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THE ECONOMIC IMPACT OF US SHALE: A REVOLUTION FOR AMERICAN WORKERS AND AMERICAN INDUSTRIES

BY DAN EBERHART, CEO, CANARY, LLC

CANARYUSA.COM WELLHEADS FRAC EQUIPMENT PRODUCTION SERVICES TABLE OF CONTENTS

JOB BOOM IN OIL & ...... 3 Percent Change in (graph)...... 4 Salary Differential and Jobs Gained (graph)...... 6

INCREASING PAY FOR OIL & GAS...... 8 Oil & Gas Pay vs. Other Industries (graph)...... 8 Wages, Employment in Eagle Ford Counties (graph)...... 9 Bakken’s Ripple Effect (map)...... 9 Disposable Income (graph)...... 10 Royalties (table)...... 11

SHALE’S IMPACT ON OTHER SEGMENTS...... 11 Heavy ...... 11 Conventional Oil...... 11 Conventional Oil – Permian (map/graph)...... 11 Manufacturing...... 12 ...... 12 Construction Loans (graph)...... 13 Transportation Sector...... 14 Railroads ...... 14 Crude by Rail (map, graph)...... 14 Rail Car Builders...... 15 Trucking...... 15 ...... 16 Personnel Services...... 17 Hospitality ...... 18 Growth (graph) ...... 18 Real Estate...... 19 ...... 21 Deposits (graph) ...... 22

2 Shale expansion is aptly compared to gale force winds: vast, strong, and sustained. Its benefits are transforming the US economic for the foreseeable future. The powerful steering current of shale activity is showing its significant impact on the domestic as a whole.

Unlike many other US industries that rely on a measure of foreign products and services, unconventional oil and activity—like shale drilling—utilizes an extensive domestic supply chain. In basic terms, this means that a larger portion of the dollars spent here, stay here.1

We’re not just talking about a couple dollars—and this isn’t only affecting individuals in the oil and gas industry. The benefits of our“Shale Revolution” are manifesting as booming employment, skyrocketing paychecks, and a of American industry.

According to IHS Consulting Vice President John Larson: “Does [shale] have an economic impact beyond just the activity identified with the extraction of these resources?” Resoundingly, yes. “If you look at the top-line number, the increase in disposable income, there’s a bigger story here.”2

“All Americans,” Larson emphasized, “have an interest in this activity, whether they realize it or not.”3

3 IT’S NOTHING BUT , WORK, WORK ALL THE TIME

High unemployment is an indicator of under-performing short-term GDP growth. And, boy, has the US been underperforming of late: The overall official unemployment rate stood at 6.2% as of July 2014.4 Although the rate has been falling since its 2009 peak of 10%, it remains higher in the short term than its “long-term equilibrium growth level” of 5%.

But one sector where unemployment is not a factor is the oil and gas industry. From 2007 to 2012, this industry grew to 162,000 jobs, a 40% increase in employment that also happens to be 40 times higher than the paltry 1% growth rate (about 1 million jobs) for the entire private sector. Looking forward, the numbers are even more striking: Employment in unconventional oil and gas is projected to more than double by 2035 from 1.7 million to 3.5 million jobs—or 2% of the total US workforce.5

The oil and gas industry also has a continuous need for infrastructure. Unlike other industries that typically require major work up front then very little throughout the duration, oil and gas ventures require constant development, from at current drilling sites to new build-up as others are identified—which means there’s always a need for workers to up with these infrastructure demands. And an added bonus: The similar production processes for oil and natural gas activity means source: www.eia.gov/todayinenergy/detail.cfm?id=12451 that workers can move from one to the other fluidly as local workforce needs fluctuate.6

Job growth in the domestic oil and gas industry has been heralded as a game-changer for the US economy. No less an authority than billionaire investor George Soros included the nation’s shale resources among the reasons to be bullish about America’s outlook compared to other countries.7

BROADCASTING LOW UNEMPLOYMENT RATES When a state’s top executive buys radio time so he can implore anyone within listening range to please come and fill 15,000 job openings, you know that there’s a severe workforce shortage.

