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Forbes.com

 

Buckeye Oil Billions Will Unleash an Ohio Manufacturing Tech Boom

September 26, 2011

By Mark P. Mills

A prediction. The Ohio Valley is on track to become a hotbed of innovation. And one which will almost certainly focus on 21st century manufacturing. The catalyst for this seemingly counter-intuitive claim? Money. Black gold. Ohio is about to be awash in both.

Early evidence of this bright future is already blossoming on the shores of the Mahoning River in Youngstown, Ohio, where global steelmaker Vallourec & Mannesmann is building a steel mill. Yes, in America. In Ohio. Some 400 jobs are in play building the ten-story building, and almost as many will be permanently employed. The $650 million project is injecting real jobs, real opportunity, and real hope – and a window on the future.

Oh, yes. The plant will build steel tubes for the energy market. The oil and gas market. The revenue gusher is unleashed by the constellation of advanced technologies that are collectively known as "fracking." Youngstown, in fact most of Ohio, sits above the massive geophysical Marcellus and Utica shale structures which are richly endowed with billions of barrels of liquid and gaseous hydrocarbons.

Fracking makes possible practical access to all that black gold. But then, by now, a lot of people have heard about the ostensible "evils" of fracking – by any industrial standards, a safe process. What this technology permits in immediate and long-term social terms is epitomized in Ohio. The implications are much broader and deeper than just one steel mill in Youngstown – as exciting as that is in these days of shutdowns.

Earlier this month a portentous study was released by the Ohio Oil & Gas Energy Education Program containing an analysis of the near-term economic impact of the development of oil and gas from Ohio’s share of the Utica Shale formation – located several thousand feet below the surface. Let’s start with the conclusions as to what this will mean for just the state of Ohio by 2015:

  • 200,000 jobs
  • $12 billion growth in overall wages
  • $22 billion increase in state economic output

On top of that, many farmers, businesses, landowners, and even some communities are sitting on land that will yield to each of them tens of millions of dollars in annual royalty payments.

How did this happen? In a word: technology. The quantity of oil you can find in the first place, and then extract, is entirely a function of technology. Most of the punditocracy has been preoccupied with how technology enables new energy alternatives to oil. But they’ve missed how new technology has also unleashed the ’old’ alternative of unconventional oil. The underlying technology trends are essentially the same in both domains.

First, engineers can now make vastly better materials using superior processes and capabilities. So today we make both better silicon for solar cells, and better steel for oil exploration. Second, engineers have access to profoundly better information, sensors and controls – "information technology," or as it is now simply contracted, IT. IT enables, for example, the dynamic integration of dispersed and episodic solar panels, allowing for more efficient extraction of the sun’s abundant energy. IT also enables the discovery, mapping and extraction of abundant but dispersed oil fields.

The technological magic in fracking resides in the maturation of directional and steerable drilling. Today, you don’t just punch a vertical hole in the ground with a dumb mechanical drill – petroleum engineers now have rotary-steerable drilling technology that permits precision snaking through the meandering underground seams. The technology is a kissin’ cousin to what doctors use, on a much smaller scale, for things like laparoscopic surgery.

Precision steerable drilling hugely benefits from yet more technology — real-time data from a technique called logging-while-drilling using technologies like gamma ray and neutron sensors that continuously analyze and report what precisely is in the ground at that point. And then this is all enabled in particular by a new class of IT-centric real-time imaging called microseismic monitoring. Again, in medical terms, think of the latter as the equivalent of continuous x-ray imaging – but done without the x-ray machine.

One of the early pioneers and major suppliers of microseismic technology today is Canada’s ESG in Kingston, Ontario. ESG is a 1993 spin-out from Queen’s University (where I count myself a proud alumnus). Microseismic technology provides real-time, instead of passive or historic images, and with very high resolution, compared with the original standard seismic gross ’snapshots’. This technology reveals a picture of the subterranean environment using exquisitely sensitive sensors. These sensors pick up natural seismic energy in the earth which allows precise mapping and extraction of the widely dispersed and meandering shale seams of rich hydrocarbons. The field is heating up. Geoscience company IHS [NYSE: IHS] recently announced a $500 million acquisition of Houston’s Seismic Micro-Technology.

If you don’t live in Ohio, or own the land over the Utica shale, you can still make a bet on the coming hydrocarbon boom via the companies that are making their own bets in developing the oil and gas fields there. Some key players in the Utica Shale include Chesapeake Energy [NYSE: CHK], as well as EV Energy Partners [NASDAQ: EVEP] which has a joint venture with Chesapeake. There is also CONSOL Energy [NYSE: CNX], Pennsylvania’s Rex Energy [NASDAQ: REXX], and Oklahoma-based Gulfport [NASDAQ: GPOR] (the latter where, full disclosure, our fund has an interest).

Back to Ohio’s budding black gold millionaires. I know Ohioans. Here’s the bet. As money flows, and both unemployment and state deficits shrink, in parallel a whole new class of Ohio millionaires will emerge from their land’s oil and gas royalty bounty. What will they do with their money? A lot of things to be sure. But a safe bet is that many will invest in the state they know and love, in local businesses, entrepreneurs and universities.

Ohio is a manufacturing-centric state – the third largest manufacturing economy amongst all the states. A lot of Ohioans will invest in and build the kind of local businesses they know, in the manufacturing sector. A lot will shower their alma maters with donations, where Ohio universities have deep roots in manufacturing-centric education. Overall, expect a fresh flow of capital into a manufacturing-technology-centric region. Nothing unleashes innovation like capital.

Innovation is the engine of economic growth, and thus future prosperity; something I amongst many others have written about often. (See for example Want more jobs? Unleash small businesses, venture capital and technology, and Searching For A Free Lunch, Finding Technology.) But the innovation engine needs fuel. Capital is that fuel. America is gushing with innovation, but starved for capital.

From Pennsylvania and New York, to Texas and the North Dakota, there are plenty of other states across this vast land sitting on shale oil and gas unleashed, or unleashable by the hydrocarbon technology boon. To note only one of the many shale formations, the East Coast’s Marcellus contains so much natural gas it is the world’s – not America’s – second largest known reserve, exceeded only by the gas field below Iran and Qatar. We should note that New York State (yet to embrace this boon) sits over the Marcellus. Imagine what this might do for depressed Binghamton, New York, strategically located atop that abundance? It has already fueled a downtown construction boom in Pittsburgh.

Never mind the national security benefit of domestic oil. And, thinking beyond the compelling near-term potential for a gusher of jobs, consider the long term. The new private capital is what will fuel the essential "animal spirits" in our economy, bringing confidence back. And in due course, new technologies and new businesses too.

These kinds of vast hydrocarbon shale fields are found around the world too, from Italy and the UK, to China. As we wrote in our book, The Bottomless Well, energy resources are primarily a function of technology, not of geophysics. What we didn’t write about is the virtuous circle … that technology unleashes resources, resource wealth creates capital, the capital is re-invested in new technology, that in turn unleashes resources. And on it goes. Or it can if we unleash it.

Ohio is leading the way.

Original Source: http://www.forbes.com/sites/markpmills/2011/09/26/buckeye-oil-billions-will-unleash-an-ohio-manufacturing-tech-boom/

 

 
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