.

Current and projected strong margins for producing on-purpose propylene from propane are triggering additional investment in North America to replace the lost supply from steam crackers. IHS expects a total of about 4 million metric tons of new propylene capacity to start-up between 2012 and 2020, including known and not-yet announced projects. By 2020, propane dehydrogenation (PDH) capacity, which is virtually non-existent today, is forecast to increase to 17% of total US capacity.

Dow Chemical to Construct a Hydrocarbon Cracker in Texas

Dow Chemical Co. will create 150 permanent jobs and spend $1.7 billion to build a hydrocarbon cracker in Brazoria County, Texas, south of Houston. The proposed ethylene cracker will process natural gas and NGLs extracted from US shale plays to produce ethylene, a key input in the manufacture of resins and other chemical intermediates. These, in turn, are used in a variety of other products in such sectors as transportation, construction, infrastructure, wire and cable, medical devices, personal care and food packaging. The proposed cracker will be Dow’s largest worldwide, and the state of Texas will invest $1 million in the project through the Texas Enterprise Fund.

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2000 2005 2010 2015 2020 2025 2030

On Purpose By-Product

Propylene Supply SourcesMillion metric tons


28 September 2013


The startup of the Petro Logistics 540,000 metric ton PDH unit in Houston in the fourth quarter of 2010 was the first in a wave of on-purpose production units to be built in North America. The capacity of this unit has been rated at 658,000 metric tons. Dow has announced two PDH units for start-up in 2015 (750,000 metric tons) and possibly 2018; Enterprise has announced a 750,000 metric ton PDH unit for 2015; and Formosa has announced a 600,000 metric ton unit for 2016.

Methanol

The methanol industry stands to benefit from the US natural gas boom. Natural gas is used directly as a feedstock to make methanol in most regions of the world, although coal is used for a significant amount of production in China. Current global demand is around 65 million metric tons, but that will more than double over the next ten years, driven by investments in China for methanol-to-olefins production and for vehicle fuel (methanol is added into gasoline). Production for traditional end uses, such as formaldehyde and acetic acid, will also continue to grow.

Global methanol production for use in olefins (ethylene and propylene) manufacturing will rise by about 30 million tons between 2012 and 2016. There will also be incremental growth in the production of formaldehyde from methanol. Formaldehyde is used to make particle board for construction purposes and components used in traditional transportation fuel blending. China currently accounts for over half of global demand for methanol. About 80% of global capacity is spread across China, the Middle East and South America. Major capacity will be added over the next five years in China, the United States, and, after 2017, in the Middle East. A large amount of the Chinese methanol capacity is based on coal and, by 2016, about half of the world’s methanol production will come from coal in China. In spite of a large increase in methanol-to-olefins capacity there, China’s imports of olefins will double between 2012 and 2016 to over 11 million metric tons. Most of the world’s exports will continue to come from the Middle East, Southeast Asia and Latin America.

Feedstock costs represent a significant share of the total cost of methanol production, and reduced prices for shale gas are now expected to allow significant margins for US methanol producers, even in slack periods. Prior to 2006, the United States was a marginal producer of methanol globally, owing to relatively high natural gas prices. (Between 1999 and 2006, the US methanol market had consolidated over 80% of its capacity.) With the expectation of improved margins, however, new investments are being made, and North American capacity is expected to grow rapidly. Methanol capacity, which peaked earlier at 6.7 million tons before falling to a low of 750,000 tons, is expected to rise to 7.6 million tons by 2017.

In one dramatic example of the change under way in the industry, the Canadian producer Methanex Corp., based in Vancouver, British Columbia, is moving two of its 1 million ton methanol units from Chile to Louisiana, and Celanese has recently announced a 1.3 million ton methanol unit in Texas. Some idled methanol units in the United States and Canada have or will be restarted. Additional methanol capacity—on top of that which is already announced—is also being contemplated. All but one of the new methanol plants will use natural gas as feedstock. Each metric ton of methanol uses nearly 35 MMBtu of natural gas, so the total natural gas usage from these new methanol investments is projected to exceed 200 Bcf per year or 0.5 Bcf per day by 2020.

Propylene Production to Rise

IHS expects a total of about 4 million metric tons of new propylene capacity to start-up between 2012 and 2020, including known and not-yet announced projects. By 2020, PDH capacity, which is virtually non-existent today, is forecast to increase to 17% of total US capacity.


IHS 29

With the advent of unconventional natural gas-based methanol production in the United States starting in 2013, US net imports will decline from the current level of 5 million metric tons per year. The United States will continue to rely on imports for its near-term supply, but imports will decrease as domestic production increases. The potential exists for the region to become balanced, or possibly a net exporter, when the new capacity comes on line. Domestic demand in North America will grow modestly—at about 2% per year through the forecast period—on the back of a slowly recovering economy.

Nitrogen Fertilizers (Ammonia)

Ammonia is used both directly as a fertilizer and as a feedstock in the production of other types of fertilizers such as urea, ammonium sulfate, ammonium nitrate and ammonium phosphates. Natural gas is the feedstock for most of the world’s ammonia, though coal is primarily used in China. The United States has gone from being a marginal producer of ammonia globally a decade ago to being one of today’s lowest cost producers. Fuel oil-based natural gas pricing in other regions, such as Eastern Europe, makes them the high-cost producers now.

Cheap, abundant natural gas will drive significant investment in the US agricultural chemical industry and reduce fertilizer imports. About 80% of global ammonia production is used to make fertilizers, and lower natural gas feedstock prices will make US ammonia-based fertilizers more competitive internationally. The remaining 20% of ammonia produced worldwide goes into other consumable products, such as explosives, resins, pesticides and pharmaceuticals.

Between 1999 and 2006, over 40% of US fertilizer capacity was shut down. But today, low natural gas prices have increased the profitability of domestic production, resulting in the restarting of facilities such as the CF Industries Holdings Inc. (Terra) plant in Donaldsonville, Louisiana; the Orascom Construction Industries plant in Beaumont, Texas; the LSB Industries Inc. plant in Pryor, Oklahoma; and, the PCS Fertilizer plant in Geismar, Louisiana. Most of the other US plants that once produced fertilizers have been demolished. But the expected returns on investment are high enough to justify building new plants on the US Gulf Coast and in strategically located areas close to crop production and shale gas deposits

Methanex is Relocating Plants from Chile to Louisiana

The Canadian methanol company Methanex Corp. is relocating two $550 million methanol plants from Chile to Geismar, Louisiana. The first one is expected to add 130 permanent jobs when it starts up in 2014. Methanex, described as the world’s largest producer of methanol, expects to break ground on the second Louisiana plant in 2014, with construction lasting about two years. This second Louisiana plant will add 35 additional permanent jobs.

The US investment comes as limited gas supplies in Chile have kept Methanex factories there operating below capacity. Chile originally had four plants and Methanex has invested more than $1.3 billion there since 1998. The two plant relocations are expected to cost a total of $1.1 billion.

30 September 2013


that can take advantage of savings in logistics cost to improve returns.

Operating rates in 2013 for US ammonia producers are estimated to reach about 90% of capacity. However, production volumes this year will satisfy only 65% of domestic demand, with the remaining 35% provided by imports, primarily from low-cost South American producers, mainly located in Trinidad. Consequently, while low-cost unconventional natural gas has already had a positive impact on US fertilizer production, the impact has only begun to be felt. Many new projects have been announced and will be starting up between 2016 and 2018. New world-scale plants are being built on the US Gulf Coast by CF Industries, Dyno Nobel, and Mosaic. Other new plants are being built close to the Midwest market by Orascom Construction Industries in Iowa and CHS Inc. in North Dakota. In total, new or expanded production facilities in the United States are capable of producing over 6 million metric tons per year of natural gas-based ammonia and another 6 million metric tons per year of urea.

Most of the new ammonia capacity will be used to provide fertilizer for the domestic market, reducing US agriculture’s reliance on imports. Nearly 7 million metric tons of ammonia are imported into the United States each year, of which 5.3 million tons come from Trinidad and Canada. Most of the remainder comes from the former Soviet Union and elsewhere and could be displaced by local production. IHS also expects most current urea imports into the United States, valued at over $2.5 billion per year, to be displaced by local production. Ammonia is expensive to ship, but if enough domestic capacity is built to allow exports, the shipments will most likely be in the form of urea, which is easily shipped in bulk.

0

5

10

15

20

25

1995 2000 2005 2010 2015 2020 2025

Production Imports Exports

US Fertilizer Industry: NitrogenMillion product tons

Source: IHS Energy

OCI Fertilizer Group Selects Iowa for New Plant

Orascom Construction Industries of Egypt is building a new green field nitrogen fertilizer plant in southeast Iowa to supply Corn Belt customers. The new plant — the first world-scale, natural gas-based fertilizer plant built in the United States in nearly 25 years—will produce up to 2 million metric tons per year of ammonia, urea, urea ammonium nitrate, and diesel exhaust fluid. The plant will help to reduce the country’s dependence on fertilizer imports, which exceed 15 million metric tons of ammonia, urea, and urea ammonium nitrate annually. Plant construction is scheduled be completed by mid-2015 at an estimated cost of $1.4 billion.

Detailing the economic benefits of the new fertilizer plant, Iowa Governor Terry Branstad said, “I am pleased to welcome OCI to Iowa. Their project is the largest investment ever made in our state. The Iowa Fertilizer Company will bring high-paying permanent jobs to Lee County and will create approximately 2,500 construction jobs over the next three years.”


IHS 31

Direct Capital Investment

The dramatic drop in natural gas prices, brought on by the unconventional natural gas revolution, will dramatically increase US chemical industry production over the 2012 to 2025 forecast horizon. Chemical production will increase by an average of $39 billion per year between 2012 and 2025. Total direct cumulative fixed capital investment by the chemical industry is expected to exceed $129 billion by 2025. The expected increases in output and capital expenditures by chemical manufacturers can be directly tied to the domestic production of unconventional natural gas.

Energy-Related Chemicals Value of Production and Capital Expenditures: United States

(Current $M)2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-25

Value of Production

Acrylics 114 116 117 329 540 631 720 732 744 995 1,254 1,479 1,505 1,531 10,807

Nitrogen Fertilizers

333 526 686 697 2,128 3,641 4,838 4,919 5,003 5,981 6,087 6,194 6,302 6,411 53,747

Chlor-alkali 386 773 1,406 1,428 1,451 1,475 1,500 1,525 1,551 1,578 1,606 1,635 1,663 2,094 20,072

Olefins 28 203 302 436 802 1,256 1,738 2,661 3,720 4,019 5,194 5,285 5,455 5,890 36,990

Polyolefins 174 214 329 1,469 5,260 12,681 18,876 21,623 24,221 27,745 31,429 31,980 33,579 34,875 244,455

Vinyls Chain

112 114 146 705 1,176 2,043 2,540 3,792 4,706 5,610 6,554 6,669 7,759 7,969 49,893

Glycols Chain

378 384 688 731 743 2,525 2,600 2,693 3,648 4,068 4,140 4,212 4,286 4,360 35,457

Methanol Chain

170 435 1,179 1,914 2,782 4,104 4,174 4,824 5,041 5,264 5,358 5,452 6,122 6,524 53,342

Aromatics Chain

0 0 0 0 0 15 57 58 59 60 61 62 106 108 587

Total Value of Production

1,695 2,765 4,854 7,709 14,883 28,371 37,042 42,827 48,694 55,320 61,683 62,968 66,777 69,761 505,350

Total CapEx 4,818 5,618 8,149 12,787 16,493 15,711 11,902 10,252 9,408 6,994 5,233 6,157 8,355 7,427 129,305


32 September 2013


Establishing the Base CaseThe economic contributions of midstream and downstream energy as well as energy-related chemicals are a function of the pace of upstream production activity. Estimates for upstream production were established as part of the Base Case associated with the October 2012 release of America’s New Energy Future.28 In that study, resource production is based on a set of bottom-up build-outs that represent IHS’s current outlook for unconventional oil and natural gas production, capital expenditures, and operating expenses. It is consistent with the analysis presented in the first two volumes of this research series. Defined as the Base Case, this outlook includes 21 of the most significant existing or emerging plays, covers private and federal lands for drilling and extractions within those plays, and assumes the status quo is maintained with regard to existing policies and the regulatory framework. The 21 plays considered in this study are shown in this table:

The variables used to derive production profiles for each of these 21 plays were obtained from IHS databases and internal research. These variables include:

• Rig count (including assumptions about ramp up, maximum rigs, time at plateau, and ramp down);

• Number of days to drill and complete a well;

• Type curves showing production profiles over time for a typical well;

• Acreage to be developed;

• Well spacing;

• Probability of geologic and commercial success.

The number of possible locations to be developed was derived from the last three items (acreage, well spacing and probability of geologic success). Type curves were derived for each play using IHS databases and software tools (Enerdeq and PowerTools) and were based on actual well production data. The number of days to drill a well, from initial mobilization through demobilization of the rigs, was also obtained from well data in IHS databases. Rig forecasts were developed for each play based on historic rig counts and estimated active rig counts operating in 2012, along with the per-well economics of each individual play.

Land Coverage

While US oil production is at its highest level in nearly a quarter of a century, the increase in production is the result of unconventional activity located primarily on state and private onshore lands in the lower 48 states. A recent Congressional Research Service report, US Crude Oil and Natural Gas Production in

28 America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy, Volume 1:National Economic Contribu-tions

Tight Oil Plays

Shale Gas Plays

Tight Sands Gas Plays

Bakken Eagle Ford shale wet gas Uinta-Piceance

Eagle Ford oil and volatile oil

Eagle Ford shale dry gas Jonah-Pinedale

Delaware Basin—Bone Spring

Marcellus shale Cotton Valley

Midland Basin—Spraberry-Wolfcamp

Utica shale (gas) Granite Wash—Colony Wash

Mississippian Woodford shale

Cleveland-Tonkawa Haynesville shale

Utica (oil) Fayetteville shale

Emerging plays Barnett shale

Niobrara


IHS 33

Federal and Non-Federal Areas, credited increased oil production since 2007 to activity on non-federal lands.29 The data collected by the Office of Natural Resource Revenue—the agency responsible for the management of revenues associated with federal offshore and federal and American Indian onshore mineral leases—also suggests that the unconventional oil and natural gas revolution is due mostly to production on non-federal lands.

Crude Oil

The increase in production on non-federal lands cited by the Congressional Research Center accounted for 74% of total US production in 2012. Most of that growth has been onshore.

Production has also been growing on federal onshore lands, but at a slower pace. Production on private and state onshore lands has grown by 36% since 2007, or by nearly 1.2 million barrels per day (mbd). In contrast, production on federal onshore lands grew by only 44,000 bd in that same time period.

Offshore production predominantly occurs in federal waters and accounts for nearly 99% of the total US offshore production. (Production occurring in state-owned shallow waters has been flat since 2007, remaining between 60,000 and 70,000 bd.) Production in federal waters has bounced around primarily due to the timing and volumes that have come on-stream from large new projects in the deepwater Gulf of Mexico. We anticipate future projects in the deepwater Gulf to boost offshore production by over 300,000 bd by 2020. This is a significant increase, but the growth onshore in unconventional energy looms considerably larger. Just as the 2007-2013 growth is attributable to onshore activity on private and state land, so is the expected growth in the future. Production from onshore unconventional oil in 2020 is anticipated to grow by another 2 mbd—more than four times that of the offshore federal waters.

Natural Gas

Since 2007, US natural gas production has increased by 5,931 billion cubic feet (Bcf). The overwhelming majority of this increase—98.5—came from unconventional oil and natural gas resources beneath onshore non-federal land. This natural gas production accounted for approximately 82% of total US production in 2012 and grew by 40% between 2007 and 2012. Gas production from onshore federal lands also increased from 2007 to 2009, but has since returned to 2007 levels, representing a mere 3% gain over the entire 5-year period 2007-2012.

Onshore production growth has more than offset the decline in offshore production. Production from federally-owned waters has dropped over 50% since 2007, representing a loss of 1,379 Bcf of gas production annually. Production from state waters has declined less, by about 3% per year. However, state production represented only 25% of all offshore production in 2012 and does not have much impact on the overall decline in offshore gas production.

Federal Lands

The federal government owns approximately 640 million acres, or roughly 28% of the 2.27 billion acres of land in the United States. Four agencies—three under the Department of the Interior and one under the Department of Agriculture—administer 95% of this land:

• Department of Agriculture:

• US Forest Service

• Department of the Interior:

• National Park Service

29 Congressional Research Center, Federal Land Ownership: Overview and Data, (February 2012).

34 September 2013


• Bureau of Land Management (BLM)

• Fish and Wildlife Service30

However, the BLM has responsibility for managing the mineral estate, including areas where the surface is either publically or privately owned. Federal land ownership is disproportionately greater in the western half of the United States where the federal government owns 47% of the land in 11 western states. In four of these 11 states, which are contiguous, the federal government owns more than 50% of the land: Oregon, 52.5%; Idaho, 62.5%; Utah 64.5%, and Nevada 82.9%.

Despite the sizable ownership stake of the federal government, fewer commercial plays historically were identified and developed on federal lands, and production was traditionally lower than in other resource-producing states, such as Texas, Oklahoma and Louisiana. Moreover, the relatively limited regional and basin-wide geological data that is available within these federal lands in the western states suggests that commercial oil and gas potential within these areas—given current technology and scientific understanding—is limited. The relatively limited quantity of federal land that has actually been leased for oil and gas activity makes insight into the resource potential across this significant federal footprint incomplete at best. In fact, in 2012, the total leased acreage of nearly 38 million acres was just 5.9% of the 640 million acres administered by the BLM.31 Without more active exploration activity, no one possesses the data necessary to accurately assess the total resource potential on federal lands.

30 Congressional Research Center, Federal Land Ownership: Overview and Data, (February 2012).

31 http://www.blm.gov/wo/st/en/prog/energy/oil_and_gas/statistics.html

G U L F O F M E X I C O

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The National Atlas of the United States of AmericaU.S. Department of the InteriorU.S. Geological Survey

Where We Arenationalatlas.gov TM

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FEDERAL LANDS AND INDIAN RESERVATIONSUS Public and Indian Lands

Source: National Atlas


IHS 35

Additionally, given the significant resources that are already identified and accessible on state and private lands, there remains a great deal of uncertainty around the willingness of operators to navigate the complexities of the regulatory structures that govern oil and gas activities on federal lands in an effort to answer this critical question. As a consequence, our Base Case assessment of the unconventional energy resources available and the corresponding economic contributions presented in this study focus on opportunities on non-federal lands.

In conclusion, the resource potential and economic contributions identified here are not inclusive of, nor do they offer insight into, the question of the resource base potential and corresponding economic opportunities associated with federal lands.

0

20

40

60

80

100

120

FY 1992

FY 1994

FY 1996

FY 1998

FY 2000

FY 2002

FY 2004

FY 2006

FY 2008

FY 2010

FY 2012

Federal Lands Under Lease As of the Last Day of the Fiscal Year (FY)

Millions of acres

Source: Public Lands Statistics

36 September 2013


Economic Contribution Assessment– Base CaseApproach and Methodology

This section focuses on measuring the economic contributions that come from increased investments and activity in what we call the unconventional energy value chain and energy-related chemicals. The objective in this section is to fully capture the unconventional energy infrastructure’s influence on the US economy through its supply-chain and its effects on workers’ incomes in the targeted sectors. To capture these effects, the results of the production and capital expenditure analyses discussed in the previous section (and in the first volume in this series for upstream activity) were integrated into our modeling system.

Defining the Economic Contribution

The steps used to derive the economic contribution of any industry can be summarized as follows:

• Any dollar of industrial expenditure, in this case the capital expenditure and operating expenditure (represented by value of production) associated with the entire unconventional oil and gas value chain and energy-related chemicals, results in direct benefits to the economy.

• These expenditures also result in indirect effects on final demand. In theory, an increase in activity associated with the unconventional oil and gas value chain and energy-related chemicals, with all else constant, would lead to more revenue and output among supplier industries, such as machinery and engineering services. This increase would also result in higher US demand for manufactured products such as pumps and compressors, which in turn require more fabricated metal and steel. These are a few of the numerous reverberations in the supply chain resulting from the change in target activities and sectors.

Participants in the unconventional oil and gas value chain and in related chemicals industries use many different products and services. As a result, a change in the level of activity would result in both a direct contribution (through production and capital expenditures) and an indirect contribution (via supply-chain dynamics) across a broad spectrum of sectors. The contribution of these first-tier supply chain industries in turn has implications for each supplier industry’s own supply chains, magnifying the indirect contribution.

The following explains the net effects on the US economy and its industrial sectors. These economic contributions are divided into three types: direct, indirect, and induced.

• The direct contribution is the effect of the core industry’s output, employment, and income. For example, unconventional oil and natural gas direct contributions in midstream processes, downstream elements, and energy-related chemicals are generated by increased capital expenditures and production. These activities result in a direct contribution of the target activities.

• Any changes in the purchasing patterns of the target industry initiate indirect contributions to all of the supplier industries that support the industry’s activities. Changes in demand from the direct industries lead to corresponding changes in output, employment, and labor income throughout their supply chains and via inter-industry linkages. The affected supplier activities span the majority of US industries.

• Finally, workers and their families in both the direct and indirect industries spend their incomes on food, housing, leisure, autos, household appliances, furniture, clothing, and other consumer items. The additional output, employment, and labor income effects that result from their consumer spending activities are categorized as the induced economic contribution.


IHS 37

For each stage in this analysis, the economic contribution is quantified in terms of employment, value added contributions to gross domestic product (GDP), and labor income. Separately, estimates of the entire unconventional energy value chain’s contributions to federal, state, and local tax revenues are also calculated.

Underlying Assumptions

The data and assumptions required to assess the economic contribution are the expected capital expenditures of midstream and downstream energy and energy-related chemicals and the increased value of energy-related chemicals production.

IHS Energy researched the capital requirements necessary to support unconventional oil and natural gas activity. The midstream elements consist of natural gas, natural gas liquids (NGL), and oil pipelines and storage, while the downstream elements include natural gas processing plants, liquefied petroleum gas (LPG) and NGL processing, and refineries. Capacity requirements for these activities are largely a function of peak upstream production, which will occur in the front half of the forecast period (by 2019). From then on, additional capacity requirements will increase, though at a slower rate, through 2025. Cumulative midstream and downstream energy capital spending over the forecast period is expected to exceed $216 billion and is detailed in the following table.

Detailed Midstream and Downstream Energy Incremental Capital Expenditures: United States

(Current $M)2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-25

LNG Processing 502 3,236 5,533 8,449 6,211 3,471 3,119 2,421 1,279 685 651 618 587 558 37,319

NG Processing 6,291 5,425 4,185 2,583 2,131 1,984 1,025 879 835 793 753 716 680 646 28,925

NG Logistics 8,871 9,148 7,222 5,084 3,069 4,295 5,065 3,545 2,244 3,608 3,560 4,045 3,994 2,315 66,065

NGL and LPG 8,017 7,341 4,395 2,158 1,871 1,690 1,460 1,253 1,110 1,051 994 939 887 843 34,010

Processing 3,510 3,912 2,109 928 835 742 649 557 529 502 477 453 431 409 16,046

Pipelines 4,120 2,919 1,947 916 792 704 616 528 502 476 453 430 409 388 15,200

Other 386 510 339 314 244 244 195 169 80 72 64 56 48 45 2,764

Crude Oil Processing 107 671 1,496 1,883 1,591 780 697 321 289 257 225 193 183 174 8,865

Crude Oil 4,589 6,298 6,931 5,100 2,175 1,912 1,333 1,145 997 878 759 715 672 638 34,142

Pipelines 4,057 5,285 6,138 4,272 1,322 1,264 1,054 948 843 738 632 601 571 542 28,267

Rail 402 623 241 211 170 95 84 63 42 40 38 36 34 33 2,112

Marine 130 390 553 618 683 553 195 134 111 100 89 78 67 64 3,763

Crude Oil & RP Storage

610 1,293 1,341 860 567 723 479 374 210 168 126 120 114 108 7,091

Total CapEx 28,987 33,412 31,102 26,117 17,615 14,855 13,179 9,938 6,963 7,439 7,068 7,345 7,117 5,282 216,418


Source: IHS Energy

For affected sectors of the chemical industry, IHS Chemical has estimated the capacity expansion and production increases being driven by the unconventional oil and gas revolution. All of the announced

38 September 2013


and expected plant expansions are compiled at the state level and divided into four census regions—Northeast, South, Southeast, and West—and then consolidated at the national level. Expected production increases are provided for nine categories of chemicals: acrylics, nitrogen fertilizers, chlor-alkali, olefins, polyolefins, vinyls chain, glycols chain, methanol chain, and aromatics chain.

Between 2012 and 2025, the total value of energy-related chemicals production is expected to exceed $505 billion. Capital spending is provided in detail, by types of equipment and structures. The cumulative capital expenditures over the forecast horizon are expected to reach more than $129 billion.


(Current $M)2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-25

Value of Production

Acrylics 114 116 117 329 540 631 720 732 744 995 1,254 1,479 1,505 1,531 10,807

Nitrogen Fertilizers

333 526 686 697 2,128 3,641 4,838 4,919 5,003 5,981 6,087 6,194 6,302 6,411 53,747

Chlor-alkali 386 773 1,406 1,428 1,451 1,475 1,500 1,525 1,551 1,578 1,606 1,635 1,663 2,094 20,072

Olefins 28 203 302 436 802 1,256 1,738 2,661 3,720 4,019 5,194 5,285 5,455 5,890 36,990

Polyolefins 174 214 329 1,469 5,260 12,681 18,876 21,623 24,221 27,745 31,429 31,980 33,579 34,875 244,455

Vinyls Chain

112 114 146 705 1,176 2,043 2,540 3,792 4,706 5,610 6,554 6,669 7,759 7,969 49,893

Glycols Chain

378 384 688 731 743 2,525 2,600 2,693 3,648 4,068 4,140 4,212 4,286 4,360 35,457

Methanol Chain

170 435 1,179 1,914 2,782 4,104 4,174 4,824 5,041 5,264 5,358 5,452 6,122 6,524 53,342

Aromatics Chain

0 0 0 0 0 15 57 58 59 60 61 62 106 108 587

Total Value of Production

1,695 2,765 4,854 7,709 14,883 28,371 37,042 42,827 48,694 55,320 61,683 62,968 66,777 69,761 505,350

Total CapEx 4,818 5,618 8,149 12,787 16,493 15,711 11,902 10,252 9,408 6,994 5,233 6,157 8,355 7,427 129,305


Methodology

As discussed previously in this report, unconventional oil and natural gas and energy-related chemicals production and their associated capital expenditures reflect market forces that take into account supply and demand conditions and market-clearing prices. Teams of analysts from IHS Energy, IHS Chemical, and IHS Economics collaborated to develop a number of “profiles.”

For the unconventional upstream oil and gas value chain, one set of IHS profiles projected the total number of wells to be drilled and the expected production and capital expenditures during each year of the forecast horizon. A second set of profiles aggregated announced and expected projects in the midstream and downstream energy value chain, summarizing anticipated annual expenditures on processes including gas processing plants, natural gas liquids (NGL) and liquefied petroleum gas (LPG) processing and pipelines, LNG exports, natural gas pipelines, crude oil transportation (pipelines, rail, marine), refineries, and storage. A third set of profiles included the chemical industry’s annual expenditures on infrastructure and any expected changes to production during each year of the forecast. Included is a summary of anticipated annual capital expenditures on raw and intermediate materials, final equipment, and supporting labor. By incorporating the timing of changes in production levels and in various classes of capital expenditures, we obtained a nuanced set of “bottom-up” production and capital spending assumptions associated with the unconventional oil and gas value chain and energy-related chemicals.


IHS 39

IHS Economics utilized the IMPLAN model to evaluate changes in these activities within the context of a comprehensive, linked industrial structure of the economy. To capture tailored capital expenditures, we decided not to enter data in the standard, aggregate categories of the IMPLAN model (e.g., drilling). Using our proprietary industry data and analyses, IHS instead focused on the unique mix of equipment, materials, and services to create a customized set of industry activities within the IMPLAN model. In this manner, IHS Economics worked in concert with our industry experts to develop modified production functions for the entire unconventional oil and gas value chain and energy-related chemicals, reflecting the unique purchasing and investment characteristics of each subsector. The capital expenditure profiles were used to compile customized technology requirements for each relevant activity. The process transformed the following subcategories of capital expenditures into a set of sector-level transactions for commodities and services that serves as inputs to the IMPLAN model.

This approach provides more accurate estimates of capital expenditures for upstream, midstream, and downstream energy and chemicals, which were then used as inputs to the IMPLAN model. For example, the requirements for upstream energy are comprised of steel, rigs, rig labor, cement, pipelines, machinery, and fabrication, whi le the chemicals category is comprised of instrumentation and electrical, engineering and project management, skil led and unskil led labor, insulation, paint, and piping. Similarly, each capital expenditure category was examined in detail to designate the best corresponding industry categories of the model (Appendix A contains more details).

The IMPLAN model quantified the direct and indirect contributions of the unconventional oil and gas value chain and chemicals. The direct and indirect contributions, when combined, represent all of the production, marketing, and sales activities required to bring primary products to the marketplace in a consumable form. IMPLAN’s input-output framework allows one to enter direct contributions, by industry, in order to analyze and quantify direct and indirect contributions. The sum of all contributions relative to the total size of the economy provides initial benchmark estimates to evaluate the importance of a given industry.

The induced economic contributions represent changes in consumer spending when incomes are altered. Induced contributions tend to be dynamic and react to shifts in consumer sentiment and employment outlooks. For this study, IHS Economics utilized its US Macroeconomic Model (Macro Model) to enhance IMPLAN’s standard methodology of measuring the induced economic contributions. The Macro Model’s dynamic equilibrium modeling methodology provides a more robust determination of the induced economic contributions than could be obtained from IMPLAN’s static modeling approach.

IHS Economics established an algorithm that links IMPLAN’s and the Macro Model’s direct and indirect contributions. Both models were run using the initial set of input assumptions to produce direct and

Components of Unconventional Oil and Natural Gas and Energy- Related Chemical Expenditures

Upstream Energy Midstream and Downstream Energy


Steel Steel Instrumentation and electrical

Rigs Equipment (rotating, heat exchangers, etc)

Engineering and project management

Rig labor Engineering and management

Skilled labor

Cement Labor Unskilled labor

Pipelines Electrical Concrete

Machinery Construction and civil Construction equipment

Fabrication Insulation

Paint

Piping

Structural steelSource: IHS Energy

40 September 2013


indirect contributions. The results were evaluated, and both the IMPLAN and Macro Model were refined, calibrated and run again in an iterative fashion, repeating the refinement and calibration process, until IMPLAN’s and the Macro Model’s direct and indirect contributions were consistent. Finally, the Macro Model was solved endogenously to produce the total economic contributions from the unconventional oil and natural gas revolution. The difference between the Macro Model and IMPLAN results (direct plus indirect) represents the expenditure-induced contributions of value added, labor income, and employment.