That’s exactly what compelled Governor Jack Dalrymple to take to the airwaves in 2011 and call, quite literally, for help. Although the state’s Bakken play had been deluged by job-seekers since shale development ramped up in 2006, there still weren’t enough outsiders to replenish dried-out local labor pools or support the rush of new workers. Going public seemed an appropriate action.

4 About the same time, an executive for oilfield services giant Halliburton, eager to recruit even semi-skilled labor, reached out even farther to plead his case. Appearing on the CNBC finance show “Mad Money,” the president of Halliburton’s western hemisphere operations described the opportunity in a nutshell: “You’ve got a high school , you can come to work for this , that job will pay $125,000 to 130,000 per year.” 8

SHALE’S “EMPLOYMENT MULTIPLIER” An industry’s “employment multiplier” measures the contribution that its jobs make to the economy; the larger the multiplier, the greater the ripple effect of support jobs and residual economic benefits across the broader economy. O&G’s employment multiplier now surpasses finance, construction, and many manufacturing sectors.9

In fact, the unconventional oil and gas industry will support 3.3 million jobs by 2020 and 3.9 million just five years later.10 Jobs are being created on three fronts: direct (e.g., at oil exploration companies), indirect (e.g., in supply industries), and induced. That last category includes positions in consumer and services that increase to meet the demand of the new directly employed workers, like the restaurant server who takes the order of the driller with income to spend.

Consider, for example, the projected seven-fold growth in shale drilling in the Marcellus over the next 10 years that will result in a $3 billion annual market for wastewater disposal and treatment. Or landscape in Pennsylvania who are licensed to do erosion and sedimentation plans—required for every drill pad, access , and pipeline being built in the Marcellus. This has been an unexpected bonus for residential and commercial landscape architects still struggling to recover from the recession. And don’t forget the government: Both federal and local branches will see their revenues increase through license , permits, inspections, and taxes. Of course, like other fields, those services will also require employees to perform those jobs.

Even industries that might not normally associate with fracking are positively affected. A telling statistic reveals that, over the past five years, the Bakken created 115,000 US jobs—and for every one of those mining jobs, an additional three positions were created in construction, , or food . As workers arrive to staff the rigs, and naturally experience an increase in revenue. Real estate agents, homebuilders, grocery stores, and a myriad of other commercial endeavors suddenly enjoy increased demand for their .

Naturally, the employment surge is strongest among direct jobs in producing states, where tens or even hundreds of thousands of new jobs have been added. Just look at these numbers from Texas (where shale development has created 575,000 jobs to date); Pennsylvania (102,600 jobs); California (96,500 jobs); Louisiana (78,900 jobs); and Colorado (77,600 jobs). It’s hard to imagine any other single industry contributing more than that.11

5 But even non-producing states are experiencing employment and economic gains, with new higher-paying jobs primarily in support positions from companies that sell goods and services involved in shale development’s lengthy supply chain. And all indications show these indirect and induced jobs continuing to increase over the next two decades.

New York exemplifies this trend: Despite an ongoing statewide moratorium on fracking, the state has gained 44,000 additional jobs in supportive industries such as finance and .12 is similarly benefiting:The world’s largest company, Linde, faced extinction 10 years ago—but recently added hundreds of new jobs and now employs more than 1,000.13 Other big winners are Illinois (38,600 jobs); Michigan (37,800 jobs); Missouri (37,700 jobs); and Florida (36,500 jobs).14

Source: IHS Consulting, “America’s New Energy Future: The Unconventional Oil and Gas Revolution and the US Economy” Appendix A

WANTED: WORKERS TO COVER ALL THE BASES Because growth continues to outpace the labor market, the local workforces can’t fill all the open positions.

According to the owner of a Montana commercial company, there is such a shortage of contractors bidding jobs in North Dakota that there’s almost no competition in hiring.15 In fact, since its first Bakken project three years ago, the glazier has worked throughout North Dakota. In Williston alone, the company has completed everything from small retail assignments to such large-scale jobs as major housing complexes for energy services provider Halliburton, which has been trying to outwit the regional housing shortage by homes for its area employees.16

As a result of Bakken opportunities, one full-service civil firm in Missoula not only reversed a declining trend but also added a dedicated oil and gas division to its portfolio and opened additional offices in Fairview and Billings.17

Likewise, North Dakota engineering firms working in the Bakken but headquartered outside of it are opening offices in small closer to the region, such as Minot and Dickinson. By reducing their employees’ commuting time in and out of the Bakken, the companies are finding it easier to add new staff.18

6 But in the shale market, “easier” is a relative term.

In the inaugural hiring survey of oil and gas industry recruiters by Rigzone, a multi-media provider of oil and gas news, 48% of hiring managers said they expected to boost hiring during the last half of 2013. Eight of the top 10 positions they’ll be looking for are .

