Tuesday, February 02, 2010

Burgh Energy Report: Regional Economic Geography

The last two weeks have been a deluge of meaty articles about shale gas. There is another sector news of interest, such as the White House's backing of nuclear energy. But shale gas innovation is the main agent of transformation.

Over the last few years, the natural gas industry has undergone cataclysmic change. The world that produced talk about a pipeline from Alaska to the contiguous United States no longer exists. Energy security concerns have shifted and climate change is now a big part of the geopolitical equation. Most remarkably, the country is now poised to become a major exporter of natural gas. That article also includes an important tidbit about the economic geography of domestic shale gas extraction:

Shale exists throughout the world, in many geologic basins, and the industry should be able to exploit it. John Curtis, director of the Potential Gas Agency at the Colorado School of Mines, which is affiliated with the Potential Gas Committee - a group considered by industry and government for expert information on the gas resource base - notes there is nothing magical about the shale in the US. That said, the US does have an edge in that it is well suited for rapid development, with much gas in lightly populated areas and a web of existing infrastructure to bring it to market. And the world experts at getting to this resource are in the US - something nobody in the industry is downplaying.

The drilling boom happens in places such as De Soto Parish in Louisiana. The Pennsylvanian equivalent might be Indiana County. This pattern suggests that drilling in the heart of Pittsburgh is unlikely and that most of the activity will take place far from population centers.

A one-time cow town, oil town, and even a tent city (when it was founded during the 1889 land rush), Oklahoma City is urgently trying to reinvent itself as the next big city in America. If "America is the Saudi Arabia of natural gas," as T. Boone Pickens puts it, then Oklahoma City is its Riyadh. It's home to three of the largest independent producers--Chesapeake, Devon, and Sandridge--which are helping to underwrite its urban ambitions.


What's unusual about the plan by local standards is that Sandridge is reusing existing buildings, rather than relocating to an exurban campus. Part of this has to do with timing--the company acquired a million square feet on the cheap when yet another energy firm, Kerr-McGee, was sold to Anadarko Petroleum in 2007 and immediately left town for Houston. Sandridge CEO Tom Ward had considered a campus, but found it was both too expensive and too inflexible for his plans to grow the company from 600 to 1,500 employees. Ward went against his own employees' wishes by electing to remain downtown instead. "Their first response was that it was going to be a longer commute, and the idea was not one they embraced originally," Ward says. "And then the Thunder came to town and a lot of things started changing." (Ward is also a minority owner in the Oklahoma City Thunder, the city's two-year-old NBA team.)

Renaissance Oklahoma City is built on shale gas. Pittsburgh presents a much more diversified portfolio, but the impact of the Marcellus Play could (should, in my opinion) be just as profound. Pittsburgh is the emerging center for the energy-starved Northeast. Think Houston, Denver, Calgary, now Oklahoma City, and then Pittsburgh.

Pittsburgh's strengthening position in the global energy economy might spillover into, of all places, my hometown of Erie. John Elliot would like to see his city become a major inland port. It's a bold idea from a risk averse town. The Erie advantage:

The Economic Development Corp. of Erie County is convinced that Erie is well-positioned to become a global player in the multibillion-dollar business of moving things.

The region is close to interstate highways and the Canadian border, and sits on Lake Erie.

It has an expanding airport, it is amply serviced by railroad lines, and about half of North America's 534 million people live within 500 miles of Erie County.

Local logistics entrepreneur Jim Berlin has already voiced his support for the project. You might say that Erie already has talent and know-how to pull it off. I have a few concerns, such as the existence of a better port in Cleveland. Erie might want to read this ferry feasibility study. The location of a major multi-modal logistics hub might be better placed elsewhere.

The connection I see between Energy Burgh and Erie is the transport of shale gas to market. Pittsburgh will anchor the inland economic growth and a corresponding port makes sense to me. For that matter, keep an eye on the doings in Youngstown. The Mahoning Valley is another potential logistics hub. Unlike Erie and Cleveland, that area has its political act together and offers similar geographic assets (sans the waterway). Possible synergy between Erie and Youngstown?

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