Jan. 10 (Bloomberg) -- Thirty-four years after Black Monday, the day Youngstown Sheet & Tube announced shutdowns marking the end of the Ohio city’s steel era, a $650 million mill is coming to life thanks to the natural-gas drilling boom.
The factory for Vallourec SA’s V&M Star will have 350 workers and produce seamless pipes used in hydraulic fracturing, also known as fracking. It’s part of a development that an oil and gas industry study calculates will mean more than 200,000 jobs and $22 billion in economic output in Ohio by 2015 -- and which has neighboring states looking to get in on the action.
The new mill is rising about two miles (3.2 kilometers) from an injection well for disposing wastewater from fracking that has been closed after 11 earthquakes shook the Youngstown area last year. States that that sit atop shale formations are cashing in on the drilling and the expanding businesses that support it, even as the Ohio Department of Natural Resources reviews the earthquake data and the U.S. Environmental Protection Agency studies the effects of fracking on drinking water with an eye on possible nationwide regulations.
“This will be the biggest thing to hit the state of Ohio economically since maybe the plow,” Aubrey K. McClendon, chief executive officer of Chesapeake Energy Corp., the most active U.S. oil and natural-gas driller, said during an energy summit that Governor John Kasich convened in Columbus in September.
Drillers have turned to fracking -- a process that injects water, sand and chemicals into rock to free natural gas -- in shale formations including the Marcellus and Utica below Ohio, New York, Pennsylvania, Maryland, West Virginia and parts of Kentucky and Tennessee. A boom in production helped cut prices 32 percent last year.
While some shale-gas development is anchored to the drilling sites, states are jockeying for spinoff investments such as a “world-scale” natural-gas processing plant that Royal Dutch Shell Plc said it plans to build in Ohio, Pennsylvania or West Virginia.
All three states say they have offered incentives to Shell, and Kasich flew to Houston in November to hand-deliver letters of support for the project.
“States compete every day for every business they can find,” Keith Burdette, West Virginia’s secretary of commerce, said in a telephone interview from Charleston. “Suddenly, there’s this vast new array of manufacturing opportunities that may be returning to this region of the country, and I think we’ll all be aggressively looking for every opportunity.”
Development of the shale-gas industry is one of Pennsylvania’s top priorities, C. Alan Walker, secretary of community and economic development, said in a Jan. 4 interview in Harrisburg. Republican Governor Tom Corbett has said he wants the state to be the “Texas of the natural-gas boom.”
Texas wants to be the Texas of the gas boom, too. Half of the eight most active U.S. oil- and gas-drilling regions are in the state, according to a December presentation by Pioneer Natural Resources Inc., a Dallas-based exploration and production company.
Oil and gas employment in the state increased by 18 percent to almost 238,000 during the year ended Oct. 31 and now exceeds the peak of the last energy boom in October 2008, according to the Texas Petro Index, a survey compiled by Amarillo economist Karr Ingham.
Bridge to Future
In Youngstown, which has lost more than half the 168,330 residents it had in 1950, V&M Star may help make the area the Utica Shale’s supply-chain capital, said Eric Planey, a vice president at the Youngstown/Warren Regional Chamber.
“I look at it as being a bridge from our past to our future,” Planey, whose father worked at Youngstown Sheet & Tube for 40 years, said in a Dec. 8 interview. “Our past was exclusively steel. It looks like our future is going to be significantly a part of the oil and gas and energy business.”
Even so, an Ohio State University analysis concluded last month that the industry study, prepared for the Ohio Oil & Gas Energy Education Program, “greatly overestimates” the economic impact. Environmental groups, including the Natural Resources Defense Council, say that job-hungry states are moving too fast to capitalize before fracking’s consequences are known.
Vanessa Pesec, president of the Network for Oil and Gas Accountability and Protection in Northeast Ohio, pointed to the earthquakes in the Youngstown area last year that she blames on the disposal well, including a 4.0-magnitude temblor on New Year’s Eve.
“This is a short-term boom with long-term negative impacts,” Pesec said in a telephone interview.
Yesterday, doctors at a conference on fracking in Arlington, Virginia, said the U.S. should declare a moratorium on the drilling process until the health effects are better understood.
David Mustine, general manager for energy of JobsOhio, the state’s development arm, said Ohio has strong regulations and he doesn’t think the complications from fracking will slow development. The state is benefiting from direct investment as well as jobs and lower natural-gas prices, he said. Oklahoma City-based Chesapeake alone has spent almost $2 billion in Ohio to acquire drilling rights, said McClendon, its CEO.
The money that drillers such as Chesapeake are paying landowners for leasing rights and royalties is buoying local economies, said Brad Hillyer, a lawyer in Uhrichsville. Landowners are being paid as much as $5,200 an acre plus royalties as high as 20 percent of the money from gas produced at a well, said Hillyer, who is negotiating leases.
No New Trucks
C.H. McCutcheon, general manager of Elder Ag & Turf Equipment Co. in East Palestine, estimated in a telephone interview that 25 percent of his business this year came from sales of equipment costing as much as $100,000 or more and paid for by lease payments that farmers received.
“If you take a look in western Pennsylvania and parts of eastern Ohio, if you go to the implement dealership, there ain’t no new tractors, red or green, and if you go to the local car dealership, there ain’t no new trucks,” Dale Arnold, director of Ohio Farm Bureau Federation’s energy services, said in an interview from Columbus.
The development “could bring an economic resurgence really to all of Ohio,” Kasich told reporters last month.
The impact is evident in Pennsylvania.
Collections of business taxes from oil and gas drilling in that state from January through November last year increased to $385.2 million, more than double the 2008 tally and a 64 percent increase from 2010, according to the revenue department.
Employment by businesses directly involved in Marcellus shale grew 114 percent in the first quarter of 2011 from the same period in 2008, according to the Pennsylvania Center for Workforce Information and Analysis. Wages in Marcellus industries average $76,036, compared with the state average of $46,222, according to the center.
Pennsylvania wants to attract manufacturing related to drilling to “reindustrialize the state,” said Walker, the economic development secretary, who is former president of Bradford Energy Co.
The big prize is the so-called cracker plant that Shell plans in Ohio, Pennsylvania or West Virginia. An announcement is expected during the first quarter, Kelly op de Weegh, a company spokeswoman, said in a telephone interview. The plant would “crack,” or process ethane from natural gas to produce ethylene, which is used in the chemical and plastics industries.
The company will invest as much as $4 billion, Walker said, an amount he said equals what Andrew Carnegie put in U.S. Steel in the early 1900s.
The project will require as many as 10,000 construction jobs and “several hundred” full-time positions at the plant, op de Weegh said in an e-mail. For every plant job, there would be seven support workers, Walker said.
Walker, Ohio’s Mustine and West Virginia’s Burdette all declined to discuss what incentives their states are offering.
The states also are competing in other ways. In a letter to legislators in November urging them to consider shale bills, Corbett cited Ohio’s “broad and sweeping law” that pre-empts local ordinances and is being used as a “carrot” to draw businesses.
Ohio officials point to predictability in rules “as they continue to attempt to lure Pennsylvania jobs and investment across our western border,” Corbett wrote.
“We are certainly mindful of what the other states are doing,” said Patrick Henderson, Corbett’s energy executive. “The governor is committed to being as competitive as we can.”
--With assistance from David Mildenberg in Austin, Texas, and Jim Efstathiou Jr. in New York. Editors: Stephen Merelman, Mark Schoifet
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