According to the survey, the most demand is for mechanical engineers,19 whose talent is needed for the hardware components of isolating well sections to create hydraulic fractures. Chemical engineers—who develop fracturing fluids and work to reduce related environment impact—plus civil, integrity, pipeline, and electrical engineers are also being sought en masse.20

Perhaps most vexing to hiring managers, however, is the lack of specialty engineers, with engineers topping the short list. This highly specialized worker searches out the oil and gas reservoirs, then determines the best extraction methods, equipment, and processes. Although the number of students earning bachelor’s degrees in petroleum engineering surged 181% to 753 between 2001 and 2011, there’s still more demand than graduates into the job market. Contributing to the squeeze is the fact that at least 40% of the world’s current petroleum engineers are expected to retire by 2025 or so. And on top of that, the 1980s oil bust discouraged young engineers from going the petroleum route, so there are few mid-level professionals to step into tenured predecessors’ shoes.21

ATTRACTING A YOUNGER AUDIENCE Because finding skilled labor to fill those positions has challenged even the most adept headhunters, recruiters turn to outside-the-box solutions to fill their plethora of job openings. Seminars and outreach are cropping up in very visible and accessible public locations like shopping malls to tap local talent. Take Mid-Ohio Valley’s Grand Central Mall, for example. Last summer, this shopping center hosted the Washington State College Oil and Gas Meet and Greet—complete with a virtual welder system to lure passersby with hands-on demos.22

Because creating a strong bullpen of qualified workers is a concern, unions have amped up efforts to local tradespeople. That move has had an immediate payback: In the Marcellus region, for example, 52 new welders were certified in the past year, and all have jobs.23

Farsighted workforce development pros have even started mining the high school ranks. In December 2011, more than 800 high school students attended the Oil & Gas Youth Career Expo in Washington County, Pennsylvania, the heart of Marcellus shale country. The daylong event featured 40 companies involved in drilling, production, and supply, all eager to get local teens to consider oil and gas industry careers.24

Drillers are also partnering with graduate recruiting programs to expand the radius of their talent searches beyond their traditional geographic boundaries.

Beyond that, higher educational institutions are increasingly stepping up, racing to educate enough engineers so oil and gas companies can achieve their ambitious shale goals. The University of Houston launched the nation’s first Subsea Engineering graduate program in the Fall 2013 semester.25 Texas A&M University-Kingsville reintroduced its bachelor’s degree in natural gas engineering, which originated in 1936 and was shelved

7 in 2000.26 And at the Colorado School of Mines, a drilling class in which students learn how to well to prevent blowouts now accommodates more than 160 students, up from less than two dozen a decade ago.27

Perhaps most significant educational gambit is the $14 million private and public aimed at enhancing the University of North Dakota’s (UND) efforts in petroleum geology and related fields. The funding includes a multi-million-dollar endowed chair in petroleum engineering and other dedicated research gifts, including and a virtual library. The dean of UND’s College of Engineering and Mines said the gift will have a lasting effect beyond the school and the O&G industry. Producing future generations of petroleum geologists and engineers, he said, will contribute to building a better world.28

BRINGING IN THE BIG BUCKS

But there’s more to this story than following shale’s yellow brick road to a good job. The road, it seems, is paved with gold.