Measuring the Economic Contributions—Base Case

A baseline macroeconomic forecast of the US economy was used to evaluate and assess the contribution of the unconventional oil and gas value chain and energy-related chemicals over a 14-year forecast period, 2012-2025. The US economy is resilient and can adjust to a long-run state of full equilibrium. Hence, any contributions, policy changes, and external shocks will initially change the economic state, with a longer-term convergence to the Macroeconomic baseline. In other words, the economic ripples that result from a one-time shock this year, such as a federal stimulus program or natural disaster, will dissipate over the longer term as the US economy returns to its equilibrium state.

In our previous report, we analyzed and presented the economic, employment, and fiscal contributions of upstream unconventional oil and natural gas activity. Building on that, this report focuses on midstream and downstream energy and energy-related chemicals. While midstream and downstream energy activities were analyzed in a combined fashion, energy-related chemicals, whose structure is significantly different, was analyzed separately.


IHS 41

US Lower 48 Economic Contribution Summary due to the Unconventional Activity Value Chain: Base Case*

Employment(Number of workers)

2012 2015 2020 2025

Upstream Energy Activity 1,748,604 2,510,663 2,985,168 3,498,678



Total Activity 2,125,504 2,888,218 3,336,055 3,874,415

Value Added(2012 $M)

Upstream Energy Activity 237,684 349,533 416,551 474,985



Total Activity 283,777 396,999 468,427 532,884

Labor Income(2012 $M)




Total Activity 149,411 206,502 242,108 278,717


*The unconventional activity value chain represents the sum of unconventional oil and natural gas value chains and energy-related chemicals. Source: IHS Economics

In contrast to upstream energy activity, the economic contribution of midstream and downstream energy is more heavily weighted in the early years of the forecast period when the investments in capacity and efficiency are made.

• Employment: In 2012, almost 324,000 jobs were associated with midstream and downstream energy activity. This decreases to almost 229,000 jobs in 2015, and falls to just below 57,000 jobs in 2025, the end of the forecast period.

• Value Added to GDP: Midstream and downstream energy value added and labor income will follow a similar path, with value added decreasing from over $39 billion in 2012 to just under $7 billion in 2025.

• Labor income: Labor income is expected to decrease from just over $21 billion in 2012 to under $4 billion in 2025.

As already discussed, expansions in midstream and downstream capacity peak in the early years as the industry builds pipeline and other facilities to meet its growing requirements. Expansions of midstream and downstream capacity peak in 2013 at $33 billion but continue at a high level of investment until 2015. Beginning in 2016, expansion is expected to start declining as the appropriate level of infrastructure is finally in place to address production. The curtailing of infrastructure investment will be accompanied by a slowdown in employment contributions. As the infrastructure build-out is completed, the raw

42 September 2013


materials, supply chain and services purchases required for construction—and the jobs supported by those purchases—will diminish.

In contrast, the economic contribution of energy-related chemicals is expected to grow over the entire forecast period, as early capital investments are leveraged to increase chemical production later in the forecast period. The path of capacity expansion for energy-related chemicals is also somewhat different. During the period 2012-2016, investment will trend upwards, as capacity is dramatically expanded to take advantage of low natural gas feedstock prices. Beginning in 2016, investment will moderate and capacity additions will be incremental. This approach will allow the industry to proactively sequence capacity to support continually rising levels of production throughout the forecast period, which will peak in 2025.

Investment in more capacity will enable the primary force driving economic activity—increases in chemicals production—to make larger contributions to GDP and employment. The transition from expanding capacity to ramping up production will result in a dramatic upward shift in economic contribution, which is detailed here:

• Employment: In 2012, employment in energy-related chemicals was more than 53,000 jobs; that will grow to almost 319,000 jobs by the end of the forecast period in 2025.

• Value Added to GDP: Energy-related chemicals value added will increase from nearly $6.8 billion in 2012 to just over $51 billion in 2025.

• Labor Income: Energy-related chemicals labor income will increase from nearly $3.8 billion in 2012 to just over $26 billion in 2025.

Employment Contribution—Base Case

IHS Economics estimates that the employment contribution from the entire unconventional oil and gas value chain and energy-related chemicals will exceed 2.1 million US jobs in 2012. By 2015, the resulting employment is expected to increase to almost 2.9 million jobs, and by 2025, to 3.9 million jobs.

Midstream and downstream energy activity is already making massive contributions—together they created nearly 324,000 US jobs in 2012 alone—in order to connect the resource base with end-users. By 2015, as the necessary infrastructure is built-out and capital expenditures begin to decrease, employment will decrease to about 229,000, and, by 2025, to only 57,000 jobs. This downward trend over the course of the forecast period reflects infrastructure investment and completion in the near-term that will support production capacity in later years.

The employment contribution of energy-related chemicals in the short and intermediate term will mainly be due to capital expenditures for capacity expansion. During this period, the employment contribution

1.9%

2.0%

2.1%

2.2%

2.3%

2.4%

Short Term (2012-2015)

Medium-term (2015-2020)

Long-Term (2020-2025)

Unconventional Oil and Natural Gas and Energy-Related Chemical Contribution to Employment



IHS 43

of this sector will nearly triple from over 53,000 in 2012 to slightly less than 149,000 jobs in 2015. In the longer term as capacity expansion begins to decline beginning in 2017, production activities will become the dominate source of economic contribution from energy-related chemical activity. The continually increasing domestic production of the sector will lead to a contribution of almost 319,000 jobs throughout the US economy in 2025.

IHS Economics estimates that the employment contribution by the unconventional oil and gas value chain and energy-related chemicals, as a share of total US employment, will average 1.97% over the short-term (2012-2015), 2.27% over the intermediate term (2015-2020), and 2.36% over the long-term (2020-2025).

US Lower 48 Employment Contribution due to the Unconventional Activity Value Chain: Base Case*

(Number of workers)2012 Direct Indirect Induced Total

Upstream Energy Activity 360,456 537,663 850,485 1,748,604



Total Activity 494,108 639,772 991,624 2,125,504

2015

Upstream Energy Activity 505,895 770,441 1,234,327 2,510,663



Total Activity 633,173 878,063 1,376,982 2,888,218

2020

Upstream Energy Activity 600,420 915,788 1,468,960 2,985,168



Total Activity 684,915 1,037,106 1,614,033 3,336,055

2025

Upstream Energy Activity 724,379 1,074,155 1,700,144 3,498,678



Total Activity 805,381 1,209,647 1,859,388 3,874,415


*The unconventional activity value chain represents the sum of unconventional oil and natural gas value chains and energy-related chemicals.Source: IHS Economics

Manufacturing Employment Contribution

Over the entire forecast period, IHS estimates that one out of every eight US jobs supported by unconventional oil and natural gas development will be in manufacturing. However, its significance for manufacturing goes much deeper than that. Based on our analysis, IHS finds that manufacturing will become increasingly reliant on unconventional development as a primary way to create and sustain jobs. By 2015, 3.2% of all US manufacturing jobs will be linked to unconventional development. By 2025, this share will jump to 4.2%. This means that unconventional development will support close to 400,000 manufacturing jobs in 2015 and just over 500,000 in 2025.

44 September 2013


The following graphic captures how much employment is attributable to the unconventional oil and natural gas value chains and energy-related chemicals for 19 manufacturing industries. By comparison, the average share of manufacturing employment due to the unconventional oil and natural gas value chains and energy-related chemicals in 2015 and 2025 is 3.2% and 4.2%, respectively.

The graphic can be interpreted as follows:

• A circle represents each industry affected by the unconventional oil and natural gas revolution.

• The size of each circle represents the size of each industry’s total employment.

• The horizontal axis shows the full unconventional value chain’s contribution to employment in 2015. Industries with above-average shares of their total employment attributable to unconventional oil and natural gas activity (greater than 3.2%) are in the right quadrants of the graph; those with below-average are in the left quadrants.

• The vertical axis shows this share of employment in 2025, with above-average employment (greater than 4.2%) in the upper quadrants, and below average in the lower quadrants.

Manufacturing Industry

Share of Employment Attributable to Unconventional Oil and Natural Gas Value Chains and Energy-Related Chemicals: Selected Manufacturing Industries

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Bubble size represents 2015 total subsector employment

& AppliancesComputer &

Electronic ProductsProducts

Transportation Equipment

Furniture & Related Products Wood

ProductsFood Manufacturing

Share of Employment Attributable to Unconventional Oil and Natural Gas Value Chains and Energy-Related Chemicals, 2015

Source: IHS EconomicsSource: IHS Economics


IHS 45

The graphic identifies four standout industries—located in the upper right quadrant—that will experience above-average shares of their total employment throughout the forecast period attributable to the unconventional oil and gas revolution: chemicals, fabricated metal products, primary metals, and machinery. This employment share within the chemicals industry will accelerate as capacity is added and some production returns to the United States to take advantage of lower prices for natural gas feedstock. Employment in the remaining three industries in the upper right quadrant will be stimulated by their roles as major suppliers to the unconventional sector. The subsequently higher capacity utilization will keep proportional employment above the overall manufacturing sector average during the forecast period. In addition, all four industries will enjoy improved cost structures from lower energy prices. The resulting improvement in capacity utilization will hold the share of employment above that of the overall manufacturing sector average during the forecast period.

At first glance, unconventional energy appears to have little impact on employment in the industries located in the lower left quadrant of the graphic. However, these industries will benefit in one very important way: while the emergence of unconventional energy may not reverse the trend of contracting employment in these industries, it will slow that contraction and preserve jobs in these industries. At the same time, as explained in the previous chapter, production is expected to increase, which will translate to productivity gains for US manufacturers.

The table below distills unconventional energy’s primary employment contribution through four broad mechanisms. The categories are:

• Increased Production Capacity: Employment levels will increase due to expansions in domestic production capacity. In addition to the chemicals industry, the US plastics industry is also expected to add capacity. Many of the industries that will expand production capacity use natural gas as a feedstock. Lower natural gas prices provide an incentive to add domestic production capacity.

• Increased Capacity Utilization within Direct Industries: Industries that are significant direct suppliers to the unconventional energy sector will also increase their capacity utilization. The rapid expansion of energy infrastructure will stimulate demand for steel, oil and gas field machinery, pumps, and other goods. This in turn will absorb some of the slack in capacity utilization, which currently hovers at 75% in primary metals and 80% in machinery. The increase in demand will also bring moderate employment gains to these industries.

• Increased Capacity Utilization within Indirect Industries: The increase in direct spending within the manufacturing sector will start a ripple effect that will stimulate indirect demand in the extended supply chain and create induced consumer demand. This will result in increased capacity utilization and potentially modest employment gains in industries such as gasoline and food.

• Improved Cost Structures via Lower Energy Prices: Lower energy costs will allow some contracting industries, such as textile mills, to remain more competitive. This will slow the industry contraction and preserve jobs through the forecast horizon.

46 September 2013


Value Added and Labor Income Contribution

Value added is the difference between the production costs of products or services and their sales prices. The constantly cited GDP measure is simply the sum of value added across all products and services produced in the United States. GDP is generally considered the broadest measure of the health of the US economy. The value-added contribution of unconventional energy and chemicals activity demonstrates the vital role they play in the US economy.

On a total direct, indirect, and induced basis, IHS expects the value added by the overall unconventional energy value chain and energy-related chemicals will amount to a 2.08% increase, on average, in the value of goods and

Primary Employment Contribution Mechanisms of Unconventional Oil and Natural Gas and Energy-Related Chemicals on Manufacturing Industries

Capacity Expansion Chemicals Plastics & Rubber Products

gy gEmployment, Indexed to 2012 Levels: 2012-2025

Unconventional Energy Supply Chain

Primary MetalsMachinerySupply Chain

Increased Capacity Food Manufacturing

Petroleum & Coal ProductsIncreased Capacity

UtilizationManufacturingProducts

Lower Energy Costs/SustainedEmployment

Textile Mills Printing & Support Activities

Due to Unconventional EnergyOverall Industry


2.0%

2.1%

2.2%

2.3%

2.4%

2.5%

Short Term (2012-2015)

Medium-term (2015-2020)

Long-Term (2020-2025)

Unconventional Oil and Natural Gas and Energy-Related Chemicals Value Added Contribution to GDP



IHS 47

services produced over the short-term (2012-2015), 2.39% over the intermediate term (2015-2020), and 2.16% over the long-term (2020-2025).

We expect value added for the unconventional energy value chain and energy-related chemicals to grow faster than the rest of the economy through 2020. During the final six years of the forecast (2020-2025), IHS Economics’ outlook for the US economy accelerates at the same time that much of the unconventional employment associated with the initial build-out dissipates. This slowing of growth is reflected in the chart, which shows that the value added contribution to overall GDP first increases in the 2015-2020 time frame and declines during 2020-2025.

Value added for the entire unconventional energy value chain and energy-related chemicals was more than $284 billion in 2012 and is expected to reach almost $397 billion by 2015. By 2025, value added, estimated at almost $533 billion, will be 31% higher than in 2015. However, the short-term gains from these activities are even more substantial: from 2012 to 2015, value added is expected to increase at a rate in excess of 5% per year.

US Lower 48 Value Added Contribution due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)2012 Direct Indirect Induced Total




Total Activity 110,265 82,051 91,461 283,777

2015




Total Activity 158,592 113,459 124,948 396,999

2020




Total Activity 185,029 137,790 145,607 468,427

2025




Total Activity 205,452 159,962 167,469 532,884



A common measure of the relative contribution of an industry to the larger economy is worker productivity, measured as the ratio of value added to employment. The higher worker productivity is, the more each worker contributes to GDP and the more efficient each worker is. In 2012, the average worker directly employed by the unconventional energy value chain and energy-related chemicals will contribute more

48 September 2013


than $223,000 to GDP. That is projected to increase steadily, to over $270,000 in 2020, reflecting a shift to more efficient and more valuable labor.

US Lower 48 Value Added Per Employee due to the Unconventional Activity Value Chain: Base Case*





Total Activity 223,160 128,250 92,233 133,510

2015




Total Activity 250,472 129,215 90,740 137,455

2020




Total Activity 270,149 132,860 90,213 140,413

2025




Total Activity 255,100 132,239 90,067 137,539

NOTES: Figures in the table are average ratios by category and are not intended to sum to the total.


Workers’ earnings from all unconventional energy and chemicals activity are estimated at almost $150 billion in 2012, $207 billion in 2015, and almost $269 billion in 2025.


IHS 49

US Lower 48 Labor Income Contribution due to the Unconventional Activity Value Chain: Base Case*





Total Activity 52,953 47,003 49,455 149,411

2015




Total Activity 73,355 64,805 68,342 206,502

2020




Total Activity 84,298 77,839 79,970 242,108

2025




Total Activity 95,788 90,834 92,096 278,717



On a direct basis, labor income for all unconventional energy and energy-related chemicals activity is estimated at more than $107,000 per employee in 2012. This increases to nearly $116,000 in 2015 and just over $123,000 in 2020, and then flattens out for the remainder of the forecast period.

50 September 2013


US Lower 48 Labor Income Per Employee due to the Unconventional Activity Value Chain: Base Case*





Total Activity 107,168 73,469 49,873 70,294

2015




Total Activity 115,853 73,804 49,631 71,498

2020




Total Activity 123,079 75,054 49,547 72,573

2025




Total Activity 118,935 75,092 49,530 71,938

NOTES: Figures in the table are average ratios by category and are not intended to sum to the total.


Government Revenues and Taxes

Increased activity in the entire unconventional energy value chain and energy-related chemicals will also increase the amount of federal, state, and local government taxes paid by energy producers and chemicals manufacturers, their employees, their extensive supply chains, and companies in ancillary industries. IHS estimates that annual government revenues from all unconventional energy and chemicals activity will increase from more than $74 billion in 2012 to more than $104 billion in 2015 and about $138 billion in 2025. Over the entire forecast period, government entities will collect more than $1.6 trillion as a result of the entire unconventional energy value chain and energy-related chemicals activity.

In addition, upstream oil and gas operators will pay $712 million in private lease payments in 2015 and over $1 billion in 2025. Over the entire forecast period, lease payments will total more than $11 billion. While private lease payments will have an income effect on the economy, royalties paid to the federal government will, in addition to the income effect, contribute to federal, state, and local budgets. State budgets will also benefit from direct federal payments based on each state’s participation in production on federal lands. In fact, the more than $36 billion in state and local tax receipts in 2012 represent approximately 5% of the US lower 48 states’ total expenditures of $647 billion and more than 45% of the estimated 2012 budget gaps of $75 billion.


IHS 51

Contribution to US Lower 48 Government Revenue due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)2012 2015 2020 2025 2012-25**

Upstream Energy Activity***

Federal Taxes 28,903 42,132 50,167 55,620 644,286

Federal Royalty Payments 1,964 2,639 3,204 2,994 39,664

Federal Bonus Payments 148 167 150 138 2,139

State and Local Taxes 22,610 33,563 39,996 44,114 512,184

Severance Taxes 5,450 8,657 11,769 13,232 143,935

Ad Valorem Taxes 2,795 4,251 5,825 6,338 70,707

State Royalty Payments 715 1,050 1,359 1,443 16,767

State Bonus Payments 430 499 472 457 6,613

Total Government Revenue 63,015 92,957 112,943 124,335 1,436,294

Lease Payments to Private Landowners 504 712 915 1,103 11,696

Midstream and Downstream Energy Activity

Federal Taxes 5,712 4,066 1,297 996 37,551

State and Local Taxes 4,038 2,771 871 669 25,582

Total Government Revenue 9,750 6,837 2,168 1,665 63,133

Energy-Related Chemicals Activity

Federal Taxes 983 2,829 6,238 7,414 68,859

State and Local Taxes 695 1,928 4,191 4,981 46,350

Total Government Revenue 1,677 4,757 10,429 12,395 115,209

Total Activity

Federal Taxes 35,598 49,026 57,702 64,030 750,696

Federal Royalty Payments 1,964 2,639 3,204 2,994 39,664

Federal Bonus Payments 148 167 150 138 2,139

State and Local Taxes 27,342 38,262 45,058 49,764 584,115

Severance Taxes 5,450 8,657 11,769 13,232 143,935

Ad Valorem Taxes 2,795 4,251 5,825 6,338 70,707

State Royalty Payments 715 1,050 1,359 1,443 16,767

State Bonus Payments 430 499 472 457 6,613

Total Government Revenue 74,443 104,551 125,540 138,395 1,614,636

Lease Payments to Private Landowners 504 712 915 1,103 11,696




***Federal royalty payments, federal bonus payments, and lease payments to private landowners only apply to the upstream energy activity where land is leased from private households for drilling.Source: IHS Economics

52 September 2013


The Macroeconomic Impact of Unconventional Oil and GasThe previous section focused on quantifying the economic contribution—in terms of employment, value added to GDP, and labor income—of the entire unconventional energy value chain and energy-related chemical activities. The focus of this section is a broader assessment of the impact on the US economy that also incorporates energy pricing and trade effects in concert with the investment and production effects present in the Base Case.

This analysis is designed to also shed light on the benefits to the broader economy of higher unconventional oil and natural gas activity that result from the effects of lower prices and higher production and investment levels. But to put these impacts in a larger economic context, they are measured in terms of their incremental impacts on such indicators as GDP, industrial production, and trade—in other words, how much they add incrementally to these broad economic indicators.

Natural gas prices are and will continue to be substantially lower than they would have been if there had not been a revolution in unconventional oil and natural gas production. Lower prices boost disposable income, GDP and employment and are a positive force during this protracted period of economic uncertainty and very slow growth. These lower energy and feedstock costs will also lead to more investment, production, and employment by manufacturers, particularly in the chemicals and refining industries. Over the longer term, we expect a manufacturing renaissance that will lead to a compositional shift in the US economy, in concert with an improvement in its comparative global advantage.

Methodology

To isolate the incremental contributions, IHS constructed a counterfactual analysis in which we removed the unconventional activity and associated contributions from our baseline economic model. Measuring the difference in these contributions—with and without the unconventional activity—allowed us to quantify the contribution associated solely with the ongoing unconventional oil and natural gas revolution, which we refer to as the Base Case.

Three distinct first-order impacts—increased domestic energy production, lower natural gas prices, and increased energy investment—from the unconventional revolution were incorporated into the IHS models under a Base Case analysis of 21 major unconventional oil and natural gas plays. The following explains how IHS incorporated these impacts:

Additional domestic energy production was changed to reflect the increased investment and capacity expansion in the oil and natural gas industry.

The resulting lower natural gas prices estimated by IHS Energy were incorporated into the US Macroeconomic Model.

The increased upstream investments to expand capacity were incorporated into the US Macroeconomic Model as part of the overall investment outlook and then the model estimated investment changes in midstream and downstream energy, along with energy-related chemicals.

Again, these shocks allowed us to measure dynamically the incremental impacts of the unconventional oil and natural gas revolution on the US economy. The incremental changes analyzed include:

• Changes in industrial and consumer behavior following a reduction in prices and an increase in economic activity; and

• Changes in trade patterns for goods and services resulting from shifts in US comparative advantage.

The IHS US Macroeconomic Model was then simulated a second time, removing the greater availability of energy at lower natural gas prices and removing the higher level of investment activity. This modeling


IHS 53

framework allowed us to look at the impacts throughout the economy and how various actors change their behavior to take advantage of the new scenario.

Broad Impact on the Economy

At the macroeconomic level, we will present results of this analysis for four broad effects: the incremental impact on US gross domestic product (GDP), employment, trade, and household disposable income. This analysis is followed by an assessment of the impact on manufacturing industries, utilizing standard industrial production indexes as our metric.

The incremental boost from the full unconventional value chain—from upstream energy through energy-related chemicals—is expected to add 2% to 3.2% to the value of all goods and services produced in the United States. That impact is forecast to increase rapidly and will peak early in the forecast period, at 3.2% by 2016. In the context of a $13-15 trillion US economy, this translates to an increase in GDP of $500 to $600 billion in any given year over the forecast period. As the industry arrives at a new steady state of operations, the economy will absorb the shocks and will approach a new long-run equilibrium that is higher than it would have been without the benefits of unconventional energy.

The combination of lower energy prices and increased investment and domestic production benefit the labor market in a similar way: the gains are strongest in the early years of the analysis and moderate later in the forecast period to a new steady state that is consistently higher than what would exist without unconventional energy development in the United States. By 2025, nearly 4 million jobs will be supported by unconventional activity, which is consistent with the static analysis of total job gains previously presented in this report.

1.5%

2.0%

2.5%

3.0%

3.5%

2012 2014 2016 2018 2020 2022 2024

Change in Gross Domestic Product due to the Unconventional Activity Value Chain: Base Case*



0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2012 2014 2016 2018 2020 2022 2024

Change in Employment due to the Unconventional Activity Value Chain: Base Case*



54 September 2013


The unconventional revolution will also substantially improve US net trade for several reasons. First, the increase in domestic energy production may allow the United States to export intermediate and refined energy products such as liquefied petroleum gases, liquefied natural gas, and refined petroleum products. Second, for energy products in which the United States is a large net importer, namely crude oil, increased domestic crude production reduces the volume of imported crude. Third, reduced energy costs, specifically for electricity and natural gas, improve the global competiveness of energy-intensive manufacturing industries.

This new competiveness in global markets may enable petroleum refiners to continue operating at high utilization rates, maintain employment and increase their contributions to GDP and government revenue. For example, the impact on US trade of the unconventional revolution will increase steadily through 2022 before plateauing at a new, higher level. In 2022 and beyond, the unconventional oil and natural gas revolution will mean $180 billion per year in additional real net trade relative to a US trade regime in which there is no unconventional activity.32

Finally—and most tangibly for American families—household disposable income will rise due to increased activity in the US unconventional oil and natural gas value chain and in energy-related chemicals. This is the cumulative impact of higher household wages and lower costs for energy and energy-intensive products. Specifically, these factors work through three primary avenues:

• Direct consumption costs are reduced as natural gas used to heat both homes and water becomes less expensive.

• Input costs for manufacturers of various consumer goods, including electricity prices, decline, reducing indirect costs for consumers.

32 Real net trade is defined as the real value (inflation-adjusted) of total exports less the real value of total imports.

-50

0

50

100

150

200

2012 2014 2016 2018 2020 2022 2024

Change in Net Trade due to the Unconventional Activity Value Chain: Base Case*2012 $B



0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2015 2020 2025

Change in Disposable Income per Household due to the Unconventional Activity Value Chain: Base Case*2012 $




IHS 55

• Wages increase as the manufacturing renaissance increases industrial activity.

In 2012, the increase in real disposable income per household resulting from the unconventional oil and natural gas revolution was more than $1,200. With nearly 120 million households in the country, this equates to total annual gains to American households of $163 billion. These benefits are expected to grow continually throughout the entire forecast period: real disposable income per household will rise from just over $2,000 per household in 2015 to more than $3,500 in 2025.

Industrial Production Indices

The impact on the US industrial production index differs somewhat from the impact on other major macroeconomic indicators. Industrial production indices measure the growth of production volume in three basic aggregate industries: manufacturing, mining, and utilities. The index for manufacturing industries is disaggregated, and the detailed indices are included in the IHS US Macroeconomic Model.

While growth in GDP and employment peak in the 2016-2017 time period, growth in US industrial production is unabated over the entire 2012-2025 forecast. Unconventional oil and natural gas development is projected to increase industrial production by 2.8% in 2015, by 3.5% in 2020, and by 3.9% in 2025.

The impact of the unconventional oil and gas revolution on the industrial production indices is captured in two ways. In the first-order impact, lower natural gas prices, increased energy investment and production, and implied lower electricity prices have direct positive ramifications for many manufacturing industries. Major industries that use energy feedstock or are intense energy users include non-durable goods manufacturers of organic chemicals, fertilizers, resins, and plastics, as well as durable goods manufacturers of primary and fabricated metals, machinery and some nonmetallic mineral products.

These impacts also have secondary effects (or second-order effects), which are captured across many manufacturing industries as the US economy continues to benefit from the unconventional energy revolution. This occurs when the first-order effects will feed through the economy to the supply chain, which in turn will have further ramifications (second-order effects) on the US economy through wages, income and prices. The dual effects of increased aggregate demand—for example, consumers spending some of their higher disposable incomes on US-made products—and reductions in imports are expected to bring new opportunities for domestic manufacturers. However, not all industries will experience large benefits from the unconventional revolution. For example, industries that are heavily import-dependent and not especially energy-intensive—textiles, apparel, consumer electronics, to name three—will not experience significant benefits from unconventional oil and natural gas development.

By contrasting the expected “lift” to certain US manufacturing sectors against historical growth rates of these select sectors, we can gain valuable insight into how they are expected to benefit from the unconventional energy revolution. Growth over the past two decades in most manufacturing sectors has

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2012 2014 2016 2018 2020 2022 2024

Change in Industrial Production Index due to the Unconventional Activity Value Chain: Base Case*



56 September 2013


been weak or even negative. With the exception of some sectors with an overarching global competitive advantage—pharmaceuticals, organic chemicals, computers and related products, transportation equipment, and miscellaneous durables—that have grown more than 1.2% over the past two decades, all other manufacturing sectors have shown sluggish growth. We do not foresee that the unconventional revolution will reverse the growth pattern for all US manufacturing sectors—in fact, many industries will continue on the same downward path through the remainder of the forecast horizon. However, the overall contribution from lower natural gas prices, increased energy activity, and the second-order economic impacts of the unconventional oil and gas revolution will improve the outlook of the manufacturing sectors.


