Thursday, March 6, 2014 Houston, TX. 8:30 9:40 a.m. AN ECONOMIST S-EYE VIEW OF THE ENERGY INDUSTRY: HYDROCARBON HAT TRICK

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1 Thursday, March 6, 214 Houston, TX 8:3 9:4 a.m. AN ECONOMIST S-EYE VIEW OF THE ENERGY INDUSTRY: HYDROCARBON HAT TRICK Presented by Jesse Thompson Business Economist Federal Reserve Bank of Dallas, Houston Branch The energy industry significantly impacts the economy, and understanding the economics of the oil and gas industry is vital to insurance professionals specializing in energy risk management and insurance. This session will discuss the current impacts, particularly from the use of hydraulic fracturing and horizontal drilling, that have changed the petrochemical industry. These technologies not only led to initial natural gas finds but also proved successful at extracting oil and other liquids. This presentation will address the impact to extraction, refining, and petrochemicals and explore the broader macroeconomic effects. Copyright 214 International Risk Management Institute, Inc. 1

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3 Jesse Thompson Business Economist Federal Reserve Bank of Dallas, Houston Branch Jesse Thompson is business economist at the Houston branch of the Federal Reserve Bank of Dallas. He conducts research covering the Houston and Gulf Coast economy and the impacts of shale gas on US industry and assists in the collection of information for the Beige Book publication of the Federal Reserve Bank of Dallas. He earned a bachelor of arts degree in philosophy and economics from the University of Houston and a master of arts in economics, with emphasis on empirical microeconomics, public economics, labor, and education, also from the University of Houston. Mr. Thompson is author of the monthly Houston Economic Indicators and the semi-annual Houston Business newsletter. He is author and coauthor for multiple articles in Southwest Economy, most recently, Booming Shale Gas Drives Texas Petrochemical Surge. He is also coauthor of Recent Trends in Earnings Volatility: Evidence from Survey and Administrative Data, The B.E. Journal of Economic Analysis & Policy 12, issue 2 (212): 1. 3

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5 An Economist s-eye View of the Energy Industry: The Hydrocarbon Hat Trick Presented By: Jesse Thompson Regional Business Economist The Federal Reserve Bank of Dallas, Houston Branch IRMI.com 1 The Hydrocarbon Hat Trick Jesse Thompson Regional Business Economist The Federal Reserve Bank of Dallas, Houston Branch March

6 The Hydrocarbon Hat Trick Extraction Refining Petrochemicals 3 Oil and Gas Extraction 4 6

7 Oil and Gas Extraction Oil and Gas Prices Diverge Natural gas Wellhead (BOE) Refiners Acquisition Cost of Crude: Imported Jan-1974 Dec-1978 Nov-1983 Oct-1988 Sep-1993 Aug-1998 Jul-23 Jun-28 *Adjusted using consumer price index: all urban consumers. SOURCE: Energy Information Administration. Author s adjustments. 5 U.S. Oil Production Growth Index (Jan-81=1) 16 3 Years of Production Declines Recovered U.S. Louisiana New Mexico Texas Jan-1981 Apr-1982 Jul-1983 Oct-1984 Jan-1986 Apr-1987 Jul-1988 Oct-1989 Jan-1991 Apr-1992 Jul-1993 Oct-1994 Jan-1996 Apr-1997 Jul-1998 Oct-1999 Jan-21 Apr-22 Jul-23 Oct-24 Jan-26 Apr-27 Jul-28 Oct-29 Jan-211 Apr-212 Jul

8 Oil and Gas Extraction Number 25 U.S. Rigs Find a Bottom Gas directed Oil directed Jan-21 Jan-211 Jan-212 Jan-213 Jan-214 SOURCE: Baker Hughes. 7 Oil and Gas Extraction 6 5 Eagle Ford Permian Williston Total U.S.Land Wells/Rig Q1-212 Q2-212 Q3-212 Q4-212 Q1-213 Q2-213 Q3-213 Q4-213* 8 8

9 Basins on Different Trends Vertical Horizontal o Directional Permian Barnett /4/11 5/4/11 8/4/11 11/4/11 2/4/12 5/4/12 8/4/12 11/4/12 2/4/13 5/4/13 8/4/13 11/4/ /4/11 5/4/11 8/4/11 11/4/11 Eagle Ford 2/4/12 5/4/12 8/4/12 11/4/12 2/4/13 5/4/13 8/4/13 11/4/13 9 Basins on Different Trends 1 9

10 Employment in Oil Basins Outpaces Texas 11 Employment in Oil Basins Outpaces Texas 12 1

11 Severance Taxes Rise $4.5 billion in revenues in 213 Oil severance taxes $3 billion Natural gas severance taxes $1.5 billion 1.7% of total state tax revenues 45% increase from

12 15 Refining and Petrochemicals 16 12

13 Refining Dollars per bbl Refiner er Margins PADDII-Chicago Gulf Coast-WTS NW Europe -5 Dec-1999 Sep-21 Jun-23 Mar-25 Dec-26 Sep-28 Jun-21 Mar Refining World Refinery Margins* Muse Pace Current Current/Avg Current Current/Avg East Coast Gulf Coast Mid-West West Coast NW-Europe SEA *US$/bbl 18 13

14 Refining U.S. Becomes Net Exporter of Finished Petroleum Products Mil. BBL, DOE Advantage U.S. Ethylene 212 Nameplate Capacity Tons/Year Asia (Exc. China) 24,96, China 13,778, Middle East 25,59, United States 28,121,132 Western Europe 24,384, Rest of World 26,74,294 Total 143,42,426. Percent share Ethylene Feed Stock Mix* NGL Naptha Gas oil Other SOURCE: Oil & Gas Journal International Survey of Steam Crackers. Note: The percent of nameplate capacity that reported feedstock mix varies. Asia (Exc. China) Middle East United States Western Europe 2 14

15 Gulf Coast Petrochemical Margins Cents/lbs Divergent Oil and Gas Prices Lead to Rise of Ethane Advantage Ethane Naphtha -3-4 Jan-1997 Jan-1999 Jan-21 Jan-23 Jan-25 Jan-27 Jan-29 Jan-211 SOURCE: Muse, Stancil, and Co Ethylene Cash Margins. Author s adjustments. 21 Ethylene Chemistry in Exports Thousands of Tonnes 12 Exports Grow, Then Flatten Out 1 8 PVC & Related Polyethylene

16 Ethylene Only Part of the Story 23 Ethylene Only Part of the Story 15 Butadiene & Isoprene Net Imports of BTX and Butadiene BTXs Butadiene & Isoprene Jan-1996 Jan-1998 Jan-2 Jan-22 Jan-24 Jan-26 Jan-28 Jan-21 Jan-212 SOURCE: International Trade Commission. Author s calculations

17 New Capacity by 22 New plants, expansions, de- e-bottlenecks, hundreds of billions of dollars in capital investment. Ethylene: up 52% Polyethylene up 47% Methanol: 12.7m tonnes On-purpose propylene plants Assuming sum it all gets built: - Costs are creeping - Permits are slow 25 Outlook 26 17

18 Outlook 27 Outlook The global economy is slowing? Uncertainty: regulatory Labor force Outlook is positive 28 18

19 Everyone Has Shale 29 The Hydrocarbon Hat Trick How Shale Is Impacting the Energy Industry Jesse Thompson Regional Business Economist The Federal Reserve Bank of Dallas, Houston Branch March

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