This low supply of available workers means that employers have to shell out some pretty pennies to attract talent. In fact, as of June 2014, oil and gas extraction paychecks topped the list over almost all others in the private sector. Oil and gas extraction workers pull in an average hourly wage of $39.28—and even support activities for oil and gas operations pay $29.27—compared with the average hourly earnings of all private-sector employees of $24.41.29

The oil and gas industry is generally known for supporting wages, from blue-collar jobs on up, and today’s serious labor shortages are compelling companies to pay top dollar. Overall wages for full-time workers in the mining, oil, and gas exploration industry jumped almost 6% in 2012. That amounts to the best annual growth recorded since the company started tracking wage trends in 2006. The 12-month percentage change in national wages was 3.5%, also the Data from Bureau of Labor Statistics, http://www.bls.gov/web/ 30 best figures since 2006. empsit/ceseeb3b.htm

PAYCHECKS AND TAKE-HOME FROM SHALE A regional study by Penn State University pointed out that the state’s highest wage increases occurred in counties with significant Marcellus activity.31 In fact, two Keystone State counties—Bradford and Washington—made a recent Bureau of Labor Statistics list of the top 100 counties experiencing the nation’s highest wage growth.32

How do these statistics translate to take-home pay? In 2010, the median annual pay for all oil and gas workers was slightly more than $37,600. Just one year later, average salaries in the Bakken were nearly twice that, at around $70,000. With overtime, the $100,000-a-year mark was well within reach.33

8 Energy workers in the Marcellus are padding their bank accounts, too. The median wage in Pennsylvania’s core Marcellus industries exceeds $80,000, besting the statewide average by more than 40%.34 In West Virginia, where the number of oil and gas extraction jobs grew by 9.5% from 2008 to 2011, wages for those workers rose on average nearly $11,000, to more than $71,700.35 And let’s not overlook Ohio, where average O&G wages are $30,247 higher than the statewide figure.36

What’s equally remarkable is how workers not even directly employed by the oil and gas industry are enjoying an economic uptick. Since the start of Eagle Ford development in 2008, personal income has risen in all but one of the 23 counties that comprise the region. In three counties—Dimmit, La Salle, and McMullen—the increase has topped 30%; in the remaining 19, the improvement is anywhere from 4.05% to 22.84%.37

Similar wage inflation has also spilled into the small towns that dot the Bakken region. Average weekly wages in places like Watford , North Dakota— population 1744—have shot up 140% since 2001, and local unemployment has dipped below 2%. At $12 per hour, the minimum wage for entry-level jobs in the town’s restaurants and convenience stores is well above the national rate; some chains have been forced to bump their pay above $15 per hour just to hold onto workers and keep up with competitors.38

THE “SHALE EFFECT” IS GOOD FOR THE NATION The Bakken is, indisputably, a high-octane local economic engine. But earlier this year, the Federal Reserve Bank of Minneapolis39 decided to explore if North Dakota’s shale oil activity influences employment and wages even farther afield. Could the Bakken be its good fortune to neighboring counties or even to adjoining states?

To assess a so-called “Bakken Ripple Effect,” the bank plotted data in 100-mile concentric circles moving away from the 12 counties that comprise the shale region’s core:

9 At first blush, the results don’t seem like much of a surprise: the closer to the Bakken, the greater the benefit in terms of higher wages and lower unemployment. But closer inspection reveals an even more gripping story. Even workers living 100-400 miles away from the Bakken’s core face a brighter economic picture—of higher wages and better employment prospects—than US employees as a whole. That’s compelling confirmation of previous findings that indicate areas where domestic energy is produced fare far better than most others.

DISPOSABLE INCOME BOOSTS, TOO The rosy economic picture doesn’t stop at low unemployment rates and astronomical paychecks.

As a result of the shale gale, an abundance of affordable natural gas has meant that we’re keeping more of our take-home pay. In 2012, average American consumers found an extra $145 in their bank accounts because of lower home utility bills. Meanwhile, all signs point to a continuing trend. As shale activity continues, its associated value chain will continue to boost household disposable income, reaching as much as $2,000 by 2015 and more than $3,500 per year by 2025.40

Shale also holds the promise of boosting household income for certain strategically situated landowners. Pinpointing the exact number of shale-made millionaires may be impossible. But earlier this year, the Baton Rouge Advocate indicated that, in just one week, the ranks increased by 21, all from DeSoto Parish, Louisiana, south of Shreveport. That area is part of the Haynesville Shale, which is believed to hold an estimated 3 million cubic feet to 15 million cubic feet of natural gas. The newspaper suggested that the big money “may be yet to come,” cautioning readers to watch what happens when 25% royalty payments start flowing to the Parish’s large landowners.41

Take Ohio’s Carroll County, the drilling hub of the Utica Shale. This sparsely populated county holds fewer than 28,850 residents, yet boasts 88 newly-minted millionaires— mainly dairy farmers.42 The numbers of permits, drilled wells, and producing wells in the county far outpace its neighbors. It’s no surprise, then, that there would be more shale- related personal wealth there as well.

