Energy boom brings new life to old businesses across U.S.

McClatchy Washington BureauNovember 28, 2013 

— This rust-bucket town near Buffalo is a perfect example of the transformation that fracking has brought to American business, where new life has been breathed into manufacturing and the nation’s railroads even as much the economy bumps along at a subpar pace.

On land that three decades ago bustled with thousands of steel workers, then lay fallow for years when America’s steel industry went bust, a new business now thrives: Welded Tube USA Inc., a subsidiary Welded Tube of Canada Corp. In September, the brand new Lackawanna plant started making steel pipes for private companies that drill for natural gas and crude oil.

Welded Tube plans in its first year to make about 100,000 tons of steel pipe used to push deep below the Earth’s surface in search of oil and natural gas. That’s more than five Eifel Towers annually on a single shift. A second shift is being eyed for February, and if the boom continues, plans call for more than tripling output to 350,000 tons, something the owners of the privately held company expect to happen in five years or less.

“We were primarily a non-energy tube producer until 2005,” said Robert “Butch” Mandel, the company’s president, who recognized that the boom in horizontal drilling would mean opportunity. “We started to reconfigure our capacity (in Canada) to produce pipes. . . . We decided at that point . . . we wanted to locate an operation that was close to the Marcellus and Utica shale plays,” two of the most significant new gas fields in the United States.

That desire to be close to the underground deposits of energy resources brought Welded Tube to what had once been home to Bethlehem Steel’s giant plant here. The shiny new 110,000-square-foot facility sits on 40 acres within a mostly overgrown 1,000-acre parcel in Lackawanna. The building, 1,000 feet long, is surrounded by weeds and shrub that have overrun the vestiges of a period when steel was king and this was a gritty industrial city.

Steel may no longer be king, but the energy boom is giving parts of the nation new and unexpected opportunity. Whether it’s extraction of natural gas in Ohio, Pennsylvania or West Virginia or crude oil being pumped from Texas or remote corners of Montana and North Dakota, the energy boom that is turning the United States into “Saudi America” has sent out tentacles that have benefited businesses far and wide.

“I think almost every state has something tied to the energy boom. Even states that have practically no energy sector are seeing some benefit from it,” said Mark Vitner, a senior economist with Wells Fargo Securities. “I think it has the potential to be the type of game-changing event that shapes the economy for the next quarter-century.”

The new abundance of natural gas, in particular, has made electricity cheaper, as more and more local utilities are switching their generating plants from coal to gas to take advantage of the lower costs. That’s made products manufactured in the United States more competitive globally, an advantage analysts expect to last for a while as other nations work to catch up with the edge the United States holds in the technology that allows horizontal drilling and fracking – hydraulic fracturing – of oil and gas deposits.

“I think we have five or 10 years of running room here,” said Daniel Yergin, the oil historian whose 1992 book on the oil industry, “The Prize,” won a Pulitzer Prize for nonfiction and whose 2011 work, “The Quest,” is considered the authoritative look at energy security and geopolitical struggles over oil.

The energy boom has also meant jobs during a time where they’ve been largely lacking. The number of people working in oil and gas extraction grew from 102,200 in 2003 to 186,800 in 2012; preliminary numbers for 2013 through October show that almost 200,000 people now work in the industry, according to the Bureau of Labor Statistics.

The numbers are even more impressive for jobs that support oil and gas operations. Those jobs more than doubled, from 121,200 in 2003 to 282,000 last year and 305,300 through October, the BLS said.

The United States is not the only North American beneficiary. In Canada, the Ontario provincial Ministry of Energy, which owns the heavily populated power plants, is moving quickly to end the use of coal as a fuel, in favor of natural gas. Even that has a U.S. benefit, however: The gas comes from Pennsylvania.

“Natural gas is now a major element” in the province’s energy mix, Garry McKeever, the Energy Ministry’s director of energy supply, transmission and distribution policy, said in an interview at Toronto headquarters.

A decade ago, nuclear power generated about 42 percent of the province’s electricity, with coal comprising 25 percent, hydropower 24 percent and natural gas 8 percent. By 2012, McKeever said, nuclear and hydropower still held dominant percentages, but coal had fallen to just 3 percent and natural gas had risen to 14 percent. And that percentage is expected to rise, with most of that expansion being filled with natural gas from the United States.

The sudden shift has seen new opportunities for old businesses. The energy company TransCanada in August announced it was converting its natural gas pipeline from the western province of Alberta so that it could bring crude oil to eastern Canada.