IHS 57

Industrial Production Indices

Historical Performance and Forecasted Changes in the Unconventional Activity Value Chain on US Manufac-turing Industries*

% Contribution of the Base Case

Compound Annual Growth Rates

2012 2015 2020 2025 1995-2005

2005-2012

1995-2012

Total Industry 1.3% 2.8% 3.5% 3.9% 3.4% 0.1% 2.0%

Food Manufacturing (311) 0.6% 1.7% 1.6% 1.4% 1.4% 0.5% 1.0%

Beverage & Tobacco Product Manufacturing (312) 0.6% 1.2% 1.4% 1.2% -0.5% -1.6% -1.0%

Textile Mills (313) 0.7% 2.0% 2.2% 2.3% -2.9% -6.1% -4.2%

Textile Product Mills (314) 0.6% 2.2% 2.3% 2.4% 0.7% -8.0% -3.0%

Apparel Manufacturing (315) 0.1% 0.9% 0.1% 0.4% -8.0% -12.8% -10.0%

Wood Product Manufacturing (321) 0.3% 1.4% 2.0% 1.7% 2.0% -5.5% -1.2%

Furniture and Related Product Manufacturing (337) 0.4% 2.2% 2.1% 2.2% 2.5% -5.8% -1.0%

Paper Manufacturing (322) 0.6% 2.8% 3.0% 3.4% -0.9% -2.4% -1.5%

Printing Support Activities (323) 0.8% 1.5% 1.7% 2.0% -0.4% -3.5% -1.7%

Petroleum and Coal Products Manufacturing (324) 1.0% 4.6% 5.8% 6.5% 1.8% 0.0% 1.1%

Chemical Manufacturing (325) 1.5% 3.6% 4.0% 4.3% 2.6% -1.0% 1.1%

Basic Chemical Manufacturing (3251) 1.2% 3.7% 5.5% 7.2% 1.3% -0.4% 0.6%

Basic Organic Chemical Manufacturing (32511A9) 1.5% 4.9% 7.1% 9.5% 1.6% 0.8% 1.3%

Basic Inorganic Chemical Manufacturing (32512T8) 0.8% 2.4% 3.9% 4.8% 0.8% -2.9% -0.8%

Resins & Synthetic Material Manufacturing (3252) 1.7% 4.4% 6.0% 8.1% 0.6% -2.1% -0.5%

Agricultural Chemical Manufacturing (3253) 1.2% 3.0% 6.9% 7.7% -0.1% -2.6% -1.1%

Pharmaceutical and Medicine Manufacturing (3254) 0.8% 2.5% 2.4% 2.0% 5.1% -1.8% 2.2%

Paints, Soaps, Toiletries & Misc. (3255T9) 1.8% 2.8% 3.4% 3.8% 1.9% 0.1% 1.1%

Plastics and Rubber Products Manufacturing (326) 1.5% 3.5% 4.1% 4.6% 1.9% -2.3% 0.1%

Leather and Allied Product Manufacturing (316) 0.8% 1.2% 1.8% 2.1% -5.7% -2.8% -4.5%

Nonmetallic Mineral Product Manufacturing (327) 1.2% 3.2% 3.5% 4.1% 2.0% -4.7% -0.8%

Glass and Glass Product Manufacturing (3272) 1.0% 3.0% 3.6% 4.1% 0.9% -2.4% -0.4%

Cement Manufacturing (32731) 0.9% 2.9% 3.4% 3.7% 2.7% -8.1% -1.9%

Concrete & Product Manufacturing (32732T9) 1.2% 4.2% 4.4% 4.7% 3.6% -6.3% -0.6%

Clay, Lime, Gypsum & Misc. (3271A4A9) 1.1% 3.4% 3.8% 4.3% 1.2% -3.1% -0.6%

Primary Metal Manufacturing (331) 1.8% 3.3% 5.1% 5.9% 0.0% 0.6% 0.2%

Iron & Steel Product Manufacturing (3311A2) 2.2% 3.7% 6.7% 7.4% 0.1% 1.0% 0.5%

Nonferrous Metal Manufacturing (3313A4) 1.1% 3.1% 3.6% 4.1% -0.3% 1.8% 0.6%

Alumina & Aluminum Products Manufacturing (3313) 1.0% 3.0% 3.4% 4.2% 0.9% -0.7% 0.2%

Nonferrous exc. Aluminum Manufacturing (3314) 1.2% 3.2% 3.8% 3.9% -1.6% 4.1% 0.7%

Foundries Manufacturing (3315) 0.4% 2.0% 2.4% 2.6% 0.4% -2.4% -0.8%

Fabricated Metal Product Manufacturing (332) 1.4% 2.8% 3.2% 4.8% 1.0% 0.1% 0.6%

Machinery Manufacturing (333) 0.4% 2.8% 3.3% 4.0% 0.8% 1.6% 1.1%

Computer and Electronic Product Manufacturing (334) 0.4% 1.9% 2.0% 1.7% 18.5% 7.8% 14.0%

Elec. Eq., Appliances, & Components Manufacturing (335) 0.1% 1.7% 1.7% 1.3% -0.1% -1.4% -0.6%

Transportation Equipment Manufacturing (336) 0.4% 1.3% 2.1% 2.3% 2.5% 1.1% 1.9%

Miscellaneous Manufacturing (339) 0.3% 2.0% 1.6% 1.8% 3.5% 0.6% 2.3%

NOTES: Industries expected to realize the largest improvement in output due to the unconventional activity value chain are highlighted



58 September 2013


The expected contribution from the revolution in unconventional energy varies across individual manufacturing industries. The degree and pattern of contributions in each sector depend on a few key factors, including their direct participation in unconventional energy (e.g., petroleum refining, organic chemicals, and fertilizer); their direct participation in upstream activity (e.g., primary, fabricated metals, and machinery); and their indirect participation in the supply chain. Second-order and income impacts on consumer-related sectors are also important (e.g., consumer electronics and food).

The non-durable manufacturing sectors that use natural gas as feedstock are expected to benefit most from the unconventional revolution. Continued lower prices for natural gas will create opportunities to expand chemical and petroleum refining capacity and to increase production. The chart below shows the percent that the unconventional revolution will contribute to the production outlook of the basic chemicals, fertilizers, and petroleum products sectors. All three sectors’ production indices were 1% higher in 2012 and are expected to be 6-8% higher in 2025.

Durable manufacturing industries are experiencing different trends. The iron and steel, fabricated metals, and machinery industries will benefit directly from increases in upstream investment activity. Some of the nonmetallic mineral products industries (e.g., glass and cement) will also benefit from lower electricity prices in their production process.

In addition to the direct impact on manufacturing, greater activity in the supply chain and the second-order economic impacts will contribute to a broader set of manufacturing sectors.

This section of the analysis assessed the economic impact that unconventional oil and natural gas activities are having on the US economy and on specific manufacturing sectors. Natural gas prices are and will continue to be substantially lower than they would have been without the unconventional revolution, generating positive immediate and medium-term contributions to GDP, employment, and real disposable income. These positive forces are reinforcing the US economy during a period of economic uncertainty and slow growth. Over the longer term, sustained improvements in industrial production are contributing to a renaissance in US manufacturing.

0.0%

2.0%

4.0%

6.0%

8.0%

2012 2015 2020 2025

Basic Chemicals Fertilizers Petroleum Products

Change in Selected Non Durable Industrial Production Indices due to the Unconventional Activity Value Chain: Base Case*



0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2012 2015 2020 2025

Iron and Steel ManufacturingFabricated Metals

MachineryNon-Metalic Products

Change in Selected Durable Industrial Production Indices due to the Unconventional Activity Value Chain: Base Case*




IHS 59

Low Production CaseThe Base Case presented earlier in this report assumed that the revolution under way in the unconventional oil and natural gas industry would continue, reducing energy prices and delivering large economic contributions to the US economy, and to the unconventional oil and natural gas value chain and energy-related chemicals. Estimates of these economic contributions are forecast for the period 2012-2025. A second case, discussed here, is the Low Production Case for the same forecast period. In this case, IHS assumed that the unconventional oil and natural gas industry would operate in a more restrictive regulatory environment that would reduce the levels of oil and natural gas production relative to the Base Case and create more modest contributions to the US economy.

This chapter first describes the assumptions and methodology that IHS used to generate forecasts for the Low Production Case. It then describes what would be the differences in the unconventional oil and natural gas industry’s economic contributions—in terms of growth, employment, disposable income, and tax revenues—between the Base Case and the Low Production Case.

Formulation of the Low Production Path

Defining the Low Production Case

The Low Production Case sets out to estimate the broader economic impacts in the event that future unconventional production is reduced by a significantly more restrictive policy and regulatory framework than that which is assumed in the Base Case. This analysis is patterned after the National Petroleum Council’s Severe Restricted Supply Scenario as described in the topic papers of the 2011 National Petroleum Council (NPC) study on Prudent Development of North American Oil and Gas Resources.33 In this scenario, the NPC said, “supply is reduced such as may occur with severe restrictions on fracture stimulation,” also known as hydraulic fracturing. Specifically, the NPC assumed that “67% of shale gas/tight gas/CBM supply is eliminated.” The reliance on the previous NPC work is to ensure that this study takes into account a credible analysis that is already in the public domain. The Low Production Case quantifies manufacturing sector activity, employment and value-added contribution to gross domestic product (GDP) under the assumption that oil and natural gas production is lower than in the Base Case over the 2012-2025 forecast horizon.

Although the 2011 NPC study analyzed potential downside alternatives for production, that study did not undertake an integrated oil and natural gas market analysis with feedback loops. However, the NPC did consider restrictive regulation on fracture stimulation as the key driver potentially constraining future production. The Low Production Case in this IHS study is based on the assumption, consistent with the NPC study, that some combination of regulatory restrictions would impose significant restrictions on fracture stimulation, which would reduce the ability of the oil and natural gas industry to access, develop, and produce unconventional hydrocarbon resources in the United States.

The NPC study did not detail the exact nature of the regulatory changes that might occur, but it assumed they would be sufficiently restrictive to curtail drilling and development activity—through a 2035 outlook horizon—over large areas of the hydrocarbon resource base. This is the approach we followed in this study. Potential policies or regulations that the NPC report suggested could restrict unconventional production include:

• An extension of drilling and hydraulic fracturing moratoria, such as those in force in New York State, to other major resource basins and watersheds.

33 National Petroleum Council. (2011) Prudent Development—Realizing the Potential of North America’s Abundant Natural Gas and Oil Re-sources Study Topic and White Papers. Paper #1-8 Onshore Natural Gas - Page B 19. http://www.npc.org/Prudent_Development-Topic_Papers/1-8_Onshore_Natural_Gas_Paper.pdf

60 September 2013


• Limitations, in some areas, of water availability for hydraulic fracturing.

• More stringent EPA ground and surface water regulations.

• More stringent well integrity regulations addressing formation integrity and potential fracture fluid migration to groundwater sources.

• More stringent regulations that limit options for produced water discharge.

• EPA classification and regulation of high-volume, low-toxicity waste material from extraction operations as hazardous waste.

• More stringent EPA regulations on containment of produced water.

• New EPA regulations governing monitoring and levels of greenhouse gas emissions at the wellhead, as well as in processing, transmission, storage, and distribution systems.

• Extension of federal air regulations to cover new types of equipment and activities, such as pneumatic devices, compressors, well completions and workovers.

• Tightening of regulated ozone emission thresholds.

• More extensive National Environmental Protection Act reviews and a reduction of categorical exclusions related to leasing programs on federal Bureau of Land Management (BLM) land.

• More complex, time-consuming and costly front-end planning requirements for leasing on BLM lands subject to multiple uses.

• Regulatory ambiguity among federal, state and local agencies.

• Constrained regulatory capacity that slows down permitting processes.

• More stringent regulations and permitting processes governing the build-out of new gathering systems and long-haul pipelines in emerging production regions.

• Significant tax increases or tax code changes, such as the elimination of intangible drilling cost allowances, depletion allowances, unconventional fuel credits and/or research and development credits covering unconventional technology development.

The NPC Severe Restricted Supply Scenario analyzes the impact of restrictions on hydraulic fracturing, but it stops short of analyzing an outright overall moratorium on hydraulic fracturing techniques. However, given the 67% reduction in the recoverable resource base of shale gas, tight gas and coal bed methane, the North American onshore natural gas recoverable resource base is reduced by between 44% and 51%. Furthermore, the time horizon in which production can be maintained at 2010 levels before the recoverable resource base is exhausted is reduced from 50 to 90 years to only 17 to 20 years.

We looked at US production history to validate whether policy and regulations that create disincentives for drilling activity could significantly reduce available energy resources and production. We found that production fell from 22.65 trillion cubic feet (tcf) in 1973 to 16.85 tcf in 1986. Although these declines resulted from wellhead price controls, the ultimate outcome was consistent with the NPC approach in that these regulatory activities effectively excluded large segments of the resource base from being economically viable. Production began to recover when these wellhead price controls began to be lifted and the natural gas market was deregulated in the late 1980s and early 1990s.

The historical pathway of US natural gas production over this period provided valuable insight into the impact on IHS’ production profile over time due to major regulatory disincentives to drilling, which played out over approximately the same time frame as the time horizon of this study. As such, it allowed us to


IHS 61

construct a plausible profile of the impact of any restrictive hydraulic fracturing regulations that may be introduced in the near future.

Although the nature of this historic regulatory distortion was very different from the regulatory frameworks currently being discussed (price controls vs. moratoria on hydraulic fracturing and restricted access), the impact on activity and production could be similar. This similarity would arise because both types of regulation have a direct impact on the amount of resources that can be economically recovered, creating a dampening effect on activity and production. This effect was observed in the decline of US natural gas production in the 1970s and 1980s. At a time of price, access or regulatory restrictions on the development of unconventional oil and gas, or on the technologies used to produce them, exploration and production companies shifted their capital budgets to locations—often overseas—with more accessible and economic prospects.

It is unlikely that the conventional resource base in the United States could provide sufficient additional economic opportunity to compensate for the reduction in developable unconventional resources. Before the unconventional boom, which began around 2007, periods of high oil and natural gas prices failed to spur a renaissance in conventional oil and gas production in the United States. The approach used in the Low Production analysis remains consistent with the detailed analysis in the NPC study. It gains additional credibility by using actual historical impacts from distortionary regulatory policy which, although different in rationale and design, were quite similar in the signals sent to exploration and production companies that caused them to significantly reduce their drilling activities.

Output Assumptions—Low Production Case

Just as in the Base Case, the data and assumptions required to undertake the economic impact for the Low Production Case reflected expected changes in output for upstream exploration and extraction, midstream processes, downstream elements, and energy-related chemicals. The IHS Energy team has estimated changes in output stemming from changes in capital investments. In addition, IHS Chemical estimated changes in chemical production from newly available capacity.

The Low Production Case stemming from potential policy and regulatory restrictions that could impact unconventional oil and gas production over the next decade results in a 67% reduction in unconventional activity through 2035. This forecast will translate to a continuous decline of production over the next decade, resulting in 52% lower natural gas production than is forecast in our Base Case by 2025, the end of our forecast horizon. The ramifications of such policy and regulations will also change the outlook for the LNG market, shifting it to a more import-dependent market. Additionally, industrial and power sector demand for natural gas will experience downward trajectory. As a result of both higher LNG imports and lower domestic production, natural gas prices are projected to peak in 2020 at over $16 per thousand cubic feet (Mcf) before reaching a plateau and dropping to over $14 per Mcf.

0

3

6

9

12

15

18

2013 2015 2017 2019 2021 2023 2025


Henry Hub Natural Gas Price: Base Case versus Low Production Case2012 $US per Mcf


62 September 2013


Both unconventional oil and natural gas production follow a similar pattern under the Low Production Case. Oil prices are projected to remain at the Base Case level.

In the Low Production Case, output from energy-related chemicals grows only at the pace of inflation. This result is in keeping with plant and capacity expansions in the Low Production Case, which is expected to end with the completion of near-term projects. In the Low Production Case, energy-related chemicals plant expansions will be undertaken up to 2014 and therefore production will stay flat over the next decade.

Capital Expenditure Assumptions—Low Production Case

Just as in the Base Case, the required data and assumptions to undertake the economic impact assessments in the Low Production Case include expected capital expenditures for upstream exploration and extraction, midstream processes, downstream elements, and energy-related chemicals. The IHS Energy team has researched the decrease in capital expenditures associated with the Low Production Case due to a heightened regulatory environment. IHS Chemical estimated the decreases in capital investment and capacity expansion in energy-related chemicals stemming from lower unconventional oil and natural gas production in the Low Production Case.

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2012 2014 2016 2018 2020 2022 2024


Unconventional Oil ProductionMbbl per day

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2012 2014 2016 2018 2020 2022 2024


Unconventional Natural Gas ProductionMMcf per day

Source: IHS Energy Source: IHS Energy

0

10,000

20,000

30,000

40,000

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60,000

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2012 2014 2016 2018 2020 2022 2024


Energy-Related Chemicals Value of ProductionCurrent $M

Source: IHS Energy


IHS 63

Using the Low Production Case’s outlook for unconventional oil and natural gas, the IHS Energy team utilized a detailed supply model to estimate the required capital expenditures for upstream activity. Due to the restrictive policies and regulations in the Low Production Case, capital expenditures in this Case over the next decade are lower than in the Base Case. The chart to the right shows that upstream investment falls, then remains relatively constant (in nominal dollars) throughout the forecast period.

The resulting decline in capital spending for midstream and downstream energy follows a path similar to upstream oil and natural gas production, which was shown in the previous section. Over the short term, capital expenditures will decline sharply along with production. From 2015 to 2025, capital spending will be flat, eliminating the capacity expansion found in the Base Case forecast and contributing to lower midstream and downstream throughput.

The next chart below shows a dramatic long-term shift downward in capital expenditures in midstream and downstream processes under the Low Production Case, similar to the downward trend in the Base Case, reflecting the lower level of activity occurring in the upstream segment under the Low Production Case. However, there is initially a surge in capital spending in the Base Case that would virtually disappear in the Low Production Case since it would be unprofitable for midstream and downstream energy sectors to expand their capacity in a heightened regulatory environment. Consequently, capital expenditures shift downward—to reflect the decline in oil and natural gas production—but maintain roughly the same trend as the Base Case, as the industry continues to build out the midstream and downstream capacity required to process these resources at the new lower level.

Finally, energy-related chemicals are expected to follow a drastically different investment path in the Low Production Case. Plans for short-term expansion projects will be completed by 2014, but the additional expansions of capacity and processes that had been forecast in later years in the Base Case to exploit the full unconventional boom will not occur. The US natural gas market in the Low Production Case will continue to be highly import-dependent for LNG, and rising natural gas prices will prevent chemical

0

50,000

100,000

150,000

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250,000

2012 2014 2016 2018 2020 2022 2024


Upstream Unconventional Oil and Gas Capital Expenditures

Current $M

Source: IHS Energy

0

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2012 2014 2016 2018 2020 2022 2024


Midstream and Downstream Unconventional Oil and Gas Capital Expenditures

Current $M

Source: IHS Energy

64 September 2013


manufacturers from building additional domestic capacity. The related chemical manufacturing will shift off-shore as the US chemical manufacturers become less competitive relative to their trading partners. By 2016, no additional capacity expansion is expected to be undertaken in the United States under the Low Production Case.

A Comparative Analysis: Base Case versus Low Production Case

The cons iderable economic opportunities being unlocked by the revolution under way in unconventional oil and natural gas is a function of the pace of exploration and development. Continued exploration and development of new fields are required to find resources and develop both existing and future discoveries. For every barrel produced today, at least one additional barrel must be discovered and developed in order to maintain current production levels. However, this process is complex and costly—from leasing, seismic surveying, permitting, pad construction, well construction, hydraulic fracturing, and production to the plugging and site reclamation once a well is no longer economically viable. As previously discussed, our Base Case includes a status quo set of assumptions around the overall regulatory complexities governing this process. Changes that impact that process or alter the pace and costs of compliance with these regulatory assumptions fundamentally shift economic conditions, altering the underlying pace and scope of the exploration and development opportunities that unfold. This will have a cascading impact: upstream activity will decrease, build-out requirements for the midstream, downstream, and chemicals sectors will decrease, and the macroeconomic benefits of oil, natural gas, and energy-related chemicals to the US will decrease. The comparative analysis presented below quantifies the lost economic opportunities that result from a more restrictive supply outlook.

Comparison of Economic Contribution Results

The data required to undertake the economic contribution assessments in the Low Production Case are comprised of expected capital expenditures for upstream exploration and development, midstream processes, downstream elements, and energy-related chemicals—these are the same contributions analyzed in the Base Case and permit a comparative analysis of the two cases.

This section addresses the midstream and downstream segments of the unconventional oil and gas value chain and the energy-related chemicals. As in the Base Case, the midstream and downstream activities were combined in this analysis, while the chemical industry, which has a significantly different structure, was analyzed separately.

Rather than report the separate results for each of the two production cases, this section instead shows the differences in the various economic contributions between the Base Case and the Low Production Case. These differences, which represent foregone opportunities, demonstrate the substantial lost benefits from implementation of overly stringent oil and natural gas fracturing regulations.

-5,000

0

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10,000

15,000

20,000

2012 2014 2016 2018 2020 2022 2024


Energy-Related Chemicals Capital ExpendituresCurrent $M

Source: IHS Energy


IHS 65

The first table below presents a sample of the summary economic results (employment, value added, labor income) for four individual years included in the 2012-2025 forecast horizon. The second table presents detailed government revenue results for the same four years.

US Lower 48 Economic Contribution Summary due to the Unconventional Activity Value Chain: Dif-ference Between Low Production Case and Base Case*

Employment(Number of workers)

2012 2015 2020 2025

Upstream Energy Activity - (1,193,049) (1,824,540) (2,442,964)

Midstream and Downstream Energy Activity - (108,757) (54,941) (41,933)

Energy-Related Chemicals Activity - (115,069) (247,221) (288,613)

Total Activity - (1,416,875) (2,126,702) (2,773,511)

Value Added(2012 $M)

Upstream Energy Activity - (100,551) (131,166) (249,552)



Total Activity - (127,829) (175,779) (300,624)

Labor Income(2012 $M)

Upstream Energy Activity - (84,431) (130,449) (172,314)



Total Activity - (99,430) (153,634) (198,517)



• Employment: If the Low Production Case occurs instead of the Base Case, total employment is expected to be just over 1.4 million lower in 2015 and would be nearly 2.8 lower in 2025.

• Value Added: Value added is expected to follow a similar path, with total forgone value added of $128 billion in 2015 and over $300 billion in 2025.

• Labor Income: The value of forgone labor income is expected to reach $198 billion in 2025.

66 September 2013


Contribution to US Lower 48 Government Revenue due to the Unconventional Activity Value Chain: Difference Between Low Production Case and Base Case*

(2012 $M)2012 2015 2020 2025 2012-25**

Upstream Energy Activity***

Federal Taxes - (15,817) (23,021) (33,035) (276,714)

Federal Royalty Payments - (289) (473) (1,218) (6,111)

Federal Bonus Payments - (18) (22) (56) (330)

State and Local Taxes - (4,991) (3,621) (16,754) (84,691)

Severance Taxes - (947) (1,739) (5,382) (22,178)

Ad Valorem Taxes - (465) (861) (2,578) (10,895)

State Royalty Payments - (115) (201) (587) (2,583)

State Bonus Payments - (55) (70) (186)s (1,019)

Total Government Revenue - (22,696) (30,008) (59,794) (404,520)

Lease Payments to Private Landowners - (472) (712) (891) (8,308)


Federal Taxes - (2,246) (1,017) (770) (19,048)

State and Local Taxes - (1,387) (659) (498) (11,516)



Federal Taxes - (2,172) (5,635) (6,811) (59,752)



Total Activity

Federal Taxes - (20,235) (29,674) (40,616) (355,514)

Federal Royalty Payments - (289) (473) (1,218) (6,111)

Federal Bonus Payments - (18) (22) (56) (330)


Severance Taxes - (947) (1,739) (5,382) (22,178)

Ad Valorem Taxes - (465) (861) (2,578) (10,895)

State Royalty Payments - (115) (201) (587) (2,583)

State Bonus Payments - (55) (70) (186) (1,019)


Lease Payments to Private Landowners - (472) (712) (891) (8,308)




***Federal royalty payments, federal bonus payments, and lease payments to private landowners only apply to the upstream energy activity where land is leased from private households for drilling.Source: IHS Economics


IHS 67

IHS estimates that annual government revenues forgone by moving from the Base Case to the Low Production Case would be nearly $30 billion in 2015, more than $41 billion in 2020, and more than $72 billion in 2025. Over the entire forecast, 2012-2025, the total sacrificed by governmental bodies would exceed $534 billion. While the majority of lost revenues would derive from reduced upstream activity, the total forgone revenue from midstream and downstream energy activity is expected to reach more than $30 billion, while lost revenue from energy-related chemicals activity is expected to reach nearly $99 billion.

Comparison of Macroeconomic Results

In order to quantify the incremental impacts in the two production cases at the macroeconomic level using a dynamic approach, we have assessed the results for a broad set of metrics using higher assumptions for natural gas prices. Not surprisingly, the GDP impacts stemming from the Low Production Case are well below those of the Base Case over the entire forecast horizon. The GDP impacts in the Low Production Case increase in the early years of the forecast period decrease in the intermediate years as natural gas prices rise, and rise again in the forecast’s latter years. A summary of the key findings are given below:

• The contribution associated with the unconventional value chain activities ranges between 2.0% and 3.3% of GDP in the Base Case. The smaller GDP impacts associated with the Low Production Cases will not exceed 1.9% at its forecast period high.

• While employment increases in the Base Case range from 1% to 3%, the employment increases in the Low Production Case will reach just 1% in 2015, will decline to 0.4% in 2018, and will be at 1.6% in 2025.

• The net trade benefit of the Base Case peaks at $183 billion in 2022, while the benefits associated with the Low Production Case, at $92 billion, are less than half that of the Base Case.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2013 2015 2017 2019 2021 2023 2025


Change in Gross Domestic Product due to the Unconventional Activity Value Chain: Base Case versus Low Production Case*

0

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2013 2015 2017 2019 2021 2023 2025


Change in Disposable Income per Household due to the Unconventional Activity Value Chain: Base Case versus Low Production Case*2012 $





68 September 2013


• On average, disposable personal income per household will be roughly $2,600 higher in any given forecast year in the Base Case, compared with just $800 higher in any given forecast year in the Low Production Case.

• While the contribution of unconventional oil and gas to the US industrial production index in the Base Case ranges from 1.5% to 4%, the Low Production Case’s contribution will only reach 1.5% at its forecast high.


IHS 69

ConclusionUnconventional oil and natural gas activity is reshaping America’s energy future and bringing significant benefits to the US economy in terms of jobs, government revenues, and GDP. This study provides the foundation for a dialogue focused on the economic effects of this unconventional revolution. It does so by extending IHS’ original economic assessment to include the full value-chain associated with the unconventional revolution, including the benefits to midstream and downstream energy and energy-related chemicals activities. This complete analysis reveals how these profound developments are reshaping the US macroeconomic outlook and contributing to a manufacturing renaissance brought about by greater US competitiveness in world markets.

The full economic contribution from the unconventional oil and natural gas value chain and energy-related chemical manufacturing has added 2.1 million jobs in 2012, and that contribution will increase to almost 3.1 million by the end of the decade and almost 3.9 million in 2025.

The value chain’s annual contributions to GDP will nearly double, from almost $284 billion in 2012 to almost $533 billion in 2025. Government revenues will average $115 billion annually and will cumulatively grow by a total of more than $1.6 trillion from 2012 to 2025.

The revolution is also benefitting households across the country. In 2012, real household disposable income increased by more than $1,200. With 120 million households in the country, this equates to an aggregate annual boost of $163 billion. The benefits to US workers will continue to rise over the forecast horizon, from just over $2,000 in 2015 to more than $3,500 in 2025.

Equally impressive is the contribution to the manufacturing sector brought about by increasing unconventional oil and natural gas activity. This activity is making energy more affordable and abundant, creating competitive advantages for energy-intensive industries and industries that use natural gas as feedstock. And while a variety of factors have encouraged the renaissance currently under way in US manufacturing, our macroeconomic modeling demonstrates that the unconventional oil and natural gas revolution is playing a significant role.



Appendix A. Impact on the US Power Sector and Other Key US Manufacturing Sectors

Prepared by:

IHS Inc.1150 Connecticut Avenue NW, Suite 401

Washington, D.C. 20036

September 2013

ii September 2013


About IHS (ihs.com)





[email protected]




[email protected]




IHS iii

Project Directors



Project Team




• Russell Heinen, Senior Director, Chemical Research




Key Contributors





Acknowledgments


We would also like to thank the subject matter experts, technical experts, industry experts and analysts who also contributed to this study: Sam Andrus, John Anton, Miguel Goncalves, Daniel Lichtenstein, Kenneth Kremer, Charlie McCarren, Mike Montgomery, John Mothersole, Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, Mihaela Solcan, and Tom Runiewicz.

This report offers an independent assessment of the importance of unconventional oil and gas to the US economy. This research was supported by the American Chemistry Council, America’s Natural Gas Alliance, the American Petroleum Institute, the Fertilizer Institute, the US Chamber of Commerce – Institute for 21st Century Energy, the National Association of Manufacturers, the Natural Gas Supply Association, Rio Tinto, and the Society of the Plastics Industry. IHS is exclusively responsible for this report and all of the analysis and content contained herein. The analysis and metrics developed during the course of this research represent the independent views of IHS and are intended to contribute to the dialogue on the role of the unconventional oil and gas production in promoting employment, economic growth, and energy security.

iv September 2013


Table of Contents

Appendix A. Impact on the US Power Sector and Other Key US Manufacturing Sectors .................... 1Implications of the Unconventional Revolution for the US Power Sector ......................................... 1

Coal-to-Gas Displacement ................................................................................................................1Coal-Fired Generation Retirements ...................................................................................................3Additions of Gas-Fired Generation Capacity .....................................................................................4

Other Energy Intensive Industries ................................................................................................... 5Non-Durable Manufacturing ..............................................................................................................5Durable Manufacturing ......................................................................................................................7


IHS 1

Appendix A. Impact on the US Power Sector and Other Key US Manufacturing SectorsImplications of the Unconventional Revolution for the US Power Sector

In the past two decades, natural gas has been the only fossil fuel with an increasing market share in US power generation. The share of power generated by natural gas nearly doubled from 1991 through 2011, while market share for both coal and oil declined. Low cost and abundant shale gas reinforces this trend. The implications are game-changing for the power sector, shale gas is resetting the cost and environmental benchmarks for future additions to generation capacity and further increasing market share for existing natural gas-fired generators. In the near-term, coal-fired and natural gas-fired generators will jockey between themselves for market share—gas and coal typically compete at the margins in several US power markets when the price spread between them tightens. But by the middle of this decade, as coal-fired power generators are retired, natural gas generators stand to benefit. In the longer term, the favorable economics of natural gas relative to other generation alternatives will make it the fuel of choice as power markets begin to add capacity to service growing domestic electricity demand.

The advance of gas-fired power generation in the United States has been driven by three related market factors:

• First, lower natural gas prices ushered in by the revolution in unconventional oil and natural gas production have increased the direct competition between existing coal-fired and gas-fired generation assets. During the recent period of very low gas prices, the variable costs of many gas-fired power generators were below the costs of their coal-fired competitors, and gas-fired generators were able to increase their production and grab market share. This price competition is the principal driver of the coal-to-gas displacement that will be discussed in more detail below.

• Second, existing coal-fired assets are facing substantial environmental retrofit costs to comply with new environmental regulations. Owners of these older, less efficient plants, which have less remaining economic life, are finding asset retirement to be the better economic decision, and much of that lost energy generation is expected to be replaced by gas-fired generation.

• Third, the development of new coal-fired generation assets is being hindered by both economic and environmental regulatory forces. The higher capital costs for new coal-fired generation (compared to gas-fired generation), in combination with the narrowing of the price advantage for coal, has made natural gas an overwhelming economic choice for new generation resource development. Anticipated environmental regulations that are also limiting carbon dioxide (CO2) emissions provide a further regulatory hindrance to new coal asset construction.

Coal-to-Gas Displacement

In the past three years, power-sector demand for natural gas has grown significantly as low gas prices have greatly reduced the spread between gas and coal prices, making gas-fired generation increasingly competitive for electric dispatch. IHS estimates that between 2008 and 2011, gas demand for power generation increased by 3.8 billion cubic feet (Bcf) per day as a result of this coal-to-gas displacement.1 Natural gas prices in 2012 averaged a cyclical low of $2.75 per million British thermal units (Btu) for the year, the result of an abnormally warm winter, high production, and higher than normal natural gas storage inventories. This further tightened the spread between coal and natural gas prices, precipitating a more than doubling of coal displacement to an average 8.4 Bcf per day in incremental natural gas

1 We benchmark against 2008 because high natural gas prices kept coal-to-gas displacement at a minimum for that year.

2 September 2013


demand for 2012 compared with 2008. IHS estimates that the displacement of coal-fired generation also resulted in the power sector’s greenhouse gas (GHG) emissions falling in 2011 and 2012 to about 11% and 17% below 2005 levels, respectively.2

IHS Energy expects this coal displacement to gradually abate during 2013 as rising natural gas prices improve coal’s competitive position. With 2013 average Henry Hub pricing for natural gas expected to be at $3.72 per million Btu for the year, we expect coal displacement to revert to close to 2011 levels as gas prices begin to rise. This abatement is expected to be sustained in 2014 and 2015 as gas prices undergo a pricing cycle before settling in at around their full life cycle costs. In the longer-term, however, the power sector’s gas demand is expected to continue to grow steadily as existing coal-fired generators are projected to retire, electricity demand increases, and gas-fired generation retains its cost advantage over competing technologies.

