Reaching a Long-Term Balance: Energy and Manufacturing
By Joseph Eddy
West Virginia has a rich history in the production of energy resources such as coal, oil, gas and, more recently, hydro-electric and wind turbine energy. For more than 150 years these resources have helped fuel our state and nation’s electric power generation and chemical, steel, aluminum, polymer, wood, automotive and glass manufacturing industries. Today, manufacturers use one-third of our nation’s total energy output for heating, fuel, processing and raw materials. West Virginia’s energy resources play an ever more important role in framing a national energy policy that includes the security and stability of abundant, affordable energy for manufacturing in West Virginia and the United States.
Today, 96 percent of West Virginia’s electric power generation comes from coal, and West Virginia leads the nation in net interstate electricity exports. We are the second-leading coal producing state and account for nearly one-third of U.S. coal production in the east and one-tenth nationwide. Coal continues to provide low cost electricity to West Virginia’s consumers and a competitive advantage for our state’s manufacturing industries. The coal industry provided more than 60,000 jobs and paid $500 million in coal severance taxes in West Virginia in 2011. Nationally, since 2007, coal-fired electric generation has declined from about 50 percent to 40 percent—at a time when overall energy consumption has a 20-year projected growth of 35 percent. Continued attacks by the Environmental Protection Agency (EPA) on coal will have costly long-term effects on West Virginia’s jobs, economy, tax base and energy costs. Abundant, affordable electric energy is paramount to the future of manufacturing in West Virginia, and clean coal technology must continue to be a measured part of our state and national energy policies.
Natural Gas Resources
Over 150 years ago, West Virginia was one of the first areas to commercially produce natural gas. In fact, from 1910 to 1925, West Virginia was the nation’s number one producer of natural gas. Since that time, West Virginia manufacturers’ fortunes or failures have been dependent upon having an abundant, affordable supply of natural gas to fuel their plants and/or supply feedstock in their chemical processes. Today, the major consumers of natural gas in the U.S. are electric power generation (35 percent), industrial/manufacturing (30 percent), residential (20 percent) and commercial/vehicle fuel (15 percent). In 2010, West Virginia oil and natural gas companies produced 288 billion cubic feet of natural gas and 1.85 million barrels of oil and paid $71 million in severance taxes and $106 million in property taxes. The industry in West Virginia makes more than 30,000 jobs possible.
The natural gas industry’s refined combination of horizontal drilling and multi-stage hydraulic fracturing has revolutionized development of previously unconventional shale formations. West Virginia’s Marcellus and Utica shales have proven to be prolific producers of high British thermal unit (Btu)natural gas and natural gas liquids when employing these drilling and completion techniques. Record high levels of gas production, associated reserve additions and mild weather over the past two years are responsible for lowering gas prices to the current $2/MMBtu range from the $6-8/MMBtu. Energy values tend to be cyclical as supply and demand, extraction costs, fuel-switching, transportation and storage costs fluctuate.
A Manufacturing Renaissance
With the addition of significant natural gas liquids reserves and a new critical feedstock cost advantage, the U.S. petrochemical industry is planning a major expansion of petrochemical capacity, reversing a decade-long decline and initializing a revitalization of West Virginia’s manufacturing industry.
West Virginia is sitting on some of the world’s largest deposits of natural gas liquids—ethane, propane and butane—the development of which could be as monumental as the Middle East oil fields. Future investment estimates for the Marcellus and Utica shales run as high as $100 billion on drilling/completions and $100 billion on midstream and downstream assets over the next 10 years.
Royal Dutch Shell has announced their interest in constructing an ethane cracker and polyethylene unit in Monaca, PA, validating the business platform for Appalachian Basin cracker investments and leading, hopefully, to additional cracker and downstream investment decisions from the petrochemical industry for West Virginia. According to the American Chemistry Council, a cracker in West Virginia would represent an investment of up to $3.5 billion, generating $7 billion in annual output, creating more than 12,000 jobs with more than $730 million in wages and generating nearly $95 million in state tax revenue and $139 million in federal revenue.
A PricewaterhouseCoopers report for the National Association of Manufacturers says low-cost domestic natural gas will save $11 billion per year in U.S. manufacturing costs over the next 10 years and create more than one million new jobs. Low energy prices also bring energy security as long as reliable supply is sustained, reducing our dependence on imported oil and natural gas. The key part of energy security is sustaining a long-term reliable supply, which can be difficult at record low gas prices as producers plan spending cuts on drilling in dry gas areas and limit their focus to the natural gas liquids areas. The current low gas pricing fits into the cyclical nature of energy resources and is apt to change as low-cost natural gas replaces reduced coal generating capacity.
A secure energy strategy is one that supports the balanced use of all abundant, affordable resources, natural and renewable. Over-regulation, subsidies and picking supply favorites alter commercial distribution and ultimately over-value and limit supply of the favored energy resource. A balanced energy strategy will help provide security, stability and growth for manufacturers and a long-term stable market for all of our state’s natural resources.