Distributors continue to home in on the booming domestic oil & gas market, driven by gains in oil and gas shale exploration and production. They say that despite concern over possibly stiffer regulations and environmental challenges, these markets continue to grow faster than other end-markets and hold potential for growth down the road.
The oil and gas market has always been a focus for GHX Industrial Inc., a Texas-based industrial distributor, but when a new technology to extract gas from shale in the U.S. emerged over the past decade, the company aggressively expanded its industrial hose and gasket business into new geographic markets.
Many distributors like GHX Industrial have benefited from a surge over the past five years in oil and gas shale exploration and production in the U.S. and Canada.
“We’re very bullish on the opportunity for a long-term robust market,” says Dan Ahuero, chairman of GHX’s board of directors. “Short of any kind of government intervention that could affect us negatively, we have a long-term positive outlook for this type of business.”
Tipco Technologies, Owings Mills, MD, an industrial distributor based near one of the hottest markets in the country for shale gas – Pennsylvania – is also watching developments closely.
Shale gas developments have offset declines in sales to the military for the distributor. Tipco has opened two new branches in the past two years, and the company has plans to open a ninth location in West Virginia to focus on future shale projects.
In addition to offering a market opportunity for many distributors across sectors, the boom has caused some hiccups and price increases as plants sell out of certain products that are in high demand. But for the most part supply chain interruptions have smoothed out, Tipco President Rob Lyons says, as suppliers and distributors work together to ensure customers’ needs in all segments are met. He has high hopes for ongoing opportunity in these markets.
Distributors are right to be optimistic. According to a recent report from the International Energy Agency, at current production rates, there are more than 100 years worth of gas, half of which is stored in shale and other formations. Recent reports also indicate that other countries are starting to exploit technology to extract shale gas to meet rising energy needs.
The IEA estimates that gas production could grow by 55 percent through 2035, driven mostly by production from unconventional sources such as shale.
According to the Pennsylvania Department of Conservation and Natural Resources, a shift in how shale is viewed, technological advances in drilling, the increased demand for natural gas coupled with higher energy prices and Wall Street’s acceptance of unconventional plays have all contributed to making this an attractive opportunity for producers – and in turn those who sell to them.
Ups and Downs of Shale Gas
A new way of extracting gas from shale – a method developed in Texas at the Barnett Shale in the late 1990s known as hydraulic fracturing, or fracking – led to increased interest in several areas of the country. As gas prices increased and technology advanced enough, fracking became more competitive with more traditional oil & gas drilling.
Newer assessments from the Energy Information Administration and U.S. Geological Survey indicate that only 3 percent of the potential shale gas reserves in the U.S. have been tapped. One of the biggest boom areas is the Marcellus Shale formation that covers parts of Pennsylvania, New York, Ohio and West Virginia.
Other targets are found in northern Michigan, Texas, Louisiana, Arkansas and North Carolina. The EIA has also found potential for gas extraction in Tennessee, Alabama, Kentucky and Georgia.
Around 2007, GHX began acquiring businesses that had locations near the major shale plays. They purchased All Hose and Specialty in Louisiana, and Robsco Inc. and McCarty Equipment Company in Texas.
“That gave us immediate access to the shale activity,” Ahuero says. GHX expanded its product line to meet the unique needs of these markets to include a line of valves specific to the industry. “We’ve added a lot of new equipment to be able to handle this kind of business,” Ahuero says.
But while many companies across sectors have positioned themselves to serve shale gas markets in recent years, they haven’t always been reliably strong, according to Eric Smith, associate director of the Tulane Energy Institute, a part of Tulane University in New Orleans, LA.
More recently, the supply of natural gas has risen and as a result gas prices have hit a low, which is great for consumers, Smith says. But this means that drilling for gas has slowed at the Marcellus Shale and other gas plays in the U.S.
Fluid power distributor Livingston & Haven, Charlotte, NC, said it has seen this in its business. The distributor supplies hydraulic motor circuits to an OEM that manufactures heat exchanges used on generator sets required for fracking, which requires rigs to drill down then horizontally below the earth’s surface before fracturing the rock and releasing petroleum or natural gas.
So attention for producers has recently shifted to oil. “The bad news is with low gas prices and high oil prices, they won’t be drilling for gas,” Smith says. “They’re drilling for oil.”
The Shale Oil Opportunity
According to a USGS report, 56 trillion cubic feet of shale oil and gas is left undiscovered, amounting to 23.9 billion barrels of oil in the U.S. Oil shale plays, identified by a solid bituminous material called kerogen, are found in Ohio, Indiana, Kentucky, Colorado, Wyoming, Utah and California.
The largest oil shale play is in the Monterey Shale in southern California, which is estimated to hold 15.3 billion barrels of technically recoverable oil, or 64 percent of estimated undeveloped shale oil resources as of January 2009, according to the EIA.
The Bakken Shale, which stretches across North Dakota, Montana and into Canada, ushered in a boom in those areas.
The promise of local supply is encouraging for distributors. “We’re very excited about the opportunity to service this industry and the chance to grow with it,” Ahuero says.
“The real underpinning is that the nation wants to become independent on our own energy and right now the new technology with the shale drilling gives us that ability to import less and utilize the technology to tap into the reserves that we have right here in our country.”
Regulatory Concerns Drive Uncertainty
Distributors say ongoing conversation about the safety of extracting oil and gas via fracking creates uncertainty in these growing markets.
Fracking continues to be a target of environmentalists, who say the technique may contaminate groundwater and even cause earthquakes. Vermont recently announced it may be the first state to outlaw the practice, even though it has very little in terms of energy reserves. It’s unknown how that move will affect other states. Other states, including New York and Maryland, have moratoriums on the practice while its impacts are studied.
Concerns about environmental impacts will prevent oil exploration in the near future at some sites, including the Green River Basin Shale, found in Colorado, Wyoming and Utah. Federal bans restrict oil exploration of this shale, which is estimated to hold the largest deposit in the world, as much as 1.4 trillion barrels of oil, according to USGS. Some reports say that while there’s not exploration, permits to drill for testing have been issued.
Industry groups will continue to track regulatory developments in these markets closely.
“The shale revolution is changing the face of American energy development,” the American Petroleum Institute’s President and CEO Jack Gerard said recently in a news release.
API represents more than 500 oil and natural gas companies. “It’s boosting domestic oil and natural gas production, putting hundreds of thousands of people to work, and delivering added billions in revenue to state and federal government.
“How much more will depend in part on government regulations.”
Planning for Market Shifts
Tipco’s Lyons says that while there is some unpredictability in these markets, because of the region he serves, with a history of ups and downs in markets like steel, automotive and construction, “we can turn pretty quickly and redirect our efforts” when needed.
One way he maintains that flexibility: giving his eight branches the autonomy to meet the needs in their markets.
“They choose what to focus on,” he says, finding the best opportunities for growth.
And while shale oil and gas markets may have some unknowns, they are growing faster than other end-markets for many distributors – which will continue to make them an attractive opportunity.
Lindsay Konzak contributed to this report.