2 See the IHS Energy Decision Brief Coal-to-Gas Displacement Produces a Sharp but Temporary Decline in US Power Sector CO2 Emis-sions.

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Source: IHS Energy

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Natural Gas Price

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Competitive Position of Coal Relative to Natural Gas in US Power Generation

Coal Increasingly Economic

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Natural Gas IncreasinglyEconomic

Coal Production RegionSource: IHS Energy

Competitive Position of Coal Relative to Natural Gas in US Power Generation

Source: IHS Energy


IHS 3

Coal-Fired Generation Retirements

For the existing fleet of coal-fueled generators, more stringent Environmental Protection Agency (EPA) restrictions on conventional air emissions (sulfur dioxide [SO2], nitrogen oxides [NOX], mercury, and other hazardous air pollutants), coal ash disposal, and cooling water use will force many coal plant operators to decide between investing in costly environmental upgrades and retiring coal units over the next few years. Facing these difficult and costly decisions about emission control retrofitting in the wake of cyclical low natural gas prices, many operators will be looking to shelve or completely retire some coal units. IHS estimates that more than 50 gigawatts (GW) of coal-fired generation capacity will be retired between 2011 and 2020. This accounts for roughly one-sixth of the existing coal fleet. These retired plants will generally be the smaller, older, and less efficient units that currently operate at reduced capacity. IHS estimates that, assuming that natural gas generation is replaces power previously generated by these retiring coal-fired units, incremental gas demand will average about 3.5 Bcf per day.

Coal Plants Regulatory ChallengesCoal Plants Regulatory Challenges

MATS(Mercury, etc.)

Apr 2015

2012 2013 2014 2016 20172015

Dec 2011( y, )

NSPS CO2 Apr 2012 2013*

RegionalHaze (PM, NOx, SO2)

2018

Cooling WaterIntake Structures 2014–282013

Coal Combustion Residuals 2013–14 2014+

NAAQS PM2 5** Dec 2012

ESPS CO2 2014 2016

CAIR Replacement(SO2 and NOX)

Aug 2012Struck down 2014 2015 2018

2018+

2020

NAAQS Ozone H2 2013 2014–15

Draft Final Compliance

QS 2.5 Dec 2012 2020

2022+

NOTES: *EPA’s NSPS for CO2 will apply to plants that begin construction 12 months after the proposal was released (i.e., April 2013).**PM2.5 = fine particulate matter (<2.5 microns). 30105-2Source: IHS Energy

Coal Plants Regulatory Challenges

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US Coal Retirements and Implications for Natural Gas Demand

Note: Gas demand is relative to 2011 coal-fired generation

Source: IHS Energy

4 September 2013


Additions of Gas-Fired Generation Capacity

Natural gas–fired generators have lower capital costs than most other types of new generation units and can often be built much more quickly, particularly when they’re compared to new coal and nuclear plants. IHS Energy expects natural gas-fired technologies to make up close to one half of all power generation capacity additions planned over the next decade. Further, the EPA is in the process of finalizing GHG performance standards for new generators. The proposed regulation targeting CO2 emissions from new fossil fuel-fired power plants includes an emission performance standard that effectively blocks the construction of conventional coal generators. However, the emissions limit was set to allow continued construction of natural gas-fired combined cycle generators (CCGT)—current CCGT technology is capable of achieving the performance standard without carbon capture and storage. The stringency level of the performance standard signals an acceptance of an ongoing role for natural gas in the power generation fuel mix and of the pre-commercial status of utility-scale capture and storage.

Natural gas-fired generators provide a flexible power source that can adapt to fluctuating power demand, maintain power system reliability, and back up the growing amount of generation available from intermittent renewable power resources. In addition, natural gas-fired combined cycle plants emit less than half the GHG emissions of coal-fired generators. IHS expects that gas-fired power plants will gradually erode coal’s share of the electricity generation mix. But despite the cumulative costs to the US coal fleet of meeting increasingly stringent environmental restrictions, most coal-fired plants will remain economic over the next two decades and in 2035 they will constitute about 23% of the

NRG Considering Three New Natural Gas-fired Power Plants in New York State

NRG Energy, a Fortune 500 company headquartered near Princeton, New Jersey, announced plans in April 2013 to construct at least one, and potentially two, new natural gas-fired electric generating plants to replace capacity if the Indian Point Nuclear power plant is retired.

NRG is expected to propose the construction of a combined cycle natural gas-fired plant that would replace oil and gas-fired units at its 580 megawatt (MW) Astoria plant in New York City. The proposed plant would cost up to $1.5 billion and would produce between 520 MW and 1,040 MW of electric power. NRG is also considering adding a 775 MW combined cycle natural gas-fired unit at its existing 1,139 MW Bowline oil and gas plant on the Hudson River, about five miles south of Indian Point. This facility would cost around $1 billion. Another facility under consideration would be a new natural gas-fired plant located at the site of the closed Lovett coal-fired plant on the Hudson River, also south of Indian Point.

These expectations of abundant long-term supplies of competitively priced natural gas from the Marcellus shale formation is the primary reason for NRG’s construction activity. NRG is also considering the three new plants in response to The New York Power Authority’s efforts to seek proposals for new power sources because of the potential shut down of the Indian Point nuclear power facility, located near New York City. The 2,037 MW Indian Point plant currently provides about 25 percent of the city’s energy supply.

0%

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1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

CoalGas/Oil

NuclearHydro

Wind Solar Other

US Power Generation Fuel MixTWh

Source: IHS Energy


IHS 5

US generation market. At the same time, utilities will be investing heavily in more combined-cycle gas turbines, and compared with current demand gas demand from the power sector is expected to double by 2035 in the US Lower 48 states. Power-sector gas consumption by itself will constitute about 47% of total US Lower 48 natural gas demand.

Other Energy Intensive Industries

The following subsection presents IHS’s analysis of the effect on selected energy-intensive industries where, directly or indirectly, natural gas prices influence the cost structure of the production process. Electricity represents a significant portion of the cost structure of industries like aluminum, steel and cement. However, in the case of fertilizer production, since natural gas is used as a feedstock, natural gas prices directly affect input costs for the fertilizer industry. 3

Non-Durable Manufacturing

Fertilizers

Around 80% of the cost of producing nitrogen-based fertilizers is associated with natural gas. It is predominantly used as a feedstock, but natural gas is also the common fuel source for manufacturing nitrogen-based fertilizers. Nitrogen is a plant nutrient, with the exception of some legumes that have the ability to fix nitrogen from the atmosphere and use it for plant growth. As part of the rapid expansion in food production capacity in the United States and around the world, the production of synthetic nitrogen has been essential to advancing crop yields and production.

The fertilizer manufacturing process is energy intensive and highly susceptible to changes in natural gas prices. The higher level of natural gas prices prior to the wide-spread development of shale gas considerably deteriorated the profitability of this industry.

Economies of scale inherent in the manufacturing process played an important role in the evolution of the competitive landscape in the United States, which promoted a consolidation process that resulted in considerable reductions in installed production capacity by 2006. Unable to compete with international prices, many small US-based producers shut down their operations or combined into larger manufacturing facilities. This caused a significant increase in market concentration, leaving a few players with control of most of the production.

Reductions in local supply, combined with strong demand due to record corn acreage levels and the positive economics of major crop production (corn, wheat, and soybeans), have put significant pressure on fertilizer prices while making the United States a net importer of this commodity. In the absence of sustained, inexpensive sources of feedstock and fuel, the market for fertilizers was characterized by reduced competition and highly volatile prices—a situation evident in the recent increases in prices for nitrogen-based fertilizer. Cheap sources of natural gas provide a competitive advantage to producers located close to the energy source, a condition that will determine the direction of trade as prices of this commodity are set in the international markets.

3 This analysis is limited to nitrogen based fertilizers.

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Index of prices paid by farmers for fertilizer (1990-92=100)US Natural Gas Wellhead Price ($US per Mcf)

Price of Fertilizers vs. Natural Gas

Source: NASS and Bureau of Labor Statistics

6 September 2013


Lower price levels for natural gas in the United States, sustained by the development of unconventional sources, have provided increasing profitability to local fertilizer manufacturers. Moreover, rigid production capacity has pushed up market clearing prices for fertilizers as demand expands to keep up with the production of agricultural products, further increasing profitability. Sustainable low natural gas prices in the future will trigger a significant increase of investment in the production capacity of fertilizers as more companies enter the market to take advantage of the increased profitability.

At the end of 2012, 26 companies were either building or expanding new nitrogen-related production capacity, with over 40 projects in different stages of development. This large amount of investment, sustained by abundant low-cost natural gas, will expand production and favor reduced prices and improved trade balances for this commodity—in addition to all of the benefits of increased economic activity and employment generation caused by falling energy prices as a result of the revolution in unconventional energy.

Food Processing

According to the 2010 Annual Survey of Manufactures data published by the US Census Bureau, the food manufacturing sector is one of the largest manufacturing sectors in the United States. The total value of food manufacturing shipments reached $646 billion, or 14.2% of total US manufacturing shipments, in 2010. Employment in the industry accounts for almost 13% of all employment in manufacturing.

Over the years, the US food manufacturing industry has been able to increase output by investing heavily in new technology and further automating its production processes. Between 1995 and 2010, total industrial food production increased by nearly 15% as the industry responded to increasing demand for prepared foods sold in grocery stores and restaurant and take-out food4.

4 The USDA Economic Research Service in its report, “Energy Use in the US Food System”, states that between 1997 and 2002 food processing showed the largest growth in energy as both households and foodservice establishments increasingly outsourced manual food preparation and cleanup activities to the manufacturing sector, which relied on energy using technologies to carry out these processes.

0

5

10

15

20

25

1995 2000 2005 2010 2015 2020 2025

Production Imports Exports

US Fertilizer Industry: NitrogenMillion product tons

Source: IHS Energy

Major Fertilizer Plant Proposed for Iowa

The Iowa Fertilizer Company, a subsidiary of Egypt-based Orascom Construction Industries, an-nounced plans in March 2013 to spend more than $1.3 billion to construct a nitrogen fertilizer manufacturing plant in Lee County, near the town of Wever, Iowa. According to Iowa Governor Terry Branstad, the proposed plant would be the largest private capital investment project in the history of the state.

The proposed plant will make ammonia and nitrogen fertilizers for sale to farmers located in the Mid-western United States, decreasing their dependence on fertilizer from suppliers located overseas. The economic benefits of the fertilizer plant include 2,000 jobs during the construction phase and 165 permanent jobs once it begins operating.


IHS 7

As the food manufacturing industry’s reliance on machinery has increased, it has also become more energy intensive. According to the US Energy Information Administration’s Annual Energy Outlook 2012, energy demand by the food processing industry is expected to grow at an average annual rate of 1.5% between 2010 and 2035.5 With the US population growing larger and with more demands on personal time, the demand for greater output of processed foods will push the industry to expand capacity.

Natural gas is the food manufacturing industry’s largest source of energy, accounting for more than half of all of the industry’s energy sources. Lower and more stable natural gas prices will help future development of the US food processing industry. Over the decade preceding the boom in unconventional energy production, escalating fossil energy prices created significant concerns for US food manufacturers. However, the advent of hydraulic fracturing technologies has opened up new opportunities for reducing and stabilizing natural gas prices. As the increase in domestic natural gas production continues to reduce US reliance on imported fuels and diminishes the risk of external energy price shocks, the US food manufacturing industry will face lower costs for their input materials and will be more able to expand capacity to meet growing consumer demand.

Durable Manufacturing

Aluminum

Aluminum production is electricity-intensive, because electricity is inherent in the chemical process required to produce it. As a result, primary aluminum smelters tend to be situated in countries where electric power is both plentiful and inexpensive, such as the Gulf States, Quebec, Iceland and Norway.6 Electricity represents 26% of the cost of producing aluminum in the United States, and about 5% of all the electricity generated in this country is consumed by the aluminum industry.

There has been a slow decline in US primary aluminum production over the past 30 years. It is conceivable that lower US natural gas prices could potentially slow or even halt this decline. However, given a number of challenges facing the industry, it is unlikely that substantial new upstream investment will be forthcoming and, it is difficult to see more than a check in its long-term decline. There are four reasons for this outlook.

5 http://www.eia.gov/forecasts/aeo/pdf/0383(2012).pdf (page 71)6 Saudi Arabia, the United Arab Emirates and Qatar use excess natural gas supplies to fuel power generation while Iceland, Quebec and Norway employ geothermal and hydroelectric energy generation processes, respectively.

0%

62%

1%

10%4% 0%

23%

Liquefied Petroleum GasesNatural GasDistillate Fuel OilSteam Coal

RenewablesResidual Fuel OilPurchased Electricity

Food Industry Energy Consumption: 2012

Source: EIA Annual Energy Outlook 2013

23%

44%

3% 3%

26%

Labor

Materials

Services and Contractors

Natural Gas

Electricity

US Primary Aluminum Current Average Cost Structure

Source: IHS Energy

http://www.eia.gov/forecasts/aeo/pdf/0383(2012).pdf

8 September 2013


First, although lower natural gas prices in North America have helped to change the economics of primary aluminum production, this is not likely to be enough to tip choices for plant locations in the region’s favor as it has in other manufacturing industries. Decisions to site new smelting capacity today are made with a global perspective based almost entirely on cost. Even if natural gas prices are so attractive as to become competitive with coal-fired generation, this still indicates an energy cost profile for potential US smelting capacity that is at best on par with potential investments overseas. In most cases, though, electricity prices even from dedicated, lower-cost gas-fired generation are not competitive with hydro-electric generation. Without a compelling cost advantage, the added environmental hurdles that a US project would likely face point to a relatively lackluster climate for new investment.

Second, the breakdown of the aluminum industry’s vertically integrated business model works against expansions of primary smelting capacity in the United States. Global mining companies have successfully leveraged the higher value added function of iron ore production to the detriment of basic steel making profitability. This same phenomenon is now pushing aluminum companies toward a horizontal structure, with producers increasingly specializing in either the upstream or downstream segments of the industry. Traditionally, the processing of bauxite ore, alumina refining, primary smelting and even downstream product fabrication were carried out by the same vertically integrated organization7. For example, companies often treated bauxite and alumina costs as internal transfer prices. Alumina prices, for instance, were generally set as a function of the price of primary aluminum, which ranged historically between 12% and 16% of prices on the London Metal Exchange (LME).

The third impact on aluminum manufacturing has been the industry’s globalization and commoditization. The broad adoption of the LME aluminum contract in the 1980s, coupled with the entry of Russian producers into the global market in the 1990s, helped commoditize the business of making aluminum and reduced its attractiveness. The final straw was the growth in Chinese alumina imports between 1995 and 2005. This development created a large independent market for alumina outside of the industry’s traditional production chain, creating a strong profit motive in the upstream segment of the industry. The end result has been that the price of alumina, as a percentage of the price of primary aluminum, has been moving toward 18%, a change that is eroding the profitability of primary smelting.

Finally, labor costs in the US aluminum industry are too high, relative to other countries. US labor costs are either on par with, or slightly higher than, those in Canada or Europe, 25% higher than in Australia, more than double those in Brazil, four times the level of those in the Middle East, and more than five times greater than they are in China, India, and Africa.

Together, these factors—no clear advantage in electricity prices, the commoditization of primary aluminum, and higher relative alumina and labor costs—make it unlikely that significant investments in domestic primary aluminum production will be forthcoming. No Greenfield capacity has been built in the United States since the early 1970s, and as much as 1 million metric tons of the rated capacity that is currently idle will probably never be restarted.

Brownfield expansions are possible. Here, however, the relatively small size of the US units, in combination with the relatively poor economics of primary smelting, argue for investing in higher value-added downstream markets. These markets, which are closer to end-users where quality is important and allow for product differentiation, can capture more value. The bottom line is that lower natural gas prices can only partially offset the migration of the US primary aluminum industry up the global cost curve. The US is currently not an attractive location for new smelting capacity and it not likely to be even with lower natural gas prices.

7 The production of aluminum metal progresses through several stages beginning with the mining of bauxite. Bauxite is then refined into alumina which is then smelted to produce primary aluminum.


IHS 9

Cement

Cement production requires large amounts of energy to drive the chemical reactions that occur inside a kiln. The common energy sources in US cement production are coal and electricity. Coal is used to heat the kiln and the feedstock, while electricity powers the stone crushers and grinders, the control systems, and the kiln’s motor. According to the 2011 Annual Survey of Manufactures, the combined cost of purchased fuels and electricity accounted for 46% of the total cost of materials used in the cement manufacturing process. The split in the industry’s spending on energy is split fairly evenly between fuels and electricity, at 54% and 46%, respectively. Looking at energy’s role in the cost of cement production, energy accounts for between 25-30% of total costs. Although cement manufacture is a highly energy-intensive industry, low natural gas prices will have a fairly limited impact on cement production in the coming years. There are two reasons for this.

First, the decision of which fuel to use to heat the kilns is not limited to simply coal versus natural gas. For decades, cement plants have used alternative kiln fuels, which have ranged from industrial waste to tires. In several cases, cement plants are actually paid to incorporate these fuels into their production processes. More often, the plants acquire these waste fuels at little or no cost. This minimal cost profile often offsets the cost of installing the equipment required to handle these alternative fuels. So even though natural gas may be a cheaper energy input than coal, it is competing with other alternative fuels that are even less expensive. This is one reason the use of natural gas in cement plants has remained fairly steady over the last decade. According to the US Geological Survey, the cement industry consumed 14.02 Bcf of natural gas in 2001. By 2011, that had fallen 4%, to 13.45 Bcf. At the same time, the amount of waste fuels consumed has increased considerably. Tire use rose from 300,000 metric tons in 2001 to 320,000 metric tons in 2011. Solid waste fuel use jumped from 320,000 metric tons to 699,000 metric tons during that period. Finally, liquid waste fuel consumption rose 32.7%, from 829,000 liters in 2001 to 1.1 million liters in 2011.

A second consideration is the cost of converting cement kilns so that they are more reliant on natural gas than coal during the calcination process8. The combustion of natural gas creates far more gas molecules than are created by coal when trying to achieve the same temperature levels. Since all of the raw materials and combustion gases must be contained within the kiln, relying primarily on natural gas as a kiln fuel requires larger kilns to produce the same tonnage of clinker. Given the fact that a new cement plant can cost upwards of $150 million, with the kiln accounting for a significant fraction of that cost, the energy savings would have to be significant to compel cement manufacturers to absorb these conversion costs if they want to take advantage of lower natural gas prices. The fragile state of nonresidential construction markets in the United States, which has weighed heavily on cement demand in the past five years, makes any large capital expenditure even less appealing.

One way in which lower natural gas prices will benefit cement manufacturers is in the industry’s electricity spending. This is where we would expect the impact of the North American natural gas revolution to have its largest impact.

Flat Glass

Flat glass is a product of the float glass manufacturing process that is commonly used as a construction material and automotive component. The flat glass industry is a highly energy intensive. The materials required to manufacture flat glass include silica, limestone, soda ash, dolomite and glass cullet (recycled glass). These materials are fed into a furnace, which melts them at temperatures of 2,700°F and above. The furnace itself is typically fired with natural gas and superheated air or waste gases. Once the materials have melted, the molten glass leaves the furnace and flows onto a bath of molten tin, where

8 Calcination is the process that occurs within the cement kiln whereby the raw cement mix is heated to a sintering temperature, which initi-ates a series of chemical reactions that transform the original mix into cement clinker.

10 September 2013


it gradually cools and spreads out into a ribbon. Due to the high operating temperatures of the furnace, most float lines run continuously for years on end.

The threat of cheap imports coupled with weak nonresidential construction markets have weighed on US flat glass manufacturers for years. Given the important role that natural gas plays in heating the furnace, gas prices should provide some relief to a struggling industry. However, it will not result in a sudden renaissance in US based glass manufacturing.

Fuel and energy costs combined account for around 26% of the total cost of materials consumed by the glass-making industry, and most flat glass facilities are already outfitted to operate on natural gas. Gaining a competitive edge on pricing relative to imports will hopefully lead to an uptick in US based flat glass production, but a lower energy bill will not be enough to incentivize new plant construction.

Although end market demand is expected to gradually improve as the recovery in construction markets slowly spreads to the nonresidential segment, capacity utilization rates for the glass manufacturing industry domestically are well below ideal operating rates. According to the Federal Reserve Board, capacity utilization for the nonmetallic minerals industry—of which glass manufacturing is a major component—stood at 58.9% of total existing capacity in March 2013. In our opinion, lower natural gas prices may give a boost to manufacturers’ profits but will not lead to a surge in new capacity additions.

Steel

Steel production can be classified by the type of furnace technology and by the mix of input material. In the US, two primary methods are used:

• Basic Oxygen Furnace (BOF): This process uses 5-25% of scrap steel to make new steel, the balance of which is iron ore. The heat source is metallurgical coal. BOFs make up approximately 40% of today’s US steelmaking.

• Electric Arc Furnace (EAF): This process uses recycled steel to make new steel. The heat source is electricity. EAFs make up about 60% of today’s US steelmaking.

Natural gas has a low impact on the steel industry. Electricity generation makes up a relatively minor share of total production costs for both production methods, so shifts in electricity prices generally have a negligible impact on costs. The area where natural gas prices does hold the promise of lowering the production cost curve is through a shift in the production method toward a third process: greater use of Direct Reduced Iron (DRI). The DRI process involves the production of highly refined iron—typically greater than 90% iron content compared to the typical content of iron ore in the United States used in either BOF or EAF, which is around 40% iron.

Various companies in the United States have announced plans to build DRI plants. If all of these plants are built, they will add 10 million short tons per year of capacity by 2017, and another 10 million by 2020. Nucor’s Midrex plant is expected to use 8.9 MMBtu (an MMBtu is equal to 1 million British Thermal Units) of natural gas per ton of DRI. Based on that, Nucor’s 20 million additional tons of DRI implies 178 MMBtu of added natural gas demand by 2020.

DRI technology is attractive in any location with low natural gas prices and easy access to iron ore, whether domestic or imported. DRI is important and capacity is likely to grow in Saudi Arabia, Iran, and possibly Venezuela, but no location is as attractive as the United States due to the unique combination of large amounts of cheap natural gas and the world’s third-largest steel industry.

Outside of capacity expansions, the US steel industry has been fairly stagnant. The recovery to pre-recession levels of production remains in the distance. Demand from the automotive sector has been the strongest of the major market segments in recent years, but growth rates are slowing. We believe


IHS 11

that the construction industry, especially the steel-intensive non-residential construction market—including construction that results from the unconventional oil and gas value chain—will offer tepid growth in the short term and could hold more promise in the long term. Full recovery for the steel industry remains in the distance on a tonnage basis, but the increasing use of natural-gas intensive DRI facilities will lower industry costs and improve long-term competitiveness, providing a long-term opportunity for the industry.

In summary, the currently low and stable trajectory of natural gas prices and the associated savings in electricity costs are providing benefits across the manufacturing sector. The opportunity to take advantage of these potential benefits would never have existed without the development of unconventional energy. In addition to the benefits discussed elsewhere in this report for midstream and downstream energy and related chemicals, which are experiencing increased investment and production in the United States, the competiveness of selected domestic manufacturing industries will also be enhanced.

Tenaris and Borusan-Mannesman to Build Steel Pipe Manufacturing Plants in Texas

In February 2013, Tenaris, a global manufacturer of steel pipe products used for drilling by the energy industry, announced plans to construct a 1 million square foot steel pipe production facility in Matago-rda County, on the Gulf Coast south of Houston. The proposed plant will require a total capital invest-ment of $1.3 billion and is expected to create 600 new permanent jobs once it begins operating. The proposed plant will include a state-of-the-art seamless pipe mill, heat treatment and premium thread-ing facilities. The mill is expected to have an annual capacity of 600,000 tons of pipe.

Borusan Mannesmann Pipe, a Turkish-owned steel pipe maker, will expand its US operations by constructing a steel pipe production facility in Baytown, north of Houston. The proposed plant will require a capital investment of $148 million and is expected to create 250 permanent operating jobs. Borusan Mannesmann’s steel pipe is used in oil and gas drilling and transmission, and the company currently produces about 1 million tons of steel pipe products annually. The Baytown facility will produce some 300,000 tons of steel pipe annually, primarily for casings used to secure oil wells and tubing to extract gas and oil from the ground.

America’s New Energy Future:The Unconventional Oil and Gas Revolution andthe US Economy


Appendix B. Production and Capital ExpenditureMethodology and Outlook – Midstream and DownstreamEnergy and Energy-Related Chemicals

Prepared by:



September 2013

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US EconomyVolume 3: A Manufacturing Renaissance – Appendix B

IHS i

About IHS (www.ihs.com)

IHS (NYSE: IHS) is the leading source of information, insight and analytics in critical areas that shape today’sbusiness landscape. Businesses and governments in more than 165 countries around the globe rely on thecomprehensive content, expert independent analysis and flexible delivery methods of IHS to make high-impactdecisions and develop strategies with speed and confidence. IHS has been in business since 1959 and became apublicly traded company on the New York Stock Exchange in 2005. Headquartered in Englewood, Colorado, USA,IHS is committed to sustainable, profitable growth and employs approximately 8,000 people in 31 countriesaround the world.

For more information, contact:

Richard F. FullenbaumVice President, Public Sector Consulting, IHS

[email protected]

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[email protected]

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[email protected]

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[email protected]

COPYRIGHT NOTICE AND LEGAL DISCLAIMER© 2013 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form withoutprior written consent, with the exception of any internal client distribution as may be permitted in the licenseagreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legalnotices and attributions of authorship. The information contained herein is from sources considered reliable but itsaccuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and tothe extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expenseincurred by reliance on information or any statement contained herein. For more information, please contact IHSat [email protected], +1 800 IHS CARE (from North American locations), or +44 (0) 1344 328 300 (fromoutside North America). All products, company names or other marks appearing in this publication are thetrademarks and property of IHS or their respective owners.

mailto:[email protected]





IHS ii

Project Directors

John W. Larson, Vice President, Economics and Public Sector Consulting

Richard Fullenbaum, Vice President, Economics and Public Sector Consulting

Project Team

Tabitha M. Bailey, Director, Economics and Public Sector Consulting

Mohsen Bonakdarpour, Managing Director, Economics and Public Sector Consulting

James Fallon, Director, Downstream Consulting

Russell Heinen, Senior Director, Chemical Research

Bob Ineson, Senior Director, Energy Research

Andrew Slaughter, Vice President, Energy Insight

Mark Wegenka, Managing Director, Chemical Consulting

Key Contributors

Patty DiOrio, Senior Research Manager; Coal, Gas, Power & Renewables Research

Bob Flanagan, Director, Economics and Public Sector Consulting

Mark Griffith, Research Director; Coal, Gas, Power & Renewables Research

Patrick Thomson, Senior Consultant, Economics and Public Sector Consulting

Acknowledgments

We extend our appreciation to our internal Advisory Board, which consists of IHS ViceChairman Daniel Yergin, IHS Senior Vice President James Rosenfield, and IHS ChiefEconomist Nariman Behravesh. They offered critical insight, guidance and support in reviewingthe methodologies and findings from this study.

We would also like to thank the subject matter experts, technical experts, industry experts andanalysts who also contributed to this study: Sam Andrus, John Anton, Miguel Goncalves, DanielLichtenstein, Kenneth Kremar, Charlie McCarren, Mike Montgomery, John Mothersole,Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, Mihaela Solcan, and TomRuniewicz.

This report offers an independent assessment of the importance of unconventional oil andgas to the US economy. This research was supported by the American Chemistry Council,America’s Natural Gas Alliance, the American Petroleum Institute, the Fertilizer Institute, theUS Chamber of Commerce – Institute for 21st Century Energy, the National Association ofManufacturers, the Natural Gas Supply Association, Rio Tinto, and the Society of the PlasticsIndustry. IHS is exclusively responsible for this report and all of the analysis and contentcontained herein. The analysis and metrics developed during the course of this researchrepresent the independent views of IHS and are intended to contribute to the dialogue on therole of the unconventional oil and gas production in promoting employment, economicgrowth, and energy security.


IHS iii

Table of Contents

Appendix B. Production and Capital Expenditure Methodology and Outlook – Midstream andDownstream Energy and Energy-Related Chemicals .............................................................. 1

Midstream and Downstream Energy....................................................................................... 1

Energy-Related Chemicals ..................................................................................................... 3

Data Sources and Methodology .......................................................................................... 3

Supply/Demand Balances ................................................................................................... 4

Capacity.............................................................................................................................. 4

Production........................................................................................................................... 5

Imports and Exports ............................................................................................................ 5

Chemical Capacity Growth Analysis.................................................................................... 5

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US EconomyVolume 3: The Manufacturing Renaissance – Appendix B

IHS 1

Appendix B. Production and Capital Expenditure Methodologyand Outlook – Midstream and Downstream Energy and Energy-Related Chemicals


In developing a capital investment forecast for the seven segments of the midstream anddownstream sectors related to unconventional oil and natural gas, a consistent evaluationmethodology was applied, with adjustments made to specific conditions unique to eachsegment. For each segment, a zero-based, project-by-project build-up of announced and “likely”investments was developed using public information that was provided by companies andinvestment groups within the industries. Likely investments were defined as those needed, inIHS Energy Insight’s view, to meet product demand either nationally or globally. For eachindividual line item, a screening level capital investment was developed using IHS proprietarymethodology. Capital investments were then distributed across a typical project schedule foreach category of project. The forecast timeframe covers 2012 through 2025.

The capital investment forecast was calibrated to our prior study, America’s New Energy Future:The Unconventional Oil and Gas Revolution and the US Economy, as well as to the natural gas,natural gas liquids (NGLs), and crude oil production forecasts. It was further refined based onthe dynamics of each industry segment.