10 And what about Texas, where oil and gas have long been incubators of great wealth? In the first 11 months of last year, it’s possible that more than $15 billion in oil royalty checks were paid to landowners in the Lone Star State. That equates to more than $40 million every day and more than $1 billion every month.43

WHAT’S GOOD FOR THE GOOSE…SHALE IMPACTS OTHER SEGMENTS

Upwards of 95% of each individual windfall goes right back into the marketplace in the form of consumer spending, boosting overall economic growth.44 Through 2035, the is slated to invest more than $5.1 trillion in energy development in the US and contribute cumulative taxes of more than $2.5 trillion. The increased production of goods and services related to continued shale development could pump as much as $475 billion into our nation’s gross domestic product (GDP).45

Drilling in these rich shale formations is not only helping the nation surge ahead in the global energy market but also pushing a diverse array of domestic industries in the right direction—from to the transportation segment to personnel services.

CONVENTIONAL OIL GETS A BOOST We’ve seen the astounding rise of shale production—but we can’t forget the place of “conventional” drilling within the US economy. Even this conventional energy has reaped the benefits of the shale revolution. The improvements in horizontal drilling and fracking have also led to advancements in traditional production within mature fields.

Several seasoned oil and gas fields demonstrate the successful application “unconventional” techniques in conventional repositories. East Texas’ Woodbine Oil Field, for example, has proliferated since its discovered in 1930, but initial production rates (IPs) from some recent horizontal wells exceed 1100 barrels per day. Similarly, three long- producing plays in the Permian Basin—Clear Fork, Grayburg, and San Andres—have significantly increased production since implementing horizontal wellbores using a waterflood enhanced recovery in 2010/2011:46

Source: IHS, “The Unconventional Offshoot”

11 Beyond its energy-sector sibling, the shale gale has filled the sails of many industries. The growth in some segments is understandable—expected, really—as their work goes hand-in-hand. Other sectors are emerging as surprising winners.

A MANUFACTURING RENAISSANCE IN THE MAKING To be sure, the cascading effect of shale development isn’t just an economic engine for the oil and gas industry. The shale revolution also impacts the prosperity of the manufacturing segment, undergoing a resurgence directly related to shale after a decade of decline.47 As the domestic natural gas supply has ballooned because of shale development, natural gas prices have dropped considerably—to their lowest mark, in fact, since the mid-1970s. Not only does this mean cheaper and heating, it also equates to cheaper manufacturing—which, in turn, translates into lower-cost consumer products and props up domestic spending.

The steel industry, for one, is posting gains unparalleled in recent years because of increased demand for tubular goods—the pipes, tubes, and joints needed to extract and move oil and natural gas. One “Big Steel” manufacturer, US Steel, is actually rebounding from losses and becoming more financially secure as a result of this increased demand.

This abundance of gas at stable, low prices will likely encourage industries will continue to increase their natural gas use. The result—greater investment, further job creation, and sustained competitiveness of domestic industry—is projected to spur nationwide industrial production growth of 4.7% by 2035.48

The effect on the manufacturing sector has already been significant. US factory employment has grown by about 3.6% to roughly 12 million people from a 2010 post- recession low.49 The National Association of Manufacturers indicates that, if the current trend continues, it will help drive the potential for 1 million new manufacturing workers by 2025.50 Further, a 25% increase in the supply of (a derived from shale gas) would give US manufacturers an advantage over many global competitors that could spur as much as $16.2 billion in capital investment by the .51

And on the topic of global competition, it’s interesting to note that some foreign companies have responded to lower US feedstock prices by building their own manufacturing facilities here, which has created even more jobs for American workers. An Austrian steelmaker, German chemical giant, French oil and pipeline company, and South African energy and chemical business are among those that recently built plants in the US52,53

CONSTRUCTION INDUSTRY BUILDS MOMENTUM And these foreign plants aren’t the only new . Shale development is building a construction frenzy throughout the US