Meanwhile, Atlanta-based Colonial Pipeline, the operator of the largest petroleum pipeline in the United States, is seeking ways to move gasoline into New York and New Jersey, away from its traditional market connecting the U.S. Gulf Coast with most major markets throughout the Southeast, from Nashville, Tenn., and Charlotte, N.C., to Raleigh, N.C. and Richmond, Va.

The energy boom has proved a boon for railroads, which have stepped in to move crude from the new oil-producing states of Montana and North Dakota in an era where building new pipelines faces a host of political and environmental hurdles.

The Burlington Northern & Santa Fe Railway Co. serves all the western locations where oil is being drawn from the Bakken and the Williston formations, which span Montana, North Dakota and Canada’s Saskatchewan province. The BNSF carries about 650,000 barrels of oil per day on its rail network; since a barrel yields about 42 gallons of gasoline, it works out to the equivalent of 27.3 million gallons of gasoline daily.

“I don’t think that there was the ability to create enough pipelines quick enough going to all the various markets that this oil wanted to go. People still have a tough time believing that a railroad can be like a pipeline,” said David Garin, vice president of industrial products for BNSF. “We’ve helped to create energy independence . . . it really feels good to us.”

Investment titan Warren Buffett has grown even richer on the good fortunes of railroads. His Berkshire Hathaway Inc. bought a stake in BNSF, then the entire company in February 2010. At $100 per share in cash and stock, it was Berkshire Hathaway’s largest-ever acquisition.

Railroads boast an advantage of speed, moving oil at about 15-20 mph, compared with pipelines, which push through oil constantly but at a slower speed of 4-5 mph.

The major railroads, called Class I carriers, together moved 234,000 carloads of crude oil in 2012, compared with just 9,500 in 2009, according to the Association of American Railroads. They boast a spill rate of 2.2 gallons per million ton miles, the association said, better than the rate of 6.3 per million ton miles of pipeline companies.

The focus on the safety of railcars, however, may change after a runaway train carrying 72 railcars of crude, operated by a small U.S. rail carrier called the Montreal, Maine & Atlantic Railway, derailed in the Quebec town of Lac-Megantic. The explosion killed at least 47 people and incinerated at least eight of the victims. Calls are mounting for greater use of puncture-resistant tank cars, although most cars are owned by the shippers of oil, not the railroads that haul them.

Railroads are also moving vast amounts of industrial sand, pushed through the pipes during the fracking process. A single horizontally drilled well uses anywhere from 3,000 tons to 10,000 tons of sand. Major railroads carried 293,000 carloads of industrial sand last year, compared with 112,000 in 2009.

“Hydraulic fracturing and horizontal drilling have made that growth so exponential. It’s as if you have moved from the cottage industry to an industrial world,” said Mark Ellis, president of the National Industrial Sand Association.

Before fracking, industrial sand had tamer demand, used in molds for making metal castings, by foundries and in water filtration projects. The Midwest accounts for almost two-thirds of the sand mined for sale to the energy sector, and companies in Wisconsin and Minnesota are emerging as new players, located strategically relatively close to North Dakota and Montana drilling and the natural gas drilling in Ohio, Pennsylvania and West Virginia.

“Who would have thought that sand would have turned into a major resource?” said Yergin, the oil historian.

In 2008, U.S. sand production was about 33 million tons, but by the end of last year it had surpassed 54 million tons, according to the U.S. Geological Survey. Energy drillers consumed about 57 percent of that production in 2012, the agency said in a report earlier this year.

Water management is also emerging as another unlikely business opportunity associated with the energy boom. As the scale of fracking grows, companies are turning to water and wastewater management firms for both storage and for saltwater injection of liquids back underground.

“We are at the state of play in the oil and gas environment services industry where we were in the 1990s with mom and pop garbage haulers,” said Jonathan Hoopes, president of GreenHunter Water LLC, a Grapevine, Texas-based waste and water company that is expanding to take advantage of the fracking boom.

Mom-and-pop operators of wells and water-storage firms are being bought up as companies grow larger to meet the energy boom. This sort of consolidation happened in solid waste as trash haulers were replaced by giant firms such as Waste Management Inc. The same is beginning to happen for water management and disposal at fracking sites, he said.

“I hate calling it a boom, because you think of the boom and bust cycle. I think we’re at the beginning of a multi-decade transitional shift that’s really going to affect our energy independence and standard of living,” said Hoopes, whose company operates 15 saltwater injection wells, up sharply from just three in February 2012. These wells receive water that been used in fracking, sometimes called oilfield brine. It’s cleared of contaminants, then injected into deposits where oil and natural gas have been extracted.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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