For example, IHS forecast for crude oil production from shale oil formations in 2025 is projectedto increase by 2.5 million barrels per day over 2012 production levels. This additional productionwill largely displace non-structural light sweet crude oil imports into the United States.1 Asindividual US refineries are configured to process different grades of crude oil, the additionalproduction activity will largely impact less complex sweet crude refineries. 2 IHS forecasts thatthe increase in light sweet crude oil production will be significant enough to begin to displaceimported light sour crude oil, which typically requires processing in more complex facilities. Onlya handful of refinery projects have been announced; however, based on IHS forecasts ofproduction volumes, it is a reasonable to assume that another 6-10 projects will be initiated toimprove the flexibility of complex refineries to process the growing volumes of light sweet crudeoil. In cases such as this, unidentified “placeholder” projects were incorporated into IHS’ capitalexpenditure forecast.

Using this methodology, there is inherently more certainty for expected capital expenditures inthe first half of the forecast period (2012-2017) than in the second half of the forecast period(2018-2022). This was expected and is in alignment with the standard corporate planning cycle.After reviewing announced projects, a key conclusion reached by IHS is that for the midstreamand downstream segments the capacity necessary for anticipated peak production will havebeen largely constructed by the end of the first half of the forecast period. With that in mind, andgiven the lack of project definition for the latter years of the forecast period, IHS has factoredinto its forecast and estimation methodology a combination of declining residual investment for

1 Light crude oil refers to crude oil with an API gravity (density) greater than or equal to 28, heavy crude oil refers to crude oil with anAPI gravity less than 28. Sweet crude oil refers to crude oil with a sulfur weight concentration less than 1 percent, sour crude oilrefers to crude oil with a sulfur concentration greater than or equal to 1 percent.

2 The conversion of heavy sour crude oil requires more processing intensity and equipment, this is typically referred to as conversioncapacity or complexity.


IHS 2

growth capital projects and sustaining capital, for the investments constructed in the front half ofthe forecast period,.

Within each midstream and downstream segment, the capital forecast is further detailed basedon typical allocation categories for a given project type: steel, process equipment (pumps,compressors, heat exchangers, etc.), civil construction (earth works and concrete), electricaland instrumentation, erection labor, and engineering and project management. For example, apipeline project will have a higher percentage allocation to steel and civil construction, while aliquefied petroleum gas (LPG) fractionator will have a higher percentage allocation to processequipment and engineering.

The IHS Energy Insight team has researched the capital requirements necessary to supportunconventional oil and natural gas activity. The midstream elements consist of natural gas,NGL, and oil pipelines and storage, while the downstream elements include natural gasprocessing plants, LPG and NGL processing, and refineries. The following tables present thedetailed capital expenditures outlook for midstream and downstream energy for the US and thefour Census regions.

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

LNG Processing 502 3,236 5,533 8,449 6,211 3,471 3,119 2,421 1,279 685 651 618 587 558 37,319

NG Processing 6,291 5,425 4,185 2,583 2,131 1,984 1,025 879 835 793 753 716 680 646 28,925

NG Logistics 8,871 9,148 7,222 5,084 3,069 4,295 5,065 3,545 2,244 3,608 3,560 4,045 3,994 2,315 66,065

NGL Processing 3,510 3,912 2,109 928 835 742 649 557 529 502 477 453 431 409 16,046

NGL Logistics 4,507 3,429 2,286 1,230 1,036 948 811 697 581 548 516 486 456 434 17,964


Crude Oil Logistics 5,199 7,590 8,272 5,960 2,742 2,635 1,812 1,519 1,206 1,046 885 834 785 746 41,233

Total 28,987 33,412 31,102 26,117 17,615 14,855 13,179 9,938 6,963 7,439 7,068 7,345 7,117 5,282 216,418


Source: IHS Energy

(Current $M)

Midstream and Downstream Energy Capital Expenditures: United States

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

LNG Processing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NG Processing 1,253 1,163 977 524 306 272 238 204 194 184 175 166 158 150 5,965

NG Logistics 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NGL Processing 551 669 467 164 148 131 115 99 94 89 85 80 76 72 2,841

NGL Logistics 323 510 339 155 119 108 93 80 67 63 59 56 52 50 2,072

Crude Oil Processing 36 200 462 351 83 0 64 53 48 42 37 32 30 29 1,466

Crude Oil Logistics 1,478 2,339 2,932 2,206 793 677 560 487 391 338 284 271 257 245 13,257

Total 3,641 4,880 5,176 3,399 1,449 1,189 1,070 923 793 716 640 605 574 545 25,601


Source: IHS Energy

(Current $M)

Midstream and Downstream Energy Capital Expenditures: Midwest Census Region

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

LNG Processing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NG Processing 612 352 337 154 114 101 88 76 72 68 65 62 59 56 2,215

NG Logistics 300 470 273 47 0 171 511 448 122 223 525 703 707 193 4,690

NGL Processing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NGL Logistics 306 632 471 160 140 128 110 94 79 74 70 66 62 59 2,449

Crude Oil Processing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Crude Oil Logistics 261 787 1,300 2,427 1,365 569 283 313 247 215 182 171 159 151 8,430

Total 1,478 2,242 2,381 2,787 1,619 969 992 931 519 580 842 1,001 986 458 17,785


Source: IHS Energy

(Current $M)

Midstream and Downstream Energy Capital Expenditures: West Census Region


IHS 3


This section outlines the methodology and assumptions used to develop the energy-relatedchemicals data contained in this study and defines the key terminology used.

Data Sources and Methodology

The energy-related chemicals data used in this study come from the following IHS databases:

o IHS Chemical's Supply/Demand Database which includes:

Historical and forecast production for every producing country and region and aglobal total;

Historical and forecast trade (imports/exports) for every country and region; Historical and forecast operating rates for every producing country, region and a

global total; Historical and forecast demand for every consuming country, region and a global

total; Historical and forecast base year inventory change for every country, region and a

global total; Historical and forecast growth rates for capacity, production, trade and demand.

o IHS Chemical's “Commercial Analysis and Planning System” (CAPS), acontinuously updated, proprietary capacity database, which includes:

Historical and forecast production capacities for every country and company, Historical and planned capacity expansions, closures and name changes, Capacity integration tables, by site, for every country and company, Top production/consumption and surplus/deficit lists by company or shareholder, Company ownership and shareholder or subsidiary data.

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

LNG Processing 502 3,236 5,533 8,449 6,211 3,471 3,119 2,421 1,279 685 651 618 587 558 37,319

NG Processing 4,169 3,558 2,687 1,831 1,643 1,551 646 554 526 500 475 451 428 407 19,424

NG Logistics 4,498 5,705 6,153 4,951 3,059 4,124 4,435 2,863 2,050 3,385 3,035 3,342 3,287 2,122 53,011

NGL Processing 2,835 3,120 1,610 736 663 589 515 442 420 399 379 360 342 325 12,734

NGL Logistics 3,818 2,177 1,401 888 753 689 590 506 423 399 375 353 332 315 13,018


Crude Oil Logistics 3,245 4,039 3,637 928 115 828 685 595 476 412 347 330 314 298 16,249

Total 19,138 22,306 22,055 19,315 13,952 12,032 10,623 7,648 5,414 5,993 5,450 5,615 5,444 4,171 159,155


Source: IHS Energy

(Current $M)

Midstream and Downstream Energy Capital Expenditures: South Census Region

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

LNG Processing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NG Processing 257 351 184 75 68 60 53 45 43 41 39 37 35 33 1,322

NG Logistics 4,074 2,973 796 86 10 0 119 234 72 0 0 0 0 0 8,364

NGL Processing 124 124 33 27 24 22 19 16 16 15 14 13 13 12 471

NGL Logistics 60 110 74 28 24 22 19 16 14 13 12 11 11 10 425

Crude Oil Processing 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Crude Oil Logistics 215 425 403 399 469 561 284 123 92 82 72 63 55 52 3,297

Total 4,729 3,983 1,490 616 595 666 494 435 237 150 137 125 113 108 13,877


Source: IHS Energy

(Current $M)

Midstream and Downstream Energy Capital Expenditures: Northeast Census Region


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o IHS Chemical's Price Database, which is updated weekly, includes:

Historical pricing for each product for each major regions of the world; A monthly forecast for each product through 2014 and annual forecast to 2035.

These IHS databases derive from various sources. Basic capacity data has evolved over aperiod of years and is updated as changes occur. This information is periodically verified indiscussions with representatives of the companies listed in the capacity tables during personalvisits to their offices or meetings at other venues. The statistics on production, imports andexports for several of the larger industrialized countries are generally obtained from governmentsources or trade associations. IHS Chemical has formed opinions by utilizing industry-basedestimates to complement the data for countries that are smaller in market size or areproblematic to analyze. IHS Chemical personnel from around the world also meet withcompanies known to have business activities in areas where data can be difficult to obtain orrequire further verification. Where there are known or suspected inconsistencies or errors inpublished data, corrections are made using IHS Chemical’s best estimates. As a result, thematerials and analyses presented in these reports are strictly the opinions of IHS Chemical andare based on publicly available information or on assessments by IHS Chemical staff.

Supply/Demand Balances

IHS Chemical generates its projections of chemicals supply and demand, prices and margins,uses IHS Global Insight’s economic growth projections for at least 20 years into the future. Theenergy-related chemicals data used in this study cover a 14-year forecast period. Furthermore,the demand forecast incorporates the impact of economic growth (defined as growth in grossdomestic product, or GDP), as well as end-use industry projections obtained from IHS GlobalInsight. Capacity projects typically have planning and construction lead times of about three tofive years. However, IHS Chemical has provided its opinion of capacity additions beyond thatfive-year horizon, shown as “hypothetical capacity” in the supply/demand tables.

Due to the rapidly changing business environment in the chemical industry, it is difficult tocapture the most up-to-date dynamics in the marketplace. Therefore, it is important to use thisdata properly. In presenting projections of future capacity, trade, supply and demand volumes,we use what we believe to be the most probable future scenarios as of the date of publication.The most likely or probable case is, of course, sensitive to alternative assumptions.Furthermore, market conditions change constantly.

Capacity

The production capacity data used in the supply/demand balances and presented in thecapacity tables are snapshots from the IHS Chemical’s database. These capacity figuresrepresent the annual nameplate or rated production capability of a unit, excluding the effects ofscheduled maintenance outages or turnarounds. Therefore, when a facility is shut down or runsat reduced operating rates for maintenance, inventory control, or other business reasons, noadjustment in capacity is shown. Likewise, the number of days each unit is out of service duringplanned or unplanned outages can vary greatly from year to year. Production units can alsoexceed their nameplate capacity for short periods of time. When changes in capacity areoccurring during a particular year, the numbers in the capacity tables are shown on a pro-ratedbasis. For example, if a new unit with a nameplate capacity of 100,000 metric tons per year isexpected to begin operation in early October, then the number shown for that year would be25,000 metric tons and the capacity for the following full year of operation would be 100,000metric tons. No attempt is made to adjust the capacity downward in early operating years to


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reflect any start-up difficulties that may occur. Units that are dismantled are removed from futureyears.

Production

Historical production volumes for energy-related chemical products in this study are generallyobtained from government sources or trade associations. IHS Chemical has formed opinions byutilizing industry-based estimates to complement data for countries with smaller markets or thatare problematic to analyze. Future production is based on IHS Chemical forecasts of theamount of product that must be produced for any given year to meet the anticipated demandarising from direct domestic consumption or exports (if any). Future production levels areadjusted to reflect changes in anticipated operating rates due to capacity additions or the levelof imports coming into the country. Production levels, therefore, reflective the amount ofcapacity available to produce the products in question, as well as the competitive position of thecountry under study, with low-cost producers generally being given export preference.

Imports and Exports

IHS Chemical includes imports and exports as important components of supply/demandbalances. Some trade flows are between countries in the same region. Note that regional importand export totals are the sum of all national trade volumes and include shipments to countrieswithin the same region. The difference between imports and exports is the net trade position ofa country or region, and this is represented in export terms, so that net exporters show apositive net trade balance and net importers show a negative net trade balance. IHS Chemicalutilizes global cost curves and other competitive production analyses to determine eachcountry’s export position or the amount of imports that will likely enter a country in any givenyear. During periods of global surplus capacity, preference is given to low-cost producers, whichwill prevail in more competitive international markets.

Chemical Capacity Growth Analysis

An analysis of the growth in chemicals capacity starts with announced and anticipated capacityadditions generated by the World Supply/Demand forecasts performed by IHS Chemical, whichwere recently updated for this analysis. We isolated the capacity that is being added due to costadvantages that currently exist, and we forecast the cost advantages to remain in place for theentire forecast period. A cost advantage results from lower input costs relative to the rest of theworld and are tied either directly or indirectly to reductions since 2008 in prices for natural gasand associated gas liquids relative to oil prices. Using this as the basis of screening, weidentified 32 chemical products, which are experiencing capacity increases almost solely due tothe shale gas impact of the US competitive position relative to the rest of the world.


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For the affected sectors of the chemical industry, IHS Chemicals has estimated the capacityexpansion and production increases due to the unconventional oil and gas revolution. All of theannounced and expected plant expansions are compiled at the state level and divided into fourCensus regions – Northeast, South, Midwest, and West – and then consolidated at the nationallevel. Expected production increases are provided for nine categories: Acrylics, NitrogenFertilizers, Chlor-alkali, Olefins, Polyolefins, Vinyls Chain, Glycols Chain, Methanol Chain, andAromatics Chain. The following tables present the detailed value of production and capitalexpenditures outlook for energy-related chemicals for the US and the four Census regions.

Acrylic Acid Linear Alpha Olefins

Acrylonitrile Linear Low Density Polyethylene

Ammonium Nitrate Diphenylmethane Diisocyanate (MDI)

Ammonia Mono Ethylene Glycol

Aniline Methanol

Butadiene Methyl Methacrylate

Caustic Soda MTBE

Chlorine Nitrobenzene

Diethylene glycol (DEG) Polyethylene Glycol

Ethylene Dichloride (EDC) Polypropylene

Ethoxylates Propylene

Ethylene Oxide Propylene Oxide

Ethylene Polyvinyl Chloride (PVC)

Formaldehyde Triethylene Glycol (TEG)

High Density Polyethylene Urea

Low Density Polyethylene Vinyl Acetate


Chemical Products Impacted by Unconventional Gas*

Note: *The products impacted by unconventional gas are either produced

from unconventional gas, or from natural gas liquids produced with

unconventional gas, or use electricity produced in power plants sourced by

unconventional gas.

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

Value of Production

Acrylics 114 116 117 329 540 631 720 732 744 995 1,254 1,479 1,505 1,531 10,807

Nitrogen Fertilizers 333 526 686 697 2,128 3,641 4,838 4,919 5,003 5,981 6,087 6,194 6,302 6,411 53,747

Chlor-alkali 386 773 1,406 1,428 1,451 1,475 1,500 1,525 1,551 1,578 1,606 1,635 1,663 2,094 20,072

Olefins 28 203 302 436 802 1,256 1,738 2,661 3,720 4,019 5,194 5,285 5,455 5,890 36,990

Polyolefins 174 214 329 1,469 5,260 12,681 18,876 21,623 24,221 27,745 31,429 31,980 33,579 34,875 244,455

Vinyls Chain 112 114 146 705 1,176 2,043 2,540 3,792 4,706 5,610 6,554 6,669 7,759 7,969 49,893

Glycols Chain 378 384 688 731 743 2,525 2,600 2,693 3,648 4,068 4,140 4,212 4,286 4,360 35,457

Methanol Chain 170 435 1,179 1,914 2,782 4,104 4,174 4,824 5,041 5,264 5,358 5,452 6,122 6,524 53,342

Aromatics Chain 0 0 0 0 0 15 57 58 59 60 61 62 106 108 587

Total Value of Production 1,695 2,765 4,854 7,709 14,883 28,371 37,042 42,827 48,694 55,320 61,683 62,968 66,777 69,761 505,350

Total Capital Expenditures 4,818 5,618 8,149 12,787 16,493 15,711 11,902 10,252 9,408 6,994 5,233 6,157 8,355 7,427 129,305




(Current $M)


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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

Value of Production

Acrylics 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Nitrogen Fertilizers 13 13 41 41 961 1,842 2,578 2,621 2,666 2,712 2,760 2,809 2,857 2,907 24,819

Chlor-alkali 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Olefins 0 5 5 5 5 5 5 5 5 6 6 6 6 6 70

Polyolefins 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Vinyls Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Glycols Chain 5 5 5 5 6 6 6 6 6 6 6 6 6 6 81

Methanol Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Aromatics Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Value of Production 18 23 51 52 971 1,853 2,589 2,632 2,677 2,724 2,772 2,821 2,870 2,919 24,971

Total Capital Expenditures 73 167 724 1,383 1,962 1,386 697 0 0 0 0 126 772 916 8,206



Energy-Related Chemicals Value of Production and Capital Expenditures: Midwest Census Region

(Current $M)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

Value of Production

Acrylics 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Nitrogen Fertilizers 0 0 0 0 0 0 430 437 445 453 461 469 477 485 3,657

Chlor-alkali 78 83 84 86 87 88 90 91 93 94 96 98 100 101 1,269

Olefins 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Polyolefins 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Vinyls Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Glycols Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Methanol Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Aromatics Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Value of Production 78 83 84 86 87 88 520 529 538 547 557 567 577 587 4,926

Total Capital Expenditures 104 12 0 96 586 695 606 0 0 0 0 0 0 0 2,099



(Current $M)

Energy-Related Chemicals Value of Production and Capital Expenditures: West Census Region

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

Value of Production

Acrylics 114 116 117 329 540 631 720 732 744 995 1,254 1,479 1,505 1,531 10,807

Nitrogen Fertilizers 321 513 645 656 1,167 1,799 1,830 1,861 1,893 2,816 2,866 2,917 2,967 3,019 25,270

Chlor-alkali 308 690 1,321 1,343 1,364 1,387 1,410 1,434 1,459 1,484 1,510 1,537 1,563 1,993 18,803

Olefins 28 198 297 431 797 1,251 1,732 2,532 3,588 3,885 5,058 5,146 5,314 5,746 36,003

Polyolefins 174 214 329 1,469 5,260 12,681 18,876 19,790 22,356 25,847 29,497 30,014 31,580 32,841 230,929

Vinyls Chain 112 114 146 705 1,176 2,043 2,540 3,792 4,706 5,610 6,554 6,669 7,759 7,969 49,893

Glycols Chain 373 379 683 726 737 2,519 2,594 2,687 3,642 4,062 4,134 4,206 4,279 4,354 35,376

Methanol Chain 170 435 1,179 1,914 2,782 4,104 4,174 4,824 5,041 5,264 5,358 5,452 6,122 6,524 53,342

Aromatics Chain 0 0 0 0 0 15 57 58 59 60 61 62 106 108 587

Total Value of Production 1,599 2,659 4,719 7,572 13,825 26,430 33,934 37,708 43,488 50,023 56,292 57,482 61,196 64,084 461,010

Total Capital Expenditures 4,642 5,439 7,425 11,308 13,781 12,631 9,414 9,219 9,408 6,994 5,233 6,031 7,584 6,511 115,620



Energy-Related Chemicals Value of Production and Capital Expenditures: South Census Region

(Current $M)

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

Value of Production

Acrylics 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Nitrogen Fertilizers 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Chlor-alkali 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Olefins 0 0 0 0 0 0 0 124 126 129 131 133 136 138 917

Polyolefins 0 0 0 0 0 0 0 1,834 1,865 1,897 1,931 1,965 1,999 2,034 13,526

Vinyls Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Glycols Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Methanol Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Aromatics Chain 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total Value of Production 0 0 0 0 0 0 0 1,958 1,992 2,026 2,062 2,098 2,135 2,172 14,443

Total Capital Expenditures 0 0 0 0 164 998 1,185 1,033 0 0 0 0 0 0 3,379



Energy-Related Chemicals Value of Production and Capital Expenditures: Northeast Census Region

(Current $M)



Appendix C. Economic Contribution Assessment –Methodology and Model Documentation

Prepared by:



September 2013

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US EconomyVolume 3: A Manufacturing Renaissance – Appendix C

IHS i





[email protected]


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IHS ii

Project Directors



Project Team








Key Contributors





Acknowledgments

We extend our appreciation to our internal Advisory Board, which consists of IHS ViceChairman Daniel Yergin, IHS Senior Vice President James Rosenfield, and IHS ChiefEconomist Nariman Behravesh. They offered critical insight, guidance and support in reviewingthe methodologies and findings from this study.

We would also like to thank the subject matter experts, technical experts, industry experts andanalysts who also contributed to this study: Sam Andrus, John Anton, Miguel Goncalves, DanielLichtenstein, Kenneth Kremar, Charlie McCarren, Mike Montgomery, John Mothersole,Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, Mihaela Solcan, and TomRuniewicz.

This report offers an independent assessment of the importance of unconventional oil andgas to the US economy. This research was supported by the American Chemistry Council,America’s Natural Gas Alliance, the American Petroleum Institute, the Fertilizer Institute, theUS Chamber of Commerce – Institute for 21st Century Energy, the National Association ofManufacturers, the Natural Gas Supply Association, Rio Tinto, and the Society of the PlasticsIndustry. IHS is exclusively responsible for this report and all of the analysis and contentcontained herein. The analysis and metrics developed during the course of this researchrepresent the independent views of IHS and are intended to contribute to the dialogue on therole of the unconventional oil and gas production in promoting employment, economicgrowth, and energy security.


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Table of Contents

Appendix C: Economic Contribution Assessment Methodology and Model Documentation ....... 1

Data Requirements and Assumptions .................................................................................... 1

Methodology........................................................................................................................... 1

Integrated Approach ........................................................................................................... 2

Modeling Objectives............................................................................................................ 3

Methodology Implementation .............................................................................................. 4

Model Documentation............................................................................................................. 5

IMPLAN Model.................................................................................................................... 5

IHS US Macroeconomic Model ........................................................................................... 9


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Appendix C: Economic Contribution Assessment Methodologyand Model Documentation

Data Requirements and Assumptions

IHS Economics, with support from IHS Energy and IHS Chemical, compiled the data required toundertake the economic contribution assessment of unconventional oil and natural gasrevolution in the United States, including upstream production activity, and midstream anddownstream energy activity and energy-related chemicals activity. The midstream anddownstream energy and energy-related chemicals value chains were segmented to distinguishthe various forms of economic activity taking place. The direct contributions from this activity, interms of production and capital expenditures, were used as inputs to the IMPLAN model as wellas the IHS US Macroeconomic Model (US Macro Model). The models require average annualestimates for capital investment and related output activity metrics. The following sectoractivities were determined to be the major, direct economic contributors in this analysis:

unconventional oil and natural gas extraction,

unconventional oil and natural gas drilling,

support activities for unconventional oil and natural gas,

construction of facilities, related materials and machinery for hydraulic fracturingand completions, and construction of oil and natural gas pipelines,

construction of processing, storage, and distribution networks, and

expansion of infrastructure and capacity in energy-related chemicals.

The IMPLAN model required oil and natural gas production to be valued in dollar terms, whilethe US Macro Model’s inputs were transformed into quadrillions of British thermal units (Btus).Capital expenditure inputs for the IMPLAN model were in nominal dollars, and the US MacroModel inputs were in real 2005 dollars. Production levels were transformed into value ofproduction using corresponding price series from IHS Energy and a conversion factor.

For the IMPLAN model, forecasts of oil and natural gas production were transformed into valuesof output, using corresponding price series and a conversion factor. Drilling capital expendituresand support services for oil and natural gas operations directly correspond to sectors within themodel. The breakdown of activities – completion, facilities, gathering and processing, andpipeline construction, midstream and downstream energy, and energy-related chemicals – weremapped to the detailed categories used in the IMPLAN model.

For the US Macro Model, oil and natural gas production forecasts were transformed intoquadrillion Btus by using corresponding conversion ratios. Upstream capital expenditures weresummed to represent total investment and all dollar estimates were converted to 2005-basedestimates and were input into the US Macro Model. The model then estimated investmentchanges in midstream and downstream oil and natural gas activity, along with energy-relatedchemicals activity.

Methodology

The economic contribution of unconventional oil and natural gas activity can be traced throughall of the industries that make up the US economy. In this section, we define the key terms andthe conceptual framework underlying the analysis of this sector’s economic contribution. IHS


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Economics has utilized a comprehensive approach that integrates an industry model (IMPLAN)and a US Macro Model to arrive at the total contribution. Documentation for these models isprovided in a later section.

Integrated Approach

To capitalize on the strengths and avoid the weaknesses of various economic modelingmethods, IHS Economics has taken the initiative to build an integrated methodology that usestwo sets of modeling systems. This methodology is better equipped to capture the followingimportant aspects of economic modeling:

Direct and indirect contributions of the value chain. The IMPLAN model has adetailed and up-to-date input-output system to trace various economic contributions viathe complete supplier chain throughout the US economy and its industrial sectors.

Dynamic econometric equilibrium. IHS' US Macroeconomic Model strives toincorporate the best insights of many theoretical approaches. This structure guaranteesthat short-run cyclical developments will converge to a robust long-run equilibrium. TheMacro Model is the preferred modeling approach when evaluating long-term incomecontributions from the unconventional oil and natural gas sector. The US Macro Modelwas used to assess the induced contribution of the value chain. It was also used in amore dynamic framework to assess unconventional oil and natural gas activity changesin the price of natural gas and shifts in global trade patterns.

The methodology used has employed outlooks for production and capital expenditures takenfrom IHS Energy and IHS Chemicals. In the first step, the analysis evaluated the direct, indirect,and induced contributions of the complete unconventional oil and natural gas value chain andenergy-related chemicals via the IMPLAN and US Macro models. Second, the US Macro Modelwas used to measure the broader contributions throughout the economy, especially in themanufacturing sector.


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Modeling Objectives

The primary objective of this type of study is to present a complete account of how the impact ofa policy or an industrial sector — in this case, the unconventional oil and natural gas sector —flows through the national industrial economy. IHS Economics used an internally consistent setof modeling and database capabilities to measure the contributions to the US economy.

To summarize, each additional dollar of industrial revenue results in both direct and indirectrepercussions on final demand. In theory, a reduction of unconventional oil and natural gasproduction, with everything else constant, would lead to less revenue and output for industriessuch as chemicals and professional services that supply the industry. This decline would alsoreduce US demand for manufactured products such as pumps and compressors, which wouldin turn require fewer fabricated metal products. These are only a few of the repercussions in thecomplex chain that would results from an isolated initial change in an industry.

Because unconventional oil and natural gas drilling and production, along with midstream,downstream and energy-related chemicals activities, use many different products and services,many mining, manufacturing, and service industries would be directly affected by a change inthis activity. The impact on these industries would have repercussions on all other producingindustries, magnifying the indirect contribution through the supply-chain process.

The net effects of these changes on the US industrial sectors due to the direct contribution from,in this case, increased production of unconventional oil and natural gas, are divided into twostages that are described below: the indirect contribution and expenditure-induced contribution.

The direct contribution is the effect of an industrial sector on the core industry’s output,employment, and income. The detailed industry IMPLAN model can evaluate these changes inthe context of a linked, comprehensive industrial structure for the US economy. For instance,the change in the value of unconventional oil and natural gas production and the differentialrequirements, capital expenditures, for drilling and facilities construction is the directcontribution; this was calculated for 2012 and for each five-year interval from 2015 through2025. The production and capital expenditure requirements were provided for the upstream,midstream and downstream value chains by segment, and for energy-related chemicals; theseexpenditures were translated into the IMPLAN requirements. In input-output modeling, themechanism through which these direct values are analyzed is as an inputted “change.”

The change in purchasing activities of an industry and its immediate impact on the mining,manufacturing, transportation, and other sectors leads to indirect effects on output, employment,and income that are attributable to those sectors, their suppliers, and suppliers' inter-industrylinkages. Supplier activities will include the majority of industries in the US economy

The induced contributions occur as workers and their families in both the direct and indirectindustries spend their incomes on food, housing, autos, household appliances, medical care,clothing, and other consumer items. The additional output, employment, and income effects arepart of the expenditure-induced contribution.


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The direct and indirect contributions represent all of the production, marketing, and salesactivities required to bring primary products to the marketplace in a consumable form. The useof an input-output model allows an analysis and quantification of these direct and indirectcontributions. The sum of all contributions, relative to the economy’s total size, provides aninitial benchmark with which to evaluate the impact and importance to the economy of a givenindustry or sector. The expenditure-induced contribution represents the changes consumersmake when their incomes are altered. Finally, additional dynamic price and industry reallocationcontributions can be captured beyond what can be captured by a static input-output model. Theuse of a dynamic equilibrium model to measure this contribution creates a very solid modelingand measurement system.

Methodology Implementation

To forecast the direct, indirect and induced contributions by the unconventional value chain andenergy-related chemicals, IHS Economics used the IMPLAN model to quantify the contributionof the unconventional oil and natural gas value chain and energy-related chemicals on the USnational and industrial economies. The IMPLAN model closely aligns with accountingconventions used in the US Bureau of Economic Analysis’s study, Input-Output Study of theU.S. Economy, and is flexible enough to evaluate changes via the value of output oremployment from the source industry. When possible, IHS Economics customized the inputs tothe IMPLAN model to correspond with the capital expenditure requirements of theunconventional oil and natural gas and energy-related chemicals industries. This processallowed us to examine the contributions of selected, large elements of the energy and chemicalsindustries and their interactions with other sectors.

In preparing this study, IHS Economics enhanced the standard methodology of measuring theexpenditure-induced contribution and used the US Macro Model to capture additionalcontributions outside the unconventional value chain and energy-related chemicals. The primaryreason for this was to depart from the static determination of income effects and rely on a morecomprehensive dynamic equilibrium modeling methodology to capture changes throughout themanufacturing sector. Production and capital expenditure assumptions were inserted into theUS Macro Model, which was then run to provide a more robust estimate of the completeinduced contribution.


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Model Documentation

IMPLAN ModelThe indirect and induced job estimates in this report were quantified through input-outputmodeling using the IMPLAN model. This modeling effort also produced estimates of valueadded and labor income related to direct, indirect, and induced jobs. This appendix providesadditional information about the IMPLAN model. The discussion is based in part on descriptionsby Minnesota IMPLAN Group, Inc. (MIG), the model’s sponsor.1

IMPLAN, short for “Impact Analysis for Planning,” is a widely used commercially available modelfor input-output analysis. MIG is responsible for the production of the IMPLAN data, model, andsoftware. Using classic input-output analysis in combination with regionally specific socialaccounting matrices and multiplier models, IMPLAN provides a highly accurate and adaptablemodel for its users. The IMPLAN system was designed to serve three functions:

data retrieval data reduction and model development impact analysis

Comprehensive and detailed data coverage for the US economy and the ability to incorporateuser-supplied data at each stage of the model-building process provide a high degree offlexibility in terms of both geographic coverage and model formulation. The IMPLAN system hastwo components: the databases and the software. The databases provide information needed to

1www.IMPLAN.com.