In Texas, the Eagle Ford shale—which recently beat the Bakken Shale to the 1 million barrel-per-day production milestone54—has contributed to whirlwind construction job growth. In 2011, the Eagle Ford was directly responsible for $474 million in construction business revenues. That figure is expected to rise to $593 million by 2020.55

12 Likewise, construction companies in Ohio also consider shale their game-changer, particularly as the natural gas industry sets up shop around the Utica formation. In addition to the 255 Utica wells built since 2011—which cost upwards of $11 million each and kept construction companies busy with everything from well site pads to new — there’s a growing number of processing and other commercial construction projects. The nation’s second-largest natural gas producer, Oklahoma City-based Chesapeake Energy , began work on three new expansive facilities to house their Ohio office near Canton—all being built by Ohio companies. Four other natural gas processing companies have Ohio projects on deck, ranging from $300 million to $1 billion-plus. Each was expected to employ at least 200 construction workers, 90% of them state residents.56

A smaller but no less significant project is the $150 million Pennant Midstream LLC natural gas processing plant under construction in Springfield Township, population 36,000. The local International Laborers Union anticipates the project to require several hundred workers from all . The president of the Western Reserve Building and Construction Trades council said that about one-third of the combined membership of the area’s unions is engaged in the oil and gas industry, with approximately 500 of them directly involved in shale work. That includes ironworkers, concrete workers, millwrights, and carpenters. As construction ramps up on processing plants and substations, the council chief speculated on even more work for the electrical trades.57

The Marcellus shale is credited with reversing a three-year slump in West Virginia’s construction industry. Between 2008 and 2011, state construction employment fell 19%. But more than half the ground was made up in just one year when, from June 2011 and June 2012, the number of construction jobs rose nearly 10%, to 36,700. During the same period, nonresidential construction spending climbed 14%.58

And what about the Bakken? Construction workers in North Dakota counties with Bakken shale wells saw employment increase 12.9% between 2007 and 2011.59 In the town of Williston—closest to the epicenter of Bakken activity—construction activity is up in each of three private development sectors: apartments, single-family homes, and commercial real estate. The Federal Reserve Bank of disclosed a boom in Bakken-area construction loans, dramatically higher than the rest of the country. And while the numbers are leveling off with the rest of the of North Dakota, first-quarter 2014 numbers are still 16.7% higher than a year earlier.60

The abundance of shale gas has ushered in a new wave of projects for engineering and construction firms. The combined need for drilling infrastructure to support ever- expanding recovery efforts and private development to catch up to populations explosions the construction industry at a loss only for days.

13 RAILROAD REBOUND DRIVEN BY SHALE Another segment that is feeling squeezed out of vacation time is the nation’s railroad industry. In the mid-1800s—back when John D. Rockefeller built the Standard Oil Empire that ushered in the petroleum age—rail was the preferred method of transporting oil from one part of the country to another. Within decades, however, pipelines were viewed as a faster, more economical option. Rail use fell by the wayside, at least as far as the oil industry was concerned.61

More recently, production from shale fields has grown faster than current pipeline capacity, and railways have emerged as an early beneficiary of the shale surge. For an industry looking to shed its old-school persona, shale transportation has been a sure kick-start.

Historically, less than 1% of crude was carried to refineries by rail.62 But by October 2012, six short years after the Bakken boom began in earnest, that figure had jumped up to 18%, and it reached 25% just a month later. US carloads of petroleum and related products rose 47% in the year-over-year period ending July 2012.63 Originated carloads of crude oil on US Class I railroads rose from 9,500 in 2008 to 233,698 in 2012 to 407,761 in 2013. In the first quarter of 2014, they totaled 110,164—higher than in any previous quarter.64

14 Rail may seem like a bit of a throwback, but it provides a convenient and economical solution to a very real problem in the industry. Building new pipelines takes time—time that production companies simply don’t have. The rail infrastructure, on the other hand, is already in place: North Dakota has about 3700 miles of , and long- abandoned tracks are being refurbished. Shipping by rail offers faster speed to market, and it prevents gridlock at production zones and the pipeline crossroads in Cushing, Oklahoma. Rail reaches areas inaccessible by pipeline. And it enables flexibility, allowing refiners to buy from a variety of locations at the best prices.65

It’s no wonder companies are bullish on these“pipelines on wheels.”

FREIGHT CAR CONSTRUCTION IS FULL SPEED AHEAD Of course, rail transportation isn’t a one-way line. As much as crude needs to flow out of the Bakken and the country’s 70 other shale plays, supplies also need to move in. Even in areas like the Marcellus and Utica, where carload volume growth is substantially less than the Bakken, railroads remain busy transporting frac sand, pipe, chemicals, and other needed for shale exploration and drilling.66,67

Not only are railroad companies adding stock, some oil and gas production companies are also considering making investments in rail. Phillips 66 said last year it might buy as many as 2000 freight cars.68

The result is a dramatic renewal in the freight car building industry. Although tanker cars make up only 20% of the rail fleet, orders for new tank cars accounted for 81% of 24,000- unit total during the first quarter of 2013. Car builders with tanker car capabilities have more than enough work to keep their production lines at full capacity. For the first time in generations, backlogs are not unusual.69

TRUCKING IS ON THE ROAD AGAIN…AND AGAIN AND AGAIN Hauling between drilling sites and production facilities has the nation’s trucking industry on the move, too. Hundreds of truckloads deliver the drilling materials to begin the fracking process and, then, to transport the recovered resources to production facilities. Between 2007 and 2012, for example, North Dakota’s transportation and warehousing industry experienced a compound annual growth rate of about 16%—with a 35% increase in 2012 alone.70

Nationally, 55% of trucking company owners have experienced some growth since 2009 because of shale, and 97% anticipate shale-related revenue growth over the next five years. Nearly half expect to increase their workforces 5%-15% to meet shale-related needs during the five years ahead, while another 11% plan to hire 50%-100% more workers.71

15 AIRPORTS HAVE GALE-FORCE LIFTOFF But drilling materials and recovered resources aren’t the only “commodities” to be transported. People—and lots of them, as we’ve seen—need to shuttle around the shale daily. And that means that business at airports around the country has been taking off, too.

A number of Texas airports are perennial leaders in passenger statistics. In March 2011, Dallas-Fort Worth’s 37,390 passengers represented a 60% increase over the previous 12 months; Houston tallied 17,240 passengers, up 44%; and Austin rose 40% to 8,040 passengers.72 In fact, the Dallas-Fort Worth was the first to sign a shale development ; Pittsburgh International soon followed suit.

Pittsburgh even acknowledged the influence of shale in air . While the airport offers daily flights to “traditional gas cities” in Texas, officials are pushing to adding regional flights into western and northeastern Pennsylvania, where out-of-state O&G companies have been expanding their operations.73

But the burst in regional , attributed largely to shale workers, also increases the needs of smaller regional airports. Airports in western North Dakota have set passenger boarding records. Tens of millions of dollars are going into the construction of terminals, parking, and runway upgrades.

Youngstown, Ohio’s Elser Metro Airport has increased incoming “special interest” airplanes and shuttling oil and gas workers to the Appalachian shales. Many of these passengers—who aren’t the top execs or suits, but rather the “working-end” employees— are nonetheless enjoying the first-class service on small company-owned jets. As a result of the influx, the state has approved $240,000 in grants for airport improvement projects in Holmes, Trumbull, and Columbiana County over the past two years.74

HOTELS FIND STAYING POWER IN SHALE The hospitality sector also clearly shares the limelight in making huge strides attributed to the shale revolution. In fact, the accommodations and food services segment has grown 7% since 2007.75 In the towns near shale plays, and are running at full occupancy with rooms rented en masse by energy companies, and developers are fast- tracking construction of new . The demand for rooms near drilling sites has the convinced of the energy boom’s staying power.

Simply put: Not only are more rooms sold, they’re selling for more money. From Marcellus to Bakken to Eagle Ford, neighboring hotels are often overbooked—even occupied beyond capacity—with energy workers, from loggers to .76 Major companies rent blocks of rooms for weeks on end, propelling lodging occupancy stats far above the September 2013 nationwide average of 63%. As a result, local are growing, and hotel developers are scrambling to build new accommodations.

The 170-room McClure Hotel in