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create IMPLAN models. The software performs the calculations and provides an interface forthe user to make final demand changes.

The IMPLAN system includes:

a national-level technology matrix estimates of sectoral activity for final demand, final payments, industry output, and

employment for the United States

Input-output accounting describes commodity flows from producers to intermediates and finalconsumers. The total industry purchases of commodities, services, employment compensation,value added, and imports are equal to the value of the commodities produced.

Purchases for final use (final demand) drive the model. Industries produce goods and servicesfor final demand and purchase goods and services from other producers. These otherproducers, in turn, purchase goods and services. This buying of goods and services (indirectpurchases) continues until leakages from the region (imports and value added) stop the cycle.

These indirect and induced effects (the effects of household spending) can be mathematicallyderived. The derivation is called the Leontief inverse. The resulting sets of multipliers describethe change of output for every regional industry caused by a one dollar change in final demandfor any given industry.

Creating regional input-output models requires a tremendous amount of data. The costs ofsurveying industries within each region to derive a list of commodity purchases productionfunctions are prohibitive. IMPLAN was developed as a cost-effective means to develop regionalinput-output models.

IMPLAN easily allows the user to do the following:

develop a complete Social Accounting Matrix (SAM) for a regional economy develop Multiplier models for predicting economic impacts modify components of the SAM including

o industry-specific information such as employment and income valueso production functionso by-productso trade flows

create custom impact analyses based on the nature of an event generate a wide variety of reports describing the social accounts, the multiplier model,

and the direct, indirect, and induced effects of an economic event examine how the effects of economic impact in a single region ripple into surrounding

regions view tax impacts of economic changes

IMPLAN SoftwareThe IMPLAN Group developed the current version of IMPLAN Version 3.0 in 2009. It is aWindows-based software package that performs the calculations necessary to create thepredictive model. The software reads the database and creates the complete set of SAMs andthe input-output accounts. Next the IMPLAN software derives the predictive multipliers. Thesoftware enables the user to make changes to the data, the trade flows, or technology. It alsoenables the user to make final demand changes that result in the impact assessment.

Features of the IMPLAN Version 3.0 include:

direct export to Excel for ease of report manipulation or printing advanced data editing functions with balancing features


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complete SAM a choice of trade-flow assumptions

o IMPLAN National Trade Flows modelo econometric regional purchase coefficientso supply/demand pooling

libraries for storing custom activities and the ability to import already created IMPLANlibraries

flexible model aggregation tools—allowing for aggregation of the model or the results single reports location—all results can be viewed, exported and printed from a single

screen Study Area, Social Accounts, Industry Accounts, and Multiplier Reports demonstrating

all stages of model building and analysis activity menu structure for easy intuitive impact analysis event-based impact databases built-in and editable margins and deflators model data in MS Access Database format

Database

For this project IHS Economics used the 2008 IMPLAN databases. Each database containsinformation on the following components for each industrial sector in the IMPLAN model.

Employment is total wages for salary jobs as well as self-employment jobs in the USeconomy.

Value added is an industry’s or an establishment’s total output less the cost ofintermediate inputs. Value added is further divided into three subcomponents:

o Labor income captures all forms of employment income, including employeecompensation (wages and benefits, employer-paid payroll taxes, unemploymenttaxes, etc.) and proprietor income (payments received by self-employedindividuals and unincorporated business owners).

o Other property type income consists of payments from rents, royalties, anddividends. This includes payments to individuals in the form of rents received onproperty, royalties from contracts, and dividends paid by corporations. This alsoincludes corporate profits earned by corporations.

o Indirect business taxes consist primarily of excise and sales taxes paid byindividuals to businesses. These taxes are collected during the normal operationof these businesses but do not include taxes on profit or income.

Final demand includes goods and services purchased for their ultimate use by an enduser. For a region this would include exports as that is a final use for that product. In aninput-output framework final demands are allocated to producing industries, with marginsallocated to the service sectors (transportation, wholesale and retail trade, insurance)associated with providing that good to the final user. Thus final demands are in producerprices, and the model provides them by components of gross domestic product (GDP).

Personal consumption expenditures (PCE) consist of payments byindividuals/households to industries for goods and services used for personalconsumption. Individuals tend to buy little directly from industries other than retail trade.However, in an input-output table, purchases made by individuals for final consumptionare shown as payments made directly to the industry producing the good. PCE is thelargest component of final demand.


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Federal government purchases are divided among military purchases, nonmilitaryuses, and capital formation. Federal military purchases are those made to support thenational defense. Goods range from food for troops to missile launchers. Nonmilitarypurchases are made to supply all other government functions. Payments made to othergovernmental units are transfers and are not included in federal government purchases.

State (provincial) and local government purchases are divided among publiceducation, non-education, and capital formation. Public education purchases are forelementary, high school, and higher education. Non-education purchases are for allother government activities. These include state (provincial) government operations,including police protection and sanitation. Private sector education purchases are notcounted here. Private education purchases show up in IMPLAN sectors 495 and 496.

Inventory purchases are made when industries do not sell all output created in oneyear, which is generally the case. Each year a portion of output goes to inventory.Inventory sales occur when industries sell more than they produce and need to depleteinventory. Inventory purchases and sales generally involve goods-producing industries(e.g., agriculture, mining, and manufacturing).

Capital formation is private expenditures made to obtain capital equipment. The dollarvalues in the IMPLAN database are expenditures made to an industrial sector producingthe capital equipment. The values are not expenditures by the industrial sector.

Foreign exports are demands made to industries for goods for export beyond nationalborders. These represent goods and services demanded by foreign parties. Domesticexports are calculated during the IMPLAN model creation and are not part of thedatabase.

IMPLAN Multipliers

The notion of a multiplier rests upon the difference between the initial effect of a change in finaldemand and the total effects of that change. Total effects can be calculated either as direct andindirect effects or as direct, indirect, and induced effects. Direct effects are production changesassociated with the immediate effects or final demand changes. Indirect effects are productionchanges in backward-linked industries cause by the changing input needs of directly affectedindustries (for example, additional purchases to produce additional output). Induced effects arethe changes in regional household spending patterns caused by changes in household incomegenerated from the direct and indirect effects.

For the US model used in this study, the IMPLAN model estimated Type I and SAM multipliersfor direct, indirect, and induced impacts.

Type I MultipliersA Type I multiplier is the direct effect produced by a change in final demand plus the indirecteffect, divided by the direct effect. Increased demands are assumed to lead to increasedemployment and population, with the average income level remaining constant. The Leontiefinverse (Type I multipliers matrix) is derived by inverting the direct coefficients matrix. The resultis a matrix of total requirement coefficients, the amount each industry must produce in order forthe purchasing industry to deliver one dollar’s worth of output to final demand.

Type SAM MultipliersType SAM multipliers incorporate “induced” effects resulting from the household expendituresfrom new labor income. The linear relationship between labor income and householdexpenditure can be customized in the IMPLAN software. The default relationship is PCE and


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total household expenditures. Each dollar of workplace-based income is spent based on theSAM relationship generated by IMPLAN.

IHS US Macroeconomic Model

The Model’s Theoretical Position

As an econometric dynamic equilibrium growth model the IHS US Macroeconomic Model strivesto incorporate the best insights of many theoretical approaches to the business cycle:Keynesian, New Keynesian, neoclassical, monetarist, and supply-side. In addition the IHS USMacroeconomic Model embodies the major properties of the neoclassical growth modelsdeveloped by Robert Solow. This structure guarantees that short-run cyclical developments willconverge to robust long-run equilibrium.

In growth models the expansion rate of technical progress, the labor force, and the capital stockdetermine the productive potential of an economy. Both technical progress and the capital stockare governed by investment, which in turn must be in balance with post-tax capital costs,available savings, and the capacity requirements of current spending. As a result monetary andfiscal policies will influence both the short- and the long-term characteristics of such aneconomy through their impacts on national saving and investment.

A modern model of output, prices, and financial conditions is melded with the growth model topresent the detailed, short-run dynamics of the economy. In specific goods markets theinteractions of a set of supply and demand relations jointly determine spending, production, andprice levels. Typically the level of inflation-adjusted demand is driven by prices, income, wealth,expectations, and financial conditions. The capacity to supply goods and services is keyed to aproduction function combining the basic inputs of labor hours, energy usage, and the capitalstocks of business equipment and structures, and government infrastructure. The “total factorproductivity” of this composite of tangible inputs is driven by expenditures on research anddevelopment (R&D) that produce technological progress.

Prices adjust in response to gaps between current production and supply potential and tochanges in the cost of inputs. Wages adjust to labor supply-demand gaps (indicated by ademographically adjusted unemployment rate), current and expected inflation (with a unit long-run elasticity), productivity, tax rates, and minimum wage legislation. The supply of laborpositively responds to the perceived availability of jobs, to the after-tax wage level, and to thegrowth and age-sex mix of the population. Demand for labor is keyed to the level of output in theeconomy and the productivity of labor, capital, and energy. Because the capital stock is largelyfixed in the short run, a higher level of output requires more employment and energy inputs.Such increases are not necessarily equal to the percentage increase in output because of theimproved efficiencies typically achieved during an upturn. Tempering the whole process of wageand price determination is the exchange rate; a rise signals prospective losses of jobs andmarkets unless costs and prices are reduced.

For financial markets the model predicts exchange rates, interest rates, stock prices, loans, andinvestments interactively with the preceding GDP and inflation variables. The Federal Reservesets the supply of reserves in the banking system and the fractional reserve requirements fordeposits. Private sector demands to hold deposits are driven by national income, expectedinflation, and by the deposit interest yield relative to the yields offered on alternativeinvestments. Banks and other thrift institutions, in turn, set deposit yields based on the marketyields of their investment opportunities with comparable maturities and on the intensity of theirneed to expand reserves to meet legal requirements. In other words the contrast between thesupply and demand for reserves sets the critical short-term interest rate for interbank


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transactions, the federal funds rate. Other interest rates are keyed to this rate, plus expectedinflation, US Treasury borrowing requirements, and sectoral credit demand intensities.

The old tradition in macroeconomic model simulations of exogenous fiscal or environmentalpolicy changes was to hold the Federal Reserve’s supply of reserves constant at baselinelevels. While this approach makes static analysis easier in the classroom, it sometimes createsunrealistic policy analyses when a dynamic model is appropriate. In the IHS US MacroeconomicModel, “monetary policy” is defined by a set of targets, instruments, and regular behaviorallinkages between targets and instruments. The model user can choose to define unchangedmonetary policy as unchanged reserves or as an unchanged reaction function in which interestrates or reserves are changed in response to changes in such policy concerns as the price leveland the unemployment rate.

Monetarist Aspects

The model pays due attention to valid lessons of monetarism by carefully representing thediverse portfolio aspects of money demand and by capturing the central bank’s role in long-terminflation phenomena.

The private sector may demand money balances as one portfolio choice among transactionsmedia (currency, checkable deposits), investment media (bonds, stocks, short-term securities),and durable assets (homes, cars, equipment, structures). Given this range of choice, eachmedium’s implicit and explicit yield must therefore match expected inflation, offset perceivedrisk, and respond to the scarcity of real savings. Money balances provide benefits by facilitatingspending transactions and can be expected to rise nearly proportionately with transactionsrequirements unless the yield of an alternative asset changes.

Now that even demand deposit yields can float to a limited extent in response to changes inTreasury bill rates, money demand no longer shifts quite as sharply when market rates change.Nevertheless the velocity of circulation (the ratio of nominal spending to money demand) is stillfar from stable during a cycle of monetary expansion or contraction. The simple monetarist linkfrom money growth to price inflation or nominal spending is therefore considered invalid as arigid short-run proposition.

Equally important, as long-run growth models demonstrate, induced changes in capitalformation can also invalidate a naive long-run identity between monetary growth and priceincreases. Greater demand for physical capital investment can enhance the economy’s supplypotential in the event of more rapid money creation or new fiscal policies. If simultaneous,countervailing influences deny an expansion of the economy’s real potential, the model willtranslate all money growth into a proportionate increase in prices rather than in physical output.

“Supply-side” Economics

Since 1980, “supply-side” political economists have pointed out that the economy’s growthpotential is sensitive to the policy environment. They focused on potential labor supply, capitalspending, and savings impacts of tax rate changes. The IHS US Macroeconomic Modelembodies supply-side hypotheses to the extent supportable by available data, and this isconsiderable in the many areas that supply-side hypotheses share with long-run growth models.These features, however, have been fundamental ingredients of our model since 1976.

Rational ExpectationsAs the rational expectations school has pointed out, much of economic decision-making isforward looking. For example the decision to buy a car or a home is not only a question ofcurrent affordability but also one of timing. The delay of a purchase until interest rates or pricesdecline has become particularly common since the mid-1970s when both inflation and interest


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rates were very high and volatile. Consumer sentiment surveys, such as those conducted by theUniversity of Michigan Survey Research Center, clearly confirm this speculative element inspending behavior.

However, households can be shown to base their expectations, to a large extent, on their pastexperiences: they believe that the best guide to the future is an extrapolation of recent economicconditions and the changes in those conditions. Consumer sentiment about whether this is a“good time to buy” can therefore be successfully modeled as a function of recent levels andchanges in employment, interest rates, inflation, and inflation expectations. Similarly inflationexpectations (influencing financial conditions) and market strength expectations (influencinginventory and capital spending decisions) can be modeled as functions of recent rates ofincrease in prices and spending.

This largely retrospective approach is not, of course, wholly satisfactory to pure adherents to therational expectations doctrine. In particular this group argues that the announcement ofmacroeconomic policy changes would significantly influence expectations of inflation or growthprior to any realized change in prices or spending. If an increase in government expenditures isannounced, the argument goes; expectations of higher taxes to finance the spending might leadto lower consumer or business spending in spite of temporarily higher incomes from the initialgovernment spending stimulus. A rational expectations theorist would thus argue that multipliereffects will tend to be smaller and more short-lived than a mainstream economist would expect.

These propositions are subject to empirical evaluation. Our conclusions are that expectations doplay a significant role in private sector spending and investment decisions; but until change hasoccurred in the economy, there is very little room for significant changes in expectations inadvance of an actual change in the variable about which the expectation is formed. The rationalexpectations school thus correctly emphasizes a previously understated element of decisionmaking, but exaggerates its significance for economic policy-making and model building.

The IHS US Macroeconomic Model allows a choice in this matter. On the one hand, the usercan simply accept IHS Economics’ judgments and let the model translate policy initiatives intoinitial changes in the economy, simultaneous or delayed changes in expectations, andsubsequent changes in the economy. On the other hand, the user can manipulate the clearlyidentified expectations variables in the model, i.e., consumer sentiment, and inflationexpectations. For example if the user believes that fear of higher taxes would subdue spending,the consumer sentiment index could be reduced accordingly. Such experiments can be made“rational” through model iterations that bring the current change in expectations in line withfuture endogenous changes in employment, prices, or financial conditions.

Theory as a ConstraintThe conceptual basis of each equation in the IHS US Macroeconomic Model was thoroughlyworked out before the regression analysis was initiated. The list of explanatory variablesincludes a carefully selected set of demographic and financial inputs. Each estimated coefficientwas then thoroughly tested to be certain that it meets the tests of modern theory and businesspractice. This attention to equation specification and coefficient results has eliminated the “shortcircuits” that can occur in evaluating a derivative risk or an alternative policy scenario. Becauseeach equation will stand up to a thorough inspection, the IHS US Macroeconomic Model is areliable analytical tool and can be used without excessive iterations. The model is not a blackbox: it functions like a personal computer spreadsheet in which each interactive cell has acarefully computed, theoretically consistent entry and thus performs logical computationssimultaneously.


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Major SectorsThe IHS US Macroeconomic Model captures the full simultaneity of the US economy,forecasting over 1,400 concepts spanning final demands, aggregate supply, prices, incomes,international trade, industrial detail, interest rates, and financial flows. Figure C-5 summarizesthe structure of the eight interactive sectors (noted in Roman numerals). The followingdiscussion presents the logic of each sector and the significant interactions with other sectors.

Spending—ConsumerThe domestic spending (I), income (II), and tax policy (III) sectors model the central circular flowof behavior as measured by the national income and product accounts. If the rest of the modelwere “frozen,” these blocks would produce a Keynesian system similar to the models pioneeredby Tinbergen and Klein, except that neoclassical price factors have been imbedded in theinvestment and other primary demand equations.


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Consumer spending on durable goods is divided into 12 categories: two new vehiclescategories; two net purchases of used cars categories; motor-vehicle parts and accessories;furnishings and durable household equipment; computers; software; calculators, typewriters andother; other recreational goods and services; therapeutic appliances and equipment; and“other.” Spending on nondurable goods is divided into seven categories: food; clothing andshoes; motor vehicle fuels, lubricants, and fluids; fuel oil and other fuels; tobacco;pharmaceutical and other medical products; and “other.” Spending on services is divided into 17categories: housing, three utilities categories, four transportation categories, health care,recreation, food, accommodation, two financial categories, insurance, telecommunication, and“other.” In addition, there is an additional services category for final consumption of nonprofitinstitutions serving households. In nearly all cases, real consumption expenditures aremotivated by real income and the user price of a particular category relative to the prices ofother consumer goods. Durable and semi-durable goods are also especially sensitive to currentfinancing costs, and consumer speculation on whether it is a “good time to buy.” The Universityof Michigan Survey of Consumer Sentiment monitors this last influence, with the index itselfmodeled as a function of current and lagged values of inflation, unemployment, and the primerate.

Spending—Business InvestmentBusiness spending includes nine fixed investment categories within equipment and software:four information processing equipment categories, industrial equipment, three transportationequipment categories, and other producers’ durable equipment. Within structures there arethree building categories; mining and petroleum structures, power and communicationstructures, land and all others. Equipment and (non-utility, non-mining) structures spendingcomponents are determined by their specific effective post-tax capital costs, capacity utilization,and replacement needs. The cost terms are sophisticated blends of post-tax debt and equityfinancing costs (offset by expected capital gains) and the purchase price of the investment good(offset by possible tax credits and depreciation-related tax benefits). This updates the well-known work of Dale Jorgenson, Robert Hall, and Charles Bischoff.

Given any cost/financing environment, the need to expand capacity is monitored by recentgrowth in national goods output weighted by the capital intensity of such production. Publicutility structure expenditures are motivated by similar concepts, except that the output terms arerestricted to utility output rather than total national goods output. Net investment in mining andpetroleum structures responds to movements in real oil and natural gas prices and to oil andnatural gas production.

Inventory demand is the most erratic component of GDP, reflecting the procyclical, speculativenature of private sector accumulation during booms and decumulation during downturns. Theforces that drive the six nonfarm inventory categories are changes in spending, short-terminterest rates and expected inflation, surges in imports, and changes in capacity utilization or thespeed of vendor deliveries. Surprise increases in demand lead to an immediate drawdown ofstocks and then a rebuilding process over the next year; the reverse naturally holds for suddenreductions in final demand. Inventory demands are sensitive to the cost of holding the stock,measured by such terms as interest costs adjusted for expected price increases and byvariables monitoring the presence of bottlenecks. The cost of a bottleneck that slows deliverytimes is lost sales: an inventory spiral can therefore be set in motion when all firms acceleratetheir accumulation during a period of strong growth but then try to deplete excessive inventorieswhen the peak is past.


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Spending—Residential InvestmentThe residential investment sector of the model includes two housing starts categories (singleand multifamily starts) and three housing sales categories (new and existing single family sales,and new single family units for sale). Housing starts and sales, in turn, drive investment demandin five GDP account categories: single family housing, multifamily housing, improvements,miscellaneous, and residential equipment.

Residential construction is typically the first sector to turn down in a recession and the first torebound in a recovery. Moreover, the magnitude of the building cycle is often the key to that ofthe subsequent macroeconomic cycle. The housing sector of the IHS US Macroeconomic Modelexplains new construction as a decision primarily based on the after-tax cost of home ownershiprelative to disposable income. This cost is estimated as the product of the average new homeprice adjusted for changes in quality, and the mortgage rate, plus operating costs, propertytaxes, and an amortized down payment. “Lever variables” allow the model user to specify theextent to which mortgage interest payments, property taxes, and depreciation allowances (forrental properties) produce tax deductions that reduce the effective cost.

The equations also include a careful specification of demographic forces. After estimating thechanges in the propensity for specific age-sex groups to form independent households, theresulting “headship rates” were multiplied by corresponding population statistics to estimate thetrend expansion of single- and multifamily households. The housing equations were thenspecified to explain current starts relative to the increase in trend households over the past year,plus pent-up demand and replacement needs. The basic phenomenon being scrutinized istherefore the proportion of the trend expansion in households whose housing needs are met bycurrent construction. The primary determinants of this proportion are housing affordability,consumer confidence, and the weather. Actual construction spending in the GDP accounts isthe value of construction “put-in-place” in each period after the start of construction (with a lag ofup to six quarters in the case of multifamily units) plus residential improvements and brokeragefees.

Spending—GovernmentThe last sector of domestic demand for goods and services, the government, is largelyexogenous (user-determined) at the federal level and endogenous (equation-determined) at thestate and local level. The user sets the real level of federal nondefense and defense purchases(for compensation, consumption of fixed capital, commodity credit corporation, inventorychange, other consumption, and gross investment), medical and nonmedical transfer payments,and medical and nonmedical grants to state and local governments. The model calculates thenominal values through multiplication by the relevant estimated prices. Transfers to foreigners,wage accruals, and subsidies (agricultural, housing, and other) are also specified by the userbut in nominal dollars. One category of federal government spending—interest payments—isdetermined within the model because of its dependence on the model’s financial and taxsectors. Federal interest payments are determined by the level of privately held federal debt,short and long-term interest rates, and the maturity of the debt.

The presence of a large and growing deficit imposes no constraint on federal spending. Thiscontrasts sharply with the state and local sector where legal requirements for balanced budgetsmean that declining surpluses or emerging deficits produce both tax increases and reductions inspending growth. State and local purchases (for compensation, consumption of fixed capital,other consumption, and construction) are also driven by the level of federal grants (due to thematching requirements of many programs), population growth, and trend increases in personalincome.


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IncomeDomestic spending, adjusted for trade flows, defines the economy’s value-added or grossnational product (GNP) and GDP. Because all value added must accrue to some sector of theeconomy, the expenditure measure of GNP also determines the nation’s gross income. Thedistribution of income among households, business, and government is determined in sectors IIand III of the model.

Pretax income categories include private and government wages, corporate profits, interest,rent, and entrepreneurial returns. Each pretax income category except corporate profits isdetermined by some combination of wages, prices, interest rates, debt levels, and capacityutilization or unemployment rates. In some cases, such as wage income, these are identitiesbased on previously calculated wage rates, employment, and hours per week.

Profits are logically the most volatile component of GNP on the income side. When nationalspending changes rapidly, the contractual arrangements for labor, borrowed funds, and energyimply that the return to equity holders is a residual that will soar in a boom and collapse in arecession. The model reflects this by calculating wage, interest, and rental income as thoroughlyreliable near-identities (e.g., wages equal average earnings multiplied by hours worked) andthen subtracting each nonprofit item from national income to solve for profits.

TaxesSince post-tax rather than pretax incomes drive expenditures, each income category must betaxed at an appropriate rate; the model therefore tracks personal, corporate, payroll, and excisetaxes separately. Users may set federal tax rates; tax revenues are then simultaneouslyprojected as the product of the rate and the associated pretax income components. However,the model automatically adjusts the effective average personal tax rate for variations in inflationand income per household, and the effective average corporate rate for credits earned onequipment, utility structures, and R&D. Substitutions or additions of “flat” taxes and value-addedtaxes for existing taxes are accomplished with specific tax rates and new definitions of taxbases. As appropriate, these are aggregated into personal, corporate, or excise tax totals.

State and local corporate profits and social insurance (payroll) tax rates are exogenous in themodel, while personal income and excise taxes are fully endogenous: the model makesreasonable adjustments automatically to press the sector toward the legally requiredapproximate budget balance. The average personal tax rate rises with income and falls with thegovernment operating surplus. Property and sales taxes provide the bulk of state exciserevenue and reflect changes in oil and natural gas production, gasoline purchases, and retailsales, as well as revenue requirements. The feedback from expenditures to taxes and taxes toexpenditures works quite well in reproducing both the secular growth of the state and localsector and its cyclical volatility.

InternationalThe international sector (IV) is a critical block that can either add or divert strength from thecentral circular flow of domestic income and spending. Depending on the prices of foreignoutput, the US exchange rate, and competing domestic prices, imports capture varying sharesof domestic demand.

Depending on similar variables and the level of world GDP, exports can add to domesticspending on US production. The exchange rate itself responds to international differences ininflation, interest rates, trade deficits, and capital flows between the United States and itscompetitors. In preparing forecasts, IHS' US Macroeconomic and World Economic Servicescollaborate in determining internally consistent trade prices and volumes, interest rates, andfinancial flows.


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Eight categories of goods and two service categories are separately modeled for both importsand exports, with one additional goods category for oil imports. For example export and importdetail for computers is included as a natural counterpart to the inclusion of the computercomponent of producers’ durable equipment spending. The computers detail allows moreaccurate analysis because computers are rapidly declining in effective quality-adjusted pricesrelative to all other goods, and because such equipment is rising so rapidly in prominence asbusinesses push ahead with new production and information processing technologies.

Investment income flows are also explicitly modeled. The stream of huge current accountdeficits incurred by the United States has important implications for the investment incomebalance. As current account deficits accumulate, the US net international investment positionand the US investment income balance deteriorate. US foreign assets and liabilities aretherefore included in the model, with the current account deficit determining the path of the netinvestment position.

Financial

The use of a detailed financial sector (V) and of interest rate and wealth effects in the spendingequations recognizes the importance of credit conditions on the business cycle and on the long-run growth prospects for the economy.

Interest rates, the key output of this sector, are modeled as a term structure, pivoting off thefederal funds rate. As noted earlier, the model gives the user the flexibility of using the supply ofreserves as the key monetary policy instrument, reflecting the Federal Reserve’s open marketpurchases or sales of Treasury securities, or using a reaction function as the policy instruction.If the supply of reserves is chosen as the policy instrument, the federal funds rate depends uponthe balance between the demand and supply of reserves to the banking system. Banks andother thrift institutions demand reserves to meet the reserve requirements on their deposits andthe associated (exogenous) fractional reserve requirements. The private sector in turn demandsdeposits of various types, depending on current yields, income, and expected inflation.

If the reaction function is chosen as the monetary policy instrument, the federal funds rate isdetermined in response to changes in such policy concerns as inflation and unemployment. Thereaction function recognizes that monetary policy seeks to stabilize prices (or to sustain a lowinflation rate) and to keep the unemployment rate as close to the natural rate as is consistentwith the price objective. A scenario designed to display the impact of a fiscal or environmentalpolicy change in the context of “unchanged” monetary policy is arguably more realistic when“unchanged” or traditional reactions to economic cycles are recognized than when the supply ofreserves is left unchanged.

Longer-term interest rates are driven by shorter-term rates as well as factors affecting the slopeof the yield curve. In the IHS US Macroeconomic Model such factors include inflationexpectations, government borrowing requirements, and corporate financing needs. Theexpected real rate of return varies over time and across the spectrum of maturities. An importantgoal of the financial sector is to capture both the persistent elements of the term structure and tointerpret changes in this structure. Twenty interest rates are covered in order to meet clientneeds regarding investment and financial allocation strategies.

InflationInflation (VI) is modeled as a carefully controlled, interactive process involving wages, prices,and market conditions. Equations embodying a near accelerationist point of view producesubstantial secondary inflation effects from any initial impetus such as a change in wagedemands or a rise in foreign oil prices. Unless the Federal Reserve expands the supply ofcredit, real liquidity is reduced by any such shock; given the real-financial interactions described


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above, this can significantly reduce growth. The process also works in reverse: a spendingshock can significantly change wage-price prospects and then have important secondaryimpacts on financial conditions. Inspection of the simulation properties of the IHS USMacroeconomic Model, including full interaction among real demands, inflation, and financialconditions, confirms that the model has moved toward central positions in the controversybetween fiscalists and monetarists, and in the debates among neoclassicists, institutionalists,and “rational expectationists.”

The principal domestic cost influences are labor compensation, nonfarm productivity (output perhour), and foreign input costs; the latter are driven by the exchange rate, the price of oil, andforeign wholesale price inflation. Excise taxes paid by the producer are an additional cost fullyfed into the pricing decision. This set of cost influences drives each of the 19 industry-specificproducer price indexes, in combination with a demand pressure indicator and appropriatelyweighted composites of the other 18 producer price indexes. In other words the inflation rate ofeach industry price index is the reliably weighted sum of the inflation rates of labor, energy,imported goods, and domestic intermediate goods, plus a variable markup reflecting theintensity of capacity utilization or the presence of bottlenecks. If the economy is in balance —with an unemployment rate near 5 percent, manufacturing capacity utilization steady near 80–85% and foreign influences neutral — then prices will rise in line with costs, and neither willshow signs of acceleration or deceleration.

Supply

The first principle of the market economy is that prices and output are determinedsimultaneously by the factors underlying both demand and supply. As noted above, the “supply-siders” have not been neglected in the IHS US Macroeconomic Model; indeed substantialemphasis on this side of the economy (VII) was incorporated as early as 1976. In the IHS USMacroeconomic Model aggregate supply is estimated by a Cobb-Douglas production functionthat combines factor input growth and improvements in total factor productivity. The outputmeasure in the production function is a gross output concept that equals private GDP, excludinghousing services, plus net energy imports.

Factor input equals a weighted average of labor, business fixed capital, public infrastructure,and energy. Based on each factor’s historical share of total input costs, the elasticity of potentialoutput with respect to labor is 0.65 (i.e., a 1 percent increase in the labor supply increasespotential GDP 0.65 percent); the business capital elasticity is 0.26; the infrastructure elasticity is0.025; and the energy elasticity is 0.07. Factor supplies are defined by estimates of the fullemployment labor force, the full employment capital stock, end-use energy demand, and thestock of infrastructure. To avoid double-counting energy input, the labor and capital inputs areboth adjusted to deduct estimates of the labor and capital that produce energy. Total factorproductivity depends upon the stock of R&D capital and trend technological change.

Potential GDP is the sum of the aggregate supply concept derived from the production function,less net energy imports, plus housing services and the compensation of governmentemployees.

Taxation and other government policies influence labor supply and all investment decisions,thereby linking tax changes to changes in potential GDP. An expansion of potential reduces firstprices and then credit costs, and thus spurs demand. Demand rises until it equilibrates with thepotential output. Thus the growth of aggregate supply is the fundamental constraint on the long-term growth of demand.


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Inflation created by demand that exceeds potential GDP or by a supply-side shock or excise taxincrease raises credit costs and weakens consumer sentiment, thus putting the brakes onaggregate demand.

ExpectationsThe contributions to the model and its simulation properties of the rational expectations schoolare as rich as the data will support. Expectations (Sector VIII) impact several expenditurecategories in the IHS US Macroeconomic Model, but the principal nuance relates to the entirespectrum of interest rates. Shifts in price expectations or the expected capital needs of thegovernment are captured through price expectations and budget deficit terms, with the formeraffecting the level of rates throughout the maturity spectrum and the latter affecting intermediateand long-term rates, and hence the shape of the yield curve. On the expenditure side,inflationary expectations have an impact on consumption via consumer sentiment, while growthexpectations affect business investment.



Appendix D. Economic Contribution Assessment –Detailed Tables

Prepared by:



September 2013

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US EconomyVolume 3: A Manufacturing Renaissance – Appendix D

IHS i





[email protected]


[email protected]



[email protected]


[email protected]







IHS ii

Project Directors



Project Team








Key Contributors





Acknowledgments

We extend our appreciation to our internal Advisory Board, which consists of IHS ViceChairman Daniel Yergin, IHS Senior Vice President James Rosenfield, and IHS ChiefEconomist Nariman Behravesh. They offered critical insight, guidance and support inreviewing the methodologies and findings from this study.

We would also like to thank the subject matter experts, technical experts, industry expertsand analysts who also contributed to this study: Sam Andrus, John Anton, MiguelGoncalves, Daniel Lichtenstein, Kenneth Kremar, Charlie McCarren, Mike Montgomery,John Mothersole, Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, MihaelaSolcan, and Tom Runiewicz.

This report offers an independent assessment of the importance of unconventional oil and gas to theUS economy. This research was supported by the American Chemistry Council, America’s NaturalGas Alliance, the American Petroleum Institute, the Fertilizer Institute, the US Chamber of Commerce– Institute for 21

stCentury Energy, the National Association of Manufacturers, the Natural Gas Supply

Association, Rio Tinto, and the Society of the Plastics Industry. IHS is exclusively responsible for thisreport and all of the analysis and content contained herein. The analysis and metrics developed duringthe course of this research represent the independent views of IHS and are intended to contribute tothe dialogue on the role of the unconventional oil and gas production in promoting employment,economic growth, and energy security.


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Table of Contents

Appendix D: Economic Contribution Assessment – Detailed Tables ...................................1

Employment Contribution ................................................................................................2

Value Added Contribution................................................................................................9

Labor Income Contribution ............................................................................................16

Government Revenue ...................................................................................................23


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Appendix D: Economic Contribution Assessment – DetailedTables

Appendix D contains tables that expand upon the summary tables presented in the body ofthe report to include a complete set of forecast years – 2012 through 2025 – and each ofthe components of the full unconventional value chain – upstream energy, midstream anddownstream energy, and energy-related chemicals.

Results for the following four concepts are presented:

1) Employment Contribution2) Value Added Contribution3) Labor Income Contribution4) Government Revenue

The three contribution concepts (employment, value added, and labor income) are firstpresented by each of the four Census regions – South, Midwest, Northeast and West – byeach of the types of activity – upstream energy activity, midstream and downstream energyactivity, and energy-related chemicals activity. Next, for the United States and each of thefour Census regions, tables are presented for each of the types of activity – upstreamenergy activity, midstream and downstream energy activity, and energy-related chemicalsactivity – by contribution type (direct, indirect, and induced).

For the United States and each of the four Census regions, government revenue ispresented for each of the types of activity – upstream energy activity, midstream anddownstream energy activity, and energy-related chemicals activity – for each of theforecast years.

As noted, each of the contributions is presented for the United States and each of the fourCensus regions – South, Midwest, Northeast, and West. The Census regions are definedas follows:

Northeast Census Region Midwest Census Region South Census Region West Census Region

Connecticut Illinois Delaware Arizona

Maine Indiana District of Colombia Colorado

Massachusetts Michigan Florida Idaho

New Hampshire Ohio Georgia Montana

Rhode Island Wisconsin Maryland Nevada

Vermont Iowa North Carolina New Mexico

New Jersey Kansas South Carolina Utah

New York Minnesota Virginia Wyoming

Pennsylvania Missouri West Virginia Alaska

Nebraska Alabama California

North Dakota Kentucky Hawaii

South Dakota Mississippi Oregon

Tennessee Washington

Arkansas

Louisiana

Oklahoma

Texas

Source: US Bureau of the Census

United States Census Regions


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Employment Contribution


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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

South Census Region

Upstream Energy Activity 949,540 1,067,898 1,186,256 1,304,614 1,353,875 1,403,136 1,452,396 1,501,657 1,550,918 1,598,467 1,646,017 1,693,566 1,741,115 1,788,664

Midstream and Downstream Energy Activity 228,485 261,715 231,314 170,142 97,178 105,449 93,640 74,684 60,884 71,628 63,614 64,790 62,663 47,860

Energy-Related Chemicals Activity 51,382 62,773 89,264 134,498 181,527 223,917 225,757 237,230 257,138 260,022 265,672 271,768 292,916 291,123

Total Activity 1,229,407 1,392,385 1,506,835 1,609,254 1,632,580 1,732,502 1,771,793 1,813,571 1,868,940 1,930,117 1,975,303 2,030,124 2,096,694 2,127,647

Midwest Census Region

Upstream Energy Activity 307,219 366,434 425,649 484,864 510,114 535,363 560,612 585,861 611,110 637,391 663,672 689,953 716,234 742,515


Energy-Related Chemicals Activity 784 1,680 6,966 12,888 21,836 20,246 16,963 10,804 10,813 10,834 10,863 11,908 17,127 18,199

Total Activity 342,842 413,633 473,029 528,787 544,951 560,977 585,744 604,998 629,131 654,782 680,524 707,291 738,446 765,537

Northeast Census Region



Energy-Related Chemicals Activity - - - - 1,321 8,013 9,438 15,142 7,010 7,031 7,048 7,041 7,022 7,027

Total Activity 243,822 264,659 267,896 289,186 302,204 321,499 335,047 352,920 356,674 371,290 386,747 402,182 417,606 433,055

West Census Region



Energy-Related Chemicals Activity 1,436 598 490 1,337 5,590 6,515 7,579 2,391 2,395 2,399 2,406 2,403 2,397 2,400

Total Activity 311,669 363,450 407,829 460,990 464,120 467,289 477,184 477,315 481,309 495,584 512,066 527,208 540,484 548,177

United States

Upstream Energy Activity 1,748,604 2,002,624 2,256,643 2,510,663 2,605,564 2,700,465 2,795,366 2,890,267 2,985,168 3,087,870 3,190,572 3,293,274 3,395,976 3,498,678



Total Activity 2,125,504 2,434,128 2,655,588 2,888,218 2,943,855 3,082,268 3,169,767 3,248,805 3,336,055 3,451,773 3,554,639 3,666,805 3,793,229 3,874,415


*The unconventional activity value chain represents the sum of upstream energy, midstream and downstream energy, and energy-related chemicals activity.


US Lower 48 Employment Contribution due to the Unconventional Activity Value Chain: Base Case*

(Number of workers)


IHS 4

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Upstream Energy Activity

Direct 360,456 408,936 457,415 505,895 524,800 543,705 562,610 581,515 600,420 625,212 650,004 674,795 699,587 724,379

Indirect 537,663 615,256 692,848 770,441 799,510 828,580 857,649 886,719 915,788 947,461 979,135 1,010,808 1,042,482 1,074,155

Induced 850,485 978,432 1,106,380 1,234,327 1,281,254 1,328,180 1,375,107 1,422,033 1,468,960 1,515,197 1,561,434 1,607,670 1,653,907 1,700,144

Total 1,748,604 2,002,624 2,256,643 2,510,663 2,605,564 2,700,465 2,795,366 2,890,267 2,985,168 3,087,870 3,190,572 3,293,274 3,395,976 3,498,678


Direct 116,342 131,255 107,971 81,581 45,451 44,011 41,438 33,661 26,386 30,264 28,306 29,247 28,318 20,611

Indirect 86,108 97,796 80,850 61,298 34,472 33,135 30,550 24,688 19,636 22,253 20,763 21,355 20,652 15,161

Induced 121,198 137,402 113,404 85,954 48,094 45,965 42,678 34,621 27,509 31,101 29,010 29,807 28,822 21,216

Total 323,648 366,453 302,224 228,832 128,017 123,111 114,665 92,971 73,530 83,617 78,079 80,409 77,792 56,989


Direct 17,310 20,443 29,655 45,697 61,306 67,029 60,463 58,103 58,110 54,445 52,379 54,738 62,089 60,391

Indirect 16,002 20,013 30,265 46,324 67,401 87,603 91,769 95,960 101,682 105,204 109,063 111,200 119,704 120,330

Induced 19,941 24,595 36,801 56,701 81,567 104,060 107,504 111,503 117,564 120,637 124,546 127,184 137,668 138,027

Total 53,252 65,051 96,720 148,722 210,274 258,692 259,736 265,567 277,356 280,286 285,989 293,121 319,462 318,748

Total Activity

Direct 494,108 560,634 595,041 633,173 631,557 654,745 664,511 673,279 684,915 709,921 730,689 758,781 789,994 805,381

Indirect 639,772 733,064 803,963 878,063 901,383 949,318 979,968 1,007,367 1,037,106 1,074,918 1,108,961 1,143,363 1,182,838 1,209,647

Induced 991,624 1,140,430 1,256,584 1,376,982 1,410,914 1,478,205 1,525,289 1,568,158 1,614,033 1,666,934 1,714,990 1,764,661 1,820,397 1,859,388

Total 2,125,504 2,434,128 2,655,588 2,888,218 2,943,855 3,082,268 3,169,767 3,248,805 3,336,055 3,451,773 3,554,639 3,666,805 3,793,229 3,874,415




Employment Contribution by Type due to the Unconventional Activity Value Chain: United States*

(Number of workers)


IHS 5

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 221,020 245,482 269,945 294,407 304,181 313,955 323,729 333,504 343,278 354,754 366,230 377,707 389,183 400,659

Indirect 294,910 333,073 371,237 409,400 425,078 440,757 456,435 472,114 487,792 503,384 518,976 534,567 550,159 565,751

Induced 433,609 489,342 545,075 600,808 624,616 648,424 672,232 696,040 719,848 740,329 760,810 781,292 801,773 822,254

Total 949,540 1,067,898 1,186,256 1,304,614 1,353,875 1,403,136 1,452,396 1,501,657 1,550,918 1,598,467 1,646,017 1,693,566 1,741,115 1,788,664


Direct 81,065 93,762 83,361 61,511 35,107 38,154 34,120 27,147 22,015 26,122 23,237 23,733 22,967 17,443

Indirect 61,843 70,950 62,356 45,808 26,155 28,277 25,027 19,982 16,305 19,090 16,975 17,281 16,711 12,759

Induced 85,577 97,002 85,597 62,823 35,916 39,018 34,492 27,555 22,564 26,415 23,403 23,776 22,985 17,658

Total 228,485 261,715 231,314 170,142 97,178 105,449 93,640 74,684 60,884 71,628 63,614 64,790 62,663 47,860


Direct 16,640 19,762 27,243 40,988 52,305 56,569 51,120 51,658 54,489 50,824 48,758 50,777 56,428 54,389

Indirect 15,376 19,287 28,038 42,149 58,600 76,661 80,395 85,789 93,792 97,287 101,110 102,932 109,860 110,143

Induced 19,365 23,724 33,983 51,362 70,622 90,687 94,242 99,783 108,857 111,911 115,804 118,060 126,628 126,591

Total 51,382 62,773 89,264 134,498 181,527 223,917 225,757 237,230 257,138 260,022 265,672 271,768 292,916 291,123

Total Activity

Direct 318,725 359,007 380,548 396,906 391,593 408,679 408,970 412,309 419,782 431,700 438,225 452,216 468,579 472,491

Indirect 372,130 423,310 461,631 497,357 509,833 545,694 561,857 577,885 597,888 619,761 637,060 654,781 676,730 688,653

Induced 538,552 610,068 664,656 714,992 731,153 778,129 800,966 823,378 851,269 878,655 900,018 923,128 951,385 966,503

Total 1,229,407 1,392,385 1,506,835 1,609,254 1,632,580 1,732,502 1,771,793 1,813,571 1,868,940 1,930,117 1,975,303 2,030,124 2,096,694 2,127,647




Employment Contribution by Type due to the Unconventional Activity Value Chain: South Census Region*

(Number of workers)


IHS 6

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 55,753 68,604 81,456 94,308 100,669 107,031 113,393 119,754 126,116 132,916 139,717 146,517 153,318 160,118

Indirect 94,781 111,758 128,735 145,712 153,082 160,452 167,822 175,192 182,562 190,363 198,164 205,964 213,765 221,566

Induced 156,685 186,072 215,458 244,845 256,362 267,880 279,397 290,914 302,432 314,112 325,792 337,471 349,151 360,831

Total 307,219 366,434 425,649 484,864 510,114 535,363 560,612 585,861 611,110 637,391 663,672 689,953 716,234 742,515


Direct 11,818 15,610 13,924 10,750 4,491 1,845 2,805 2,863 2,478 2,255 2,059 1,866 1,747 1,660

Indirect 9,291 12,081 10,593 8,119 3,416 1,433 2,151 2,204 1,902 1,730 1,584 1,438 1,347 1,273

Induced 13,730 17,828 15,895 12,166 5,095 2,091 3,212 3,266 2,827 2,572 2,346 2,125 1,991 1,890

Total 34,839 45,519 40,413 31,035 13,002 5,369 8,169 8,333 7,208 6,557 5,989 5,429 5,085 4,823


Direct 249 548 2,316 4,323 6,696 5,500 3,878 1,803 1,803 1,804 1,804 2,143 3,843 4,184

Indirect 235 497 2,029 3,731 6,755 6,761 6,152 4,340 4,340 4,350 4,371 4,691 6,280 6,618

Induced 300 635 2,622 4,833 8,385 7,986 6,933 4,662 4,670 4,680 4,689 5,075 7,004 7,397

Total 784 1,680 6,966 12,888 21,836 20,246 16,963 10,804 10,813 10,834 10,863 11,908 17,127 18,199

Total Activity

Direct 67,820 84,762 97,696 109,381 111,856 114,375 120,076 124,419 130,397 136,975 143,580 150,526 158,908 165,962

Indirect 104,307 124,336 141,357 157,562 163,253 168,646 176,125 181,736 188,805 196,443 204,118 212,093 221,392 229,457

Induced 170,715 204,535 233,976 261,843 269,842 277,956 289,542 298,842 309,930 321,364 332,826 344,672 358,146 370,117

Total 342,842 413,633 473,029 528,787 544,951 560,977 585,744 604,998 629,131 654,782 680,524 707,291 738,446 765,537




(Number of workers)

Employment Contribution by Type due to the Unconventional Activity Value Chain: Midwest Census Region*


IHS 7

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 25,948 32,264 38,580 44,895 47,731 50,568 53,404 56,241 59,077 63,482 67,888 72,293 76,698 81,104

Indirect 55,584 63,558 71,533 79,507 82,866 86,225 89,584 92,944 96,303 100,327 104,351 108,376 112,400 116,425

Induced 114,341 129,512 144,683 159,854 166,251 172,648 179,044 185,441 191,837 198,966 206,095 213,224 220,353 227,481

Total 195,874 225,334 254,795 284,256 296,848 309,441 322,033 334,625 347,217 362,776 378,334 393,893 409,451 425,010


Direct 18,531 15,041 4,807 1,654 1,296 1,272 1,233 1,212 840 483 445 409 372 337

Indirect 11,409 9,494 3,269 1,346 1,140 1,156 946 747 649 412 379 346 313 279

Induced 18,008 14,790 5,024 1,930 1,598 1,618 1,396 1,196 958 589 540 493 447 403

Total 47,948 39,325 13,100 4,930 4,034 4,045 3,576 3,154 2,447 1,483 1,364 1,248 1,133 1,018


Direct - - - - 469 2,827 3,306 4,233 1,408 1,408 1,409 1,409 1,409 1,409

Indirect - - - - 357 2,196 2,620 4,778 2,495 2,510 2,521 2,516 2,507 2,511

Induced - - - - 495 2,990 3,513 6,131 3,107 3,113 3,119 3,116 3,106 3,108

Total - - - - 1,321 8,013 9,438 15,142 7,010 7,031 7,048 7,041 7,022 7,027

Total Activity

Direct 44,480 47,305 43,387 46,549 49,497 54,666 57,943 61,685 61,325 65,374 69,742 74,110 78,479 82,849

Indirect 66,993 73,052 74,802 80,853 84,364 89,578 93,150 98,469 99,447 103,248 107,251 111,238 115,220 119,214

Induced 132,349 144,302 149,707 161,784 168,343 177,255 183,953 192,767 195,902 202,668 209,754 216,833 223,906 230,992

Total 243,822 264,659 267,896 289,186 302,204 321,499 335,047 352,920 356,674 371,290 386,747 402,182 417,606 433,055




Employment Contribution by Type due to the Unconventional Activity Value Chain: Northeast Census Region*

(Number of workers)


IHS 8

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 57,735 62,585 67,435 72,285 72,218 72,151 72,084 72,016 71,949 74,059 76,169 78,278 80,388 82,498

Indirect 92,387 106,866 121,344 135,822 138,484 141,146 143,807 146,469 149,131 153,387 157,644 161,901 166,157 170,414

Induced 145,850 173,507 201,163 228,820 234,025 239,229 244,434 249,638 254,843 261,790 268,737 275,684 282,631 289,578

Total 295,972 342,957 389,943 436,928 444,727 452,526 460,325 468,124 475,923 489,236 502,549 515,862 529,176 542,489


Direct 4,928 6,842 5,879 7,666 4,556 2,741 3,279 2,440 1,053 1,404 2,565 3,240 3,231 1,172

Indirect 3,789 5,271 4,632 6,024 3,761 2,270 2,425 1,755 780 1,021 1,826 2,290 2,281 850

Induced 5,544 7,782 6,887 9,036 5,486 3,238 3,576 2,605 1,159 1,524 2,721 3,412 3,398 1,266

Total 14,261 19,895 17,397 22,726 13,803 8,248 9,281 6,800 2,992 3,949 7,111 8,942 8,911 3,288


Direct 420 133 96 386 1,836 2,133 2,159 409 409 410 410 410 410 410

Indirect 467 229 198 445 1,689 1,985 2,603 1,054 1,055 1,057 1,062 1,061 1,057 1,059

Induced 548 236 196 506 2,065 2,397 2,817 928 930 932 934 933 930 931

Total 1,436 598 490 1,337 5,590 6,515 7,579 2,391 2,395 2,399 2,406 2,403 2,397 2,400

Total Activity

Direct 63,083 69,560 73,410 80,337 78,610 77,025 77,522 74,866 73,411 75,872 79,143 81,928 84,028 84,079

Indirect 96,643 112,365 126,173 142,291 143,934 145,400 148,836 149,278 150,966 155,466 160,532 165,251 169,496 172,323

Induced 151,942 181,524 208,246 238,362 241,576 244,864 250,827 253,171 256,932 264,247 272,391 280,028 286,959 291,775

Total 311,669 363,450 407,829 460,990 464,120 467,289 477,184 477,315 481,309 495,584 512,066 527,208 540,484 548,177




Employment Contribution by Type due to the Unconventional Activity Value Chain: West Census Region*

(Number of workers)

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US EconomyVolume 3: The Manufacturing Renaissance – Appendix D

IHS 9

Value Added Contribution


IHS 10

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

South Census Region




Total Activity 180,180 207,001 228,293 248,036 253,771 269,937 277,780 285,303 294,990 303,030 309,205 315,446 323,626 327,458



Midstream and Downstream Energy Activity 4,198 5,515 4,938 3,775 1,577 655 1,000 1,021 884 806 734 665 623 592

Energy-Related Chemicals Activity 96 204 839 1,547 2,722 2,628 2,327 1,600 1,608 1,608 1,612 1,737 2,359 2,486

Total Activity 34,649 42,249 48,481 54,200 56,084 57,975 60,926 63,128 65,906 68,576 71,255 74,058 77,386 80,229



Midstream and Downstream Energy Activity 6,342 5,338 1,859 738 614 624 527 436 363 228 209 190 172 155

Energy-Related Chemicals Activity - - - - 190 1,142 1,341 2,429 1,281 1,284 1,286 1,285 1,283 1,284

Total Activity 30,817 34,024 34,755 37,845 39,681 42,413 44,285 47,051 47,601 49,539 51,593 53,644 55,695 57,750

West Census Region


Midstream and Downstream Energy Activity 1,852 2,625 2,354 3,090 1,882 1,114 1,205 873 394 516 910 1,137 1,132 428

Energy-Related Chemicals Activity 200 92 78 189 740 854 1,043 376 379 379 380 380 379 379

Total Activity 38,287 44,754 50,270 56,918 57,366 57,815 59,199 59,304 59,930 61,548 63,440 65,163 66,654 67,446

United States




Total Activity 283,777 328,027 361,799 396,999 406,901 428,140 442,189 454,786 468,427 482,693 495,493 508,312 523,362 532,884




US Lower 48 Value Added Contribution due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)


IHS 11

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 96,700 112,894 129,088 145,281 150,923 156,565 162,208 167,850 173,492 177,439 181,387 185,335 189,282 193,230

Indirect 67,171 77,161 87,152 97,142 100,832 104,522 108,211 111,901 115,591 119,311 123,032 126,753 130,474 134,195

Induced 73,813 84,912 96,011 107,110 111,181 115,253 119,325 123,397 127,469 131,487 135,505 139,523 143,541 147,559

Total 237,684 274,967 312,250 349,533 362,937 376,340 389,744 403,148 416,551 428,238 439,925 451,611 463,298 474,985


Direct 11,768 13,388 11,100 8,406 4,663 4,417 4,029 3,328 2,659 2,956 2,747 2,806 2,710 2,025

Indirect 12,405 14,091 11,640 8,838 4,981 4,766 4,402 3,545 2,828 3,199 2,985 3,067 2,965 2,180

Induced 15,153 17,180 14,179 10,747 6,013 5,747 5,336 4,329 3,439 3,889 3,627 3,727 3,604 2,653

Total 39,327 44,659 36,919 27,991 15,657 14,931 13,767 11,202 8,927 10,044 9,359 9,600 9,279 6,857


Direct 1,797 2,149 3,142 4,905 6,900 8,394 8,351 8,475 8,878 8,898 9,113 9,350 10,258 10,198

Indirect 2,475 3,175 4,886 7,479 11,207 15,463 16,885 18,021 19,371 20,430 21,524 21,849 23,315 23,587

Induced 2,494 3,076 4,602 7,091 10,200 13,012 13,442 13,942 14,699 15,083 15,571 15,901 17,212 17,257

Total 6,766 8,401 12,630 19,475 28,307 36,869 38,678 40,437 42,949 44,411 46,209 47,100 50,784 51,041

Total Activity

Direct 110,265 128,432 143,329 158,592 162,486 169,377 174,587 179,653 185,029 189,294 193,247 197,492 202,250 205,452

Indirect 82,051 94,427 103,678 113,459 117,020 124,751 129,499 133,466 137,790 142,941 147,542 151,669 156,754 159,962

Induced 91,461 105,168 114,792 124,948 127,395 134,013 138,103 141,667 145,607 150,458 154,703 159,151 164,357 167,469

Total 283,777 328,027 361,799 396,999 406,901 428,140 442,189 454,786 468,427 482,693 495,493 508,312 523,362 532,884




Value Added Contribution by Type due to the Unconventional Activity Value Chain: United States*

(2012 $M)


IHS 12

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 70,522 81,760 92,997 104,234 107,795 111,356 114,917 118,478 122,039 123,834 125,628 127,422 129,217 131,011

Indirect 39,126 44,355 49,583 54,811 56,861 58,910 60,959 63,009 65,058 66,908 68,758 70,608 72,458 74,308

Induced 36,971 41,602 46,232 50,863 52,875 54,888 56,900 58,913 60,925 62,653 64,381 66,109 67,837 69,565

Total 146,620 167,716 188,812 209,908 217,531 225,154 232,777 240,400 248,023 253,395 258,767 264,139 269,511 274,883


Direct 8,081 9,342 8,343 6,108 3,451 3,720 3,215 2,626 2,166 2,491 2,193 2,212 2,135 1,671

Indirect 8,705 10,029 8,865 6,523 3,718 4,012 3,571 2,848 2,328 2,728 2,424 2,466 2,384 1,824

Induced 10,279 11,809 10,561 7,757 4,416 4,807 4,249 3,398 2,792 3,276 2,890 2,931 2,833 2,188

Total 27,066 31,180 27,768 20,388 11,585 12,539 11,035 8,871 7,286 8,495 7,506 7,608 7,352 5,682


Direct 1,724 2,077 2,893 4,422 5,946 7,246 7,287 7,581 8,301 8,322 8,538 8,740 9,475 9,380

Indirect 2,369 3,063 4,567 6,891 9,898 13,749 15,008 16,137 17,859 18,916 20,006 20,288 21,541 21,769

Induced 2,401 2,965 4,253 6,427 8,812 11,250 11,673 12,314 13,521 13,902 14,388 14,671 15,747 15,744

Total 6,494 8,104 11,713 17,740 24,655 32,245 33,967 36,032 39,681 41,140 42,931 43,699 46,763 46,893

Total Activity

Direct 80,327 93,178 104,232 114,764 117,192 122,322 125,419 128,685 132,507 134,646 136,358 138,374 140,826 142,062

Indirect 50,201 57,447 63,015 68,226 70,476 76,670 79,539 81,994 85,245 88,552 91,188 93,361 96,383 97,900

Induced 49,651 56,376 61,046 65,046 66,103 70,945 72,822 74,624 77,238 79,831 81,659 83,710 86,417 87,496

Total 180,180 207,001 228,293 248,036 253,771 269,937 277,780 285,303 294,990 303,030 309,205 315,446 323,626 327,458




Value Added Contribution by Type due to the Unconventional Activity Value Chain: South Census Region*

(2012 $M)


IHS 13

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 6,648 8,522 10,396 12,270 13,471 14,672 15,873 17,075 18,276 19,267 20,259 21,250 22,242 23,233

Indirect 10,459 12,302 14,145 15,987 16,771 17,556 18,340 19,124 19,908 20,713 21,518 22,323 23,127 23,932

Induced 13,247 15,705 18,163 20,621 21,543 22,464 23,386 24,308 25,230 26,181 27,132 28,084 29,035 29,986

Total 30,355 36,529 42,704 48,878 51,785 54,692 57,600 60,507 63,414 66,162 68,909 71,656 74,404 77,151


Direct 1,299 1,704 1,514 1,152 480 201 307 315 272 248 226 205 192 182

Indirect 1,287 1,692 1,508 1,157 484 201 305 312 269 246 224 203 191 180

Induced 1,611 2,119 1,915 1,466 612 253 388 394 342 313 284 257 240 229

Total 4,198 5,515 4,938 3,775 1,577 655 1,000 1,021 884 806 734 665 623 592


Direct 26 57 237 440 704 605 468 261 261 260 260 295 467 502

Indirect 33 69 280 513 993 1,051 1,016 773 776 776 778 821 1,035 1,079

Induced 37 78 322 593 1,025 972 843 566 571 572 573 621 857 905

Total 96 204 839 1,547 2,722 2,628 2,327 1,600 1,608 1,608 1,612 1,737 2,359 2,486

Total Activity

Direct 7,973 10,283 12,147 13,862 14,656 15,478 16,648 17,651 18,809 19,775 20,745 21,750 22,901 23,917

Indirect 11,780 14,063 15,933 17,658 18,248 18,808 19,661 20,209 20,954 21,735 22,520 23,347 24,353 25,192

Induced 14,895 17,902 20,400 22,680 23,180 23,689 24,617 25,268 26,143 27,066 27,989 28,961 30,132 31,120

Total 34,649 42,249 48,481 54,200 56,084 57,975 60,926 63,128 65,906 68,576 71,255 74,058 77,386 80,229




(2012 $M)

Value Added Contribution by Type due to the Unconventional Activity Value Chain: Midwest Census Region*


IHS 14

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 6,075 7,774 9,472 11,171 11,875 12,579 13,283 13,987 14,691 15,572 16,453 17,333 18,214 19,095

Indirect 7,287 8,385 9,483 10,581 11,051 11,521 11,991 12,461 12,931 13,469 14,007 14,546 15,084 15,622

Induced 11,113 12,527 13,941 15,355 15,951 16,547 17,143 17,739 18,334 18,986 19,638 20,290 20,942 21,594

Total 24,475 28,686 32,897 37,107 38,877 40,647 42,417 44,186 45,956 48,027 50,098 52,169 54,240 56,310


Direct 1,819 1,542 529 203 165 167 147 127 101 63 58 53 48 43

Indirect 1,878 1,590 566 241 207 211 168 127 115 75 68 62 56 50

Induced 2,645 2,207 764 294 242 246 212 182 146 90 82 75 68 62

Total 6,342 5,338 1,859 738 614 624 527 436 363 228 209 190 172 155


Direct - - - - 53 316 368 588 271 271 271 271 271 271

Indirect - - - - 60 367 435 906 531 533 534 534 533 533

Induced - - - - 77 459 538 935 479 480 481 480 479 480

Total - - - - 190 1,142 1,341 2,429 1,281 1,284 1,286 1,285 1,283 1,284

Total Activity

Direct 7,894 9,315 10,001 11,373 12,093 13,062 13,798 14,702 15,064 15,906 16,782 17,657 18,533 19,409

Indirect 9,165 9,975 10,049 10,823 11,318 12,099 12,594 13,494 13,577 14,077 14,610 15,142 15,673 16,205

Induced 13,758 14,734 14,705 15,649 16,269 17,252 17,893 18,855 18,959 19,556 20,201 20,845 21,489 22,135

Total 30,817 34,024 34,755 37,845 39,681 42,413 44,285 47,051 47,601 49,539 51,593 53,644 55,695 57,750




Value Added Contribution by Type due to the Unconventional Activity Value Chain: Northeast Census Region*

(2012 $M)


IHS 15

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 13,455 14,839 16,223 17,606 17,782 17,958 18,134 18,310 18,486 18,767 19,048 19,329 19,610 19,891

Indirect 10,298 12,119 13,941 15,763 16,149 16,535 16,921 17,307 17,693 18,221 18,749 19,277 19,805 20,333

Induced 12,482 15,078 17,674 20,271 20,812 21,354 21,896 22,437 22,979 23,666 24,353 25,041 25,728 26,415

Total 36,234 42,036 47,838 53,640 54,743 55,847 56,951 58,054 59,158 60,654 62,150 63,647 65,143 66,639


Direct 568 801 714 943 566 329 360 260 119 155 270 337 335 128

Indirect 550 780 701 916 572 343 358 258 116 151 268 336 334 126

Induced 734 1,044 939 1,231 744 442 487 355 159 210 371 465 463 174

Total 1,852 2,625 2,354 3,090 1,882 1,114 1,205 873 394 516 910 1,137 1,132 428


Direct 47 16 12 43 197 227 229 45 45 45 45 45 45 45

Indirect 78 43 38 75 256 296 426 204 205 205 206 206 206 206

Induced 76 33 27 71 287 331 388 127 129 129 129 129 129 129

Total 200 92 78 189 740 854 1,043 376 379 379 380 380 379 379

Total Activity

Direct 14,070 15,656 16,949 18,593 18,546 18,515 18,723 18,615 18,650 18,966 19,363 19,710 19,990 20,064

Indirect 10,925 12,942 14,680 16,753 16,977 17,174 17,705 17,769 18,014 18,578 19,223 19,819 20,345 20,665

Induced 13,291 16,155 18,641 21,572 21,843 22,126 22,771 22,920 23,267 24,005 24,854 25,634 26,319 26,718

Total 38,287 44,754 50,270 56,918 57,366 57,815 59,199 59,304 59,930 61,548 63,440 65,163 66,654 67,446




Value Added Contribution by Type due to the Unconventional Activity Value Chain: West Census Region*

(2012 $M)


IHS 16

Labor Income Contribution


IHS 17

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

South Census Region




Total Activity 93,690 107,075 117,500 127,075 129,829 137,975 141,651 145,324 150,111 154,576 158,043 161,757 166,493 168,851



Midstream and Downstream Energy Activity 2,260 2,971 2,659 2,030 847 354 537 551 476 434 396 359 336 319

Energy-Related Chemicals Activity 53 114 469 859 1,484 1,395 1,209 813 813 809 806 873 1,203 1,269

Total Activity 18,904 22,918 26,204 29,209 30,148 31,065 32,560 33,676 35,099 36,572 38,050 39,599 41,425 42,992



Midstream and Downstream Energy Activity 3,376 2,846 991 393 326 333 280 233 194 121 111 102 92 83

Energy-Related Chemicals Activity - - - - 104 617 718 1,277 661 659 657 657 658 658

Total Activity 16,649 18,270 18,565 20,118 21,070 22,504 23,467 24,892 25,152 26,207 27,323 28,443 29,562 30,682

West Census Region


Midstream and Downstream Energy Activity 995 1,410 1,265 1,659 1,009 599 645 468 211 276 487 609 607 229

Energy-Related Chemicals Activity 110 49 41 102 404 460 546 187 188 187 186 186 187 187

Total Activity 20,238 23,661 26,576 30,101 30,354 30,601 31,334 31,401 31,745 32,696 33,792 34,800 35,684 36,193

United States




Total Activity 149,411 171,924 188,846 206,502 211,401 222,145 229,012 235,293 242,108 250,051 257,208 264,598 273,163 278,717




US Lower 48 Labor Income Contribution due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)


IHS 18

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 43,608 50,379 57,150 63,921 66,363 68,805 71,247 73,689 76,131 78,346 80,560 82,775 84,989 87,204

Indirect 39,250 44,955 50,660 56,365 58,496 60,627 62,758 64,889 67,021 69,302 71,584 73,865 76,147 78,428

Induced 41,682 47,949 54,217 60,484 62,783 65,083 67,382 69,681 71,981 74,250 76,519 78,788 81,057 83,326

Total 124,541 143,284 162,027 180,770 187,642 194,515 201,387 208,260 215,132 221,897 228,662 235,427 242,192 248,957


Direct 7,974 9,083 7,543 5,703 3,160 3,022 2,729 2,269 1,806 2,011 1,868 1,912 1,846 1,377

Indirect 6,459 7,339 6,068 4,604 2,593 2,489 2,292 1,850 1,474 1,668 1,556 1,600 1,547 1,137

Induced 6,675 7,567 6,246 4,734 2,649 2,532 2,350 1,907 1,515 1,713 1,598 1,642 1,587 1,168

Total 21,107 23,989 19,857 15,040 8,401 8,043 7,371 6,025 4,795 5,392 5,022 5,153 4,981 3,682


Direct 1,371 1,654 2,427 3,731 5,185 6,193 6,085 6,130 6,361 6,329 6,410 6,588 7,248 7,207

Indirect 1,294 1,642 2,508 3,837 5,680 7,663 8,247 8,738 9,345 9,789 10,255 10,425 11,161 11,270

Induced 1,099 1,355 2,027 3,124 4,493 5,732 5,921 6,141 6,475 6,643 6,859 7,004 7,581 7,601

Total 3,763 4,651 6,962 10,692 15,358 19,588 20,253 21,008 22,181 22,761 23,524 24,017 25,990 26,078

Total Activity

Direct 52,953 61,116 67,120 73,355 74,707 78,019 80,061 82,087 84,298 86,685 88,839 91,275 94,084 95,788

Indirect 47,003 53,937 59,236 64,805 66,768 70,780 73,297 75,477 77,839 80,759 83,395 85,890 88,855 90,834

Induced 49,455 56,872 62,490 68,342 69,926 73,346 75,653 77,729 79,970 82,606 84,975 87,433 90,226 92,096

Total 149,411 171,924 188,846 206,502 211,401 222,145 229,012 235,293 242,108 250,051 257,208 264,598 273,163 278,717




Labor Income Contribution by Type due to the Unconventional Activity Value Chain: United States*

(2012 $M)


IHS 19

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 31,803 36,489 41,175 45,861 47,399 48,938 50,476 52,014 53,553 54,667 55,782 56,896 58,010 59,125

Indirect 22,863 25,843 28,823 31,803 32,987 34,170 35,354 36,538 37,721 38,863 40,004 41,145 42,287 43,428

Induced 20,878 23,492 26,107 28,722 29,858 30,995 32,131 33,268 34,404 35,380 36,356 37,331 38,307 39,283

Total 75,544 85,824 96,105 106,386 110,244 114,103 117,961 121,820 125,678 128,910 132,141 135,373 138,604 141,836


Direct 5,476 6,337 5,670 4,144 2,339 2,545 2,178 1,790 1,471 1,695 1,491 1,507 1,454 1,136

Indirect 4,532 5,224 4,621 3,398 1,935 2,095 1,859 1,486 1,213 1,423 1,264 1,286 1,244 951

Induced 4,528 5,202 4,652 3,417 1,945 2,117 1,872 1,497 1,230 1,443 1,273 1,291 1,248 964

Total 14,536 16,763 14,943 10,958 6,219 6,757 5,909 4,773 3,914 4,560 4,028 4,084 3,946 3,051


Direct 1,315 1,598 2,235 3,364 4,468 5,346 5,309 5,484 5,948 5,919 6,005 6,158 6,694 6,629

Indirect 1,239 1,584 2,344 3,535 5,016 6,814 7,331 7,824 8,615 9,064 9,532 9,680 10,312 10,401

Induced 1,058 1,306 1,873 2,831 3,882 4,956 5,141 5,424 5,956 6,123 6,337 6,462 6,936 6,934

Total 3,611 4,488 6,452 9,730 13,366 17,115 17,781 18,732 20,519 21,106 21,874 22,300 23,943 23,965

Total Activity

Direct 38,593 44,424 49,079 53,369 54,206 56,828 57,963 59,288 60,972 62,281 63,278 64,561 66,159 66,890

Indirect 28,634 32,651 35,788 38,736 39,938 43,079 44,544 45,848 47,550 49,349 50,800 52,112 53,843 54,780

Induced 26,463 30,000 32,632 34,970 35,685 38,068 39,144 40,188 41,590 42,946 43,966 45,084 46,491 47,181

Total 93,690 107,075 117,500 127,075 129,829 137,975 141,651 145,324 150,111 154,576 158,043 161,757 166,493 168,851




Labor Income Contribution by Type due to the Unconventional Activity Value Chain: South Census Region*

(2012 $M)


IHS 20

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 2,998 3,798 4,598 5,399 5,923 6,447 6,971 7,495 8,020 8,513 9,006 9,499 9,992 10,485

Indirect 6,112 7,167 8,221 9,276 9,730 10,183 10,636 11,090 11,543 12,032 12,520 13,009 13,498 13,987

Induced 7,481 8,869 10,257 11,644 12,165 12,686 13,206 13,727 14,247 14,784 15,322 15,859 16,396 16,933

Total 16,591 19,833 23,076 26,319 27,817 29,315 30,814 32,312 33,810 35,329 36,848 38,367 39,886 41,405


Direct 880 1,156 1,029 782 326 137 208 215 185 169 154 140 131 124

Indirect 670 881 786 603 252 105 159 163 140 128 117 106 99 94

Induced 710 933 844 646 270 111 171 174 151 138 125 113 106 101

Total 2,260 2,971 2,659 2,030 847 354 537 551 476 434 396 359 336 319


Direct 20 44 183 335 529 446 341 189 187 185 183 208 330 355

Indirect 17 36 144 263 503 521 496 375 374 372 371 392 495 516

Induced 16 34 142 261 452 428 371 249 251 252 253 273 377 398

Total 53 114 469 859 1,484 1,395 1,209 813 813 809 806 873 1,203 1,269

Total Activity

Direct 3,898 4,998 5,810 6,515 6,777 7,031 7,520 7,899 8,392 8,866 9,343 9,846 10,453 10,964

Indirect 6,799 8,084 9,152 10,142 10,485 10,809 11,292 11,627 12,058 12,532 13,008 13,507 14,093 14,596

Induced 8,207 9,836 11,242 12,551 12,886 13,225 13,748 14,149 14,649 15,174 15,699 16,245 16,879 17,432

Total 18,904 22,918 26,204 29,209 30,148 31,065 32,560 33,676 35,099 36,572 38,050 39,599 41,425 42,992




(2012 $M)

Labor Income Contribution by Type due to the Unconventional Activity Value Chain: Midwest Census Region*


IHS 21

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 2,740 3,465 4,190 4,915 5,221 5,528 5,834 6,140 6,447 6,881 7,315 7,749 8,183 8,617

Indirect 4,258 4,885 5,512 6,140 6,411 6,683 6,954 7,226 7,497 7,824 8,150 8,477 8,803 9,130

Induced 6,275 7,074 7,872 8,671 9,007 9,344 9,680 10,017 10,353 10,721 11,089 11,458 11,826 12,194

Total 13,273 15,424 17,575 19,725 20,640 21,554 22,469 23,383 24,297 25,426 26,555 27,684 28,812 29,941


Direct 1,232 1,046 359 137 112 114 100 87 69 43 39 36 33 30

Indirect 978 828 295 126 108 110 87 66 60 39 36 33 29 26

Induced 1,165 972 336 129 106 108 93 80 64 40 36 33 30 27

Total 3,376 2,846 991 393 326 333 280 233 194 121 111 102 92 83


Direct - - - - 40 233 268 425 194 193 191 191 192 192

Indirect - - - - 31 182 212 439 256 255 255 255 255 255

Induced - - - - 34 202 237 412 211 211 212 212 211 211

Total - - - - 104 617 718 1,277 661 659 657 657 658 658

Total Activity

Direct 3,972 4,511 4,549 5,052 5,373 5,875 6,201 6,652 6,710 7,116 7,545 7,976 8,408 8,839

Indirect 5,236 5,713 5,807 6,265 6,549 6,975 7,254 7,731 7,814 8,118 8,441 8,764 9,088 9,411

Induced 7,441 8,046 8,209 8,800 9,148 9,654 10,011 10,509 10,629 10,972 11,337 11,702 12,067 12,432

Total 16,649 18,270 18,565 20,118 21,070 22,504 23,467 24,892 25,152 26,207 27,323 28,443 29,562 30,682




Labor Income Contribution by Type due to the Unconventional Activity Value Chain: Northeast Census Region*

(2012 $M)


IHS 22

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025


Direct 6,068 6,627 7,187 7,746 7,820 7,893 7,966 8,039 8,112 8,285 8,458 8,631 8,804 8,977

Indirect 6,017 7,060 8,103 9,146 9,368 9,591 9,814 10,036 10,259 10,584 10,909 11,234 11,559 11,884

Induced 7,048 8,514 9,981 11,447 11,753 12,058 12,364 12,670 12,976 13,364 13,752 14,140 14,528 14,916

Total 19,133 22,202 25,271 28,339 28,941 29,542 30,144 30,745 31,347 32,233 33,119 34,005 34,891 35,777


Direct 385 543 485 640 383 225 244 177 81 105 184 229 228 87

Indirect 286 406 365 477 298 179 186 135 60 79 140 175 174 65

Induced 323 460 414 542 328 195 215 156 70 92 164 205 204 77

Total 995 1,410 1,265 1,659 1,009 599 645 468 211 276 487 609 607 229


Direct 36 12 9 33 148 168 167 32 32 32 31 31 31 31

Indirect 41 22 20 38 130 147 208 99 99 98 98 98 98 98

Induced 33 14 12 31 126 146 171 56 57 57 57 57 57 57

Total 110 49 41 102 404 460 546 187 188 187 186 186 187 187

Total Activity

Direct 6,489 7,183 7,682 8,419 8,351 8,286 8,376 8,248 8,225 8,422 8,673 8,891 9,064 9,095

Indirect 6,344 7,489 8,488 9,661 9,796 9,917 10,208 10,270 10,418 10,761 11,146 11,507 11,831 12,047

Induced 7,405 8,989 10,406 12,020 12,207 12,399 12,750 12,883 13,103 13,513 13,973 14,402 14,789 15,050

Total 20,238 23,661 26,576 30,101 30,354 30,601 31,334 31,401 31,745 32,696 33,792 34,800 35,684 36,193




Labor Income Contribution by Type due to the Unconventional Activity Value Chain: West Census Region*

(2012 $M)


IHS 23

Government Revenue


IHS 24

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025

Upstream Energy Activity**

Federal Taxes 28,903 33,312 37,722 42,132 43,739 45,346 46,953 48,560 50,167 51,258 52,348 53,439 54,530 55,620 644,028

Federal Royalty Payments 1,964 2,189 2,414 2,639 2,752 2,865 2,978 3,091 3,204 3,162 3,120 3,078 3,036 2,994 39,487

Federal Bonus Payments 148 155 161 167 164 160 157 153 150 147 145 143 140 138 2,127

State and Local Taxes 22,610 26,261 29,912 33,563 34,849 36,136 37,423 38,709 39,996 40,820 41,643 42,467 43,291 44,114 511,794

Severance Taxes 5,450 6,519 7,588 8,657 9,279 9,902 10,524 11,147 11,769 12,062 12,354 12,647 12,939 13,232 144,071

Ad Valorem Taxes 2,795 3,280 3,766 4,251 4,566 4,881 5,195 5,510 5,825 5,928 6,030 6,133 6,235 6,338 70,732

State Royalty Payments 715 827 939 1,050 1,112 1,174 1,235 1,297 1,359 1,375 1,392 1,409 1,426 1,443 16,753

State Bonus Payments 430 453 476 499 493 488 483 478 472 469 466 463 460 457 6,587

Total Government Revenue 63,015 72,996 82,976 92,957 96,954 100,951 104,949 108,946 112,943 115,222 117,500 119,778 122,057 124,335 1,435,579

Lease Payments to Private Landowners 504 573 642 711 751 792 832 873 913 950 986 1,023 1,059 1,096 11,705


Federal Taxes 5,712 5,163 4,615 4,066 3,512 2,958 2,404 1,850 1,297 1,237 1,176 1,116 1,056 996 37,159

State and Local Taxes 4,038 3,615 3,193 2,771 2,391 2,011 1,631 1,251 871 831 790 750 710 669 25,522

Total Government Revenue 9,750 8,779 7,808 6,837 5,903 4,969 4,035 3,102 2,168 2,067 1,967 1,866 1,766 1,665 62,682


Federal Taxes 983 1,598 2,214 2,829 3,511 4,193 4,875 5,557 6,238 6,474 6,709 6,944 7,179 7,414 66,716

State and Local Taxes 695 1,106 1,517 1,928 2,381 2,833 3,286 3,738 4,191 4,349 4,507 4,665 4,823 4,981 44,997


Total Activity

Federal Taxes 35,598 40,074 44,550 49,026 50,761 52,497 54,232 55,967 57,702 58,968 60,233 61,499 62,765 64,030 747,903

Federal Royalty Payments 1,964 2,189 2,414 2,639 2,752 2,865 2,978 3,091 3,204 3,162 3,120 3,078 3,036 2,994 39,487

Federal Bonus Payments 148 155 161 167 164 160 157 153 150 147 145 143 140 138 2,127


Severance Taxes 5,450 6,519 7,588 8,657 9,279 9,902 10,524 11,147 11,769 12,062 12,354 12,647 12,939 13,232 144,071

Ad Valorem Taxes 2,795 3,280 3,766 4,251 4,566 4,881 5,195 5,510 5,825 5,928 6,030 6,133 6,235 6,338 70,732

State Royalty Payments 715 827 939 1,050 1,112 1,174 1,235 1,297 1,359 1,375 1,392 1,409 1,426 1,443 16,753


Total Government Revenue 74,443 84,479 94,515 104,551 108,749 112,947 117,144 121,342 125,540 128,111 130,682 133,253 135,824 138,395 1,609,974

Lease Payments to Private Landowners 504 573 642 711 751 792 832 873 913 950 986 1,023 1,059 1,096 11,705



**Federal royalty payments, federal bonus payments, and lease payments to private landowners only apply to upstream energy activity where land is leased from private households for drilling.


US Government Revenue due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)


IHS 25

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025


Federal Taxes 18,592 21,184 23,775 26,366 27,209 28,053 28,896 29,739 30,583 30,775 30,968 31,161 31,354 31,547 390,203

Federal Royalty Payments 53 69 86 96 96 104 113 124 137 145 156 163 170 178 1,691

Federal Bonus Payments 27 9 17 30 27 27 27 27 31 27 27 27 27 29 358


Severance Taxes 3,142 3,956 4,768 5,471 5,778 6,210 6,667 7,125 7,602 7,875 8,172 8,419 8,637 8,862 92,685

Ad Valorem Taxes 989 1,217 1,435 1,627 1,726 1,852 1,976 2,101 2,228 2,276 2,327 2,360 2,383 2,408 26,906

State Royalty Payments 236 295 349 387 393 417 444 469 496 506 519 529 539 554 6,134



Lease Payments to Private Landowners 317 356 395 440 469 499 527 559 590 619 646 668 685 705 7,476


Federal Taxes 3,917 3,615 3,490 2,979 2,615 2,497 1,933 1,469 1,062 1,049 946 887 839 828 28,125

State and Local Taxes 2,796 2,542 2,409 2,019 1,771 1,695 1,316 998 715 706 638 598 566 558 19,324



Federal Taxes 941 1,543 2,054 2,578 3,060 3,669 4,288 4,958 5,774 6,005 6,241 6,451 6,618 6,819 60,997

State and Local Taxes 667 1,070 1,414 1,768 2,094 2,509 2,924 3,363 3,893 4,052 4,213 4,355 4,475 4,613 41,411


Total Activity

Federal Taxes 23,450 26,341 29,319 31,923 32,884 34,218 35,117 36,167 37,418 37,830 38,156 38,499 38,811 39,194 479,325

Federal Royalty Payments 53 69 86 96 96 104 113 124 137 145 156 163 170 178 1,691



Severance Taxes 3,142 3,956 4,768 5,471 5,778 6,210 6,667 7,125 7,602 7,875 8,172 8,419 8,637 8,862 92,685

Ad Valorem Taxes 989 1,217 1,435 1,627 1,726 1,852 1,976 2,101 2,228 2,276 2,327 2,360 2,383 2,408 26,906









South Census Region Government Revenue due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)


IHS 26

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025


Federal Taxes 5,133 6,212 7,291 8,370 8,876 9,383 9,890 10,396 10,903 11,299 11,696 12,092 12,488 12,885 136,911

Federal Royalty Payments 908 1,030 1,136 1,277 1,404 1,484 1,547 1,629 1,719 1,735 1,753 1,770 1,781 1,782 20,955



Severance Taxes 1,411 1,566 1,712 1,968 2,235 2,373 2,478 2,598 2,713 2,752 2,769 2,807 2,853 2,875 33,109

Ad Valorem Taxes 934 1,039 1,142 1,310 1,490 1,596 1,679 1,771 1,861 1,884 1,897 1,923 1,954 1,973 22,456






Federal Taxes 604 633 610 544 351 129 173 167 127 98 92 77 70 85 3,760

State and Local Taxes 425 444 427 374 240 86 117 112 85 65 61 51 47 57 2,589

Total Government Revenue 1,029 1,077 1,037 917 591 215 290 279 212 164 152 128 117 142 6,349


Federal Taxes 14 38 146 224 336 296 288 214 227 229 229 250 329 357 3,177


Total Government Revenue 23 64 241 367 552 485 473 354 374 376 374 409 532 575 5,200

Total Activity

Federal Taxes 5,750 6,883 8,047 9,137 9,564 9,808 10,351 10,777 11,257 11,626 12,016 12,419 12,887 13,326 143,849

Federal Royalty Payments 908 1,030 1,136 1,277 1,404 1,484 1,547 1,629 1,719 1,735 1,753 1,770 1,781 1,782 20,955



Severance Taxes 1,411 1,566 1,712 1,968 2,235 2,373 2,478 2,598 2,713 2,752 2,769 2,807 2,853 2,875 33,109

Ad Valorem Taxes 934 1,039 1,142 1,310 1,490 1,596 1,679 1,771 1,861 1,884 1,897 1,923 1,954 1,973 22,456









Midwest Census Region Government Revenue due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)


IHS 27

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025


Federal Taxes 1,807 2,081 2,356 2,630 2,723 2,817 2,910 3,003 3,096 3,170 3,243 3,317 3,390 3,463 40,006

Federal Royalty Payments 7 12 16 19 19 20 23 25 28 30 33 35 37 40 345

Federal Bonus Payments - - - - - - - - - - - - - - -


Severance Taxes - - - - - - - - - - - - - - -

Ad Valorem Taxes - - - - - - - - - - - - - - -

State Royalty Payments 13 21 29 34 34 37 41 45 50 54 58 62 66 71 616

State Bonus Payments - - - - - - - - - - - - - - -


Lease Payments to Private Landowners 32 35 39 43 46 48 52 56 60 64 67 69 73 78 761


Federal Taxes 926 617 228 104 132 118 89 71 51 27 25 21 19 22 2,450


Total Government Revenue 1,557 1,036 383 175 225 200 150 118 85 45 42 36 32 36 4,120


Federal Taxes - - - - 23 131 171 337 187 189 189 191 183 188 1,789

State and Local Taxes - - - - 14 77 99 204 118 117 116 118 113 116 1,092

Total Government Revenue - - - - 38 208 269 541 305 306 305 309 296 304 2,882

Total Activity

Federal Taxes 2,733 2,698 2,583 2,734 2,879 3,065 3,170 3,412 3,335 3,386 3,457 3,529 3,592 3,673 44,246

Federal Royalty Payments 7 12 16 19 19 20 23 25 28 30 33 35 37 40 345

Federal Bonus Payments - - - - - - - - - - - - - - -


Severance Taxes - - - - - - - - - - - - - - -

Ad Valorem Taxes - - - - - - - - - - - - - - -

State Royalty Payments 13 21 29 34 34 37 41 45 50 54 58 62 66 71 616

State Bonus Payments - - - - - - - - - - - - - - -


Lease Payments to Private Landowners 32 35 39 43 46 48 52 56 60 64 67 69 73 78 761





Northeast Census Region Government Revenue due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)


IHS 28

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2012-2025


Federal Taxes 3,371 3,836 4,301 4,766 4,930 5,094 5,258 5,421 5,585 6,013 6,441 6,869 7,297 7,725 76,907

Federal Royalty Payments 996 1,078 1,176 1,247 1,232 1,257 1,295 1,313 1,320 1,252 1,178 1,110 1,048 995 16,497



Severance Taxes 897 997 1,108 1,218 1,267 1,319 1,379 1,424 1,455 1,435 1,414 1,421 1,449 1,494 18,276

Ad Valorem Taxes 510 580 656 723 750 789 837 871 895 879 864 868 885 917 11,026






Federal Taxes 266 299 287 440 414 215 209 143 56 63 113 131 128 61 2,824




Federal Taxes 28 17 14 27 91 97 128 47 50 51 51 51 49 51 752

State and Local Taxes 18 10 8 16 56 58 79 31 33 33 32 33 32 32 472


Total Activity

Federal Taxes 3,665 4,152 4,601 5,232 5,435 5,406 5,594 5,611 5,692 6,126 6,605 7,052 7,474 7,837 80,483

Federal Royalty Payments 996 1,078 1,176 1,247 1,232 1,257 1,295 1,313 1,320 1,252 1,178 1,110 1,048 995 16,497



Severance Taxes 897 997 1,108 1,218 1,267 1,319 1,379 1,424 1,455 1,435 1,414 1,421 1,449 1,494 18,276

Ad Valorem Taxes 510 580 656 723 750 789 837 871 895 879 864 868 885 917 11,026









West Census Region Government Revenue due to the Unconventional Activity Value Chain: Base Case*

(2012 $M)



Appendix E. Economic Contribution Assessment –Description of Contents and Example of Detailed IndustryResults

Prepared by:



September 2013

America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US EconomyVolume 3: A Manufacturing Renaissance – Appendix E

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COPYRIGHT NOTICE AND LEGAL DISCLAIMER© 2013 IHS. No portion of this report may be reproduced, reused, or otherwise distributed in any form withoutprior written consent, with the exception of any internal client distribution as may be permitted in the licenseagreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHSlegal notices and attributions of authorship. The information contained herein is from sources considered reliablebut its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it,and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage orexpense incurred by reliance on information or any statement contained herein. For more information, pleasecontact IHS at [email protected], +1 800 IHS CARE (from North American locations), or +44 (0) 1344 328300 (from outside North America). All products, company names or other marks appearing in this publication arethe trademarks and property of IHS or their respective owners.






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Project Directors



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Key Contributors





Acknowledgments

We extend our appreciation to our internal Advisory Board, which consists of IHS ViceChairman Daniel Yergin, IHS Senior Vice President James Rosenfield, and IHS ChiefEconomist Nariman Behravesh. They offered critical insight, guidance and support inreviewing the methodologies and findings from this study.

We would also like to thank the subject matter experts, technical experts, industry expertsand analysts who also contributed to this study: Sam Andrus, John Anton, MiguelGoncalves, Daniel Lichtenstein, Kenneth Kremar, Charlie McCarren, Mike Montgomery,John Mothersole, Rajeevee Panditharatna, Stewart Ramsey, Paul Robinson, MihaelaSolcan, and Tom Runiewicz.

This report offers an independent assessment of the importance of unconventional oil and gas to theUS economy. This research was supported by the American Chemistry Council, America’s NaturalGas Alliance, the American Petroleum Institute, the Fertilizer Institute, the US Chamber of Commerce– Institute for 21

stCentury Energy, the National Association of Manufacturers, the Natural Gas Supply

Association, Rio Tinto, and the Society of the Plastics Industry. IHS is exclusively responsible for thisreport and all of the analysis and content contained herein. The analysis and metrics developed duringthe course of this research represent the independent views of IHS and are intended to contribute tothe dialogue on the role of the unconventional oil and gas production in promoting employment,economic growth, and energy security.


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Appendix E. Economic Contribution Assessment – Descriptionof Contents and Example of Detailed Industry Results

An Excel workbook containing the detailed economic contribution assessment results willserve as the complete detailed appendix of economic contributions, with results presentedat the 3-digit level of the North American Industrial Classification System (NAICS).

For each 3-digit NAICS, industry employment, value added, and labor income by type(direct, indirect, and induced) are reported for the four census regions and United Statesfrom 2012 to 2025. Additionally, these results are presented separately for upstreamenergy, midstream and downstream energy, and energy-related chemicals.

Each NAICS industry is presented on a separate worksheet within the EXCEL workbook.Each worksheet, in turn, has 20 unique tables sorted by region (United States, South,Midwest, Northeast, West) then activity type (Upstream, Midstream and Downstream,Energy-Related Chemicals, Total).

What follows is a representative table, which displays the dimensions to be found in eachof the tables in the complete electronic appendix.


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2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Employment (Number of Workers)

Direct - - - - - - - - - - - - - -

Indirect 1,727 1,972 2,217 2,462 2,564 2,666 2,767 2,869 2,970 3,046 3,121 3,197 3,273 3,348

Induced 7,374 8,669 9,965 11,261 11,679 12,097 12,515 12,933 13,351 13,646 13,941 14,237 14,532 14,827

Total 9,100 10,641 12,183 13,724 14,243 14,763 15,282 15,802 16,322 16,692 17,063 17,434 17,804 18,175

Value Added (2012 $M)

Direct - - - - - - - - - - - - - -

Indirect 99 114 129 143 149 155 161 167 173 177 181 186 190 195

Induced 519 611 702 794 823 853 883 912 942 963 984 1,004 1,025 1,046

Total 618 725 831 937 972 1,008 1,043 1,079 1,114 1,140 1,165 1,190 1,216 1,241

Labor Income (2012 $M)

Direct - - - - - - - - - - - - - -

Indirect 37 43 48 53 55 57 60 62 64 66 67 69 71 72

Induced 181 212 243 275 285 295 305 316 326 333 341 348 355 362

Total 218 255 291 328 340 353 365 378 390 399 408 417 426 435



United States Economic Contribution Summary due to Upstream Energy Activity: Base Case

Crop Production (NAICS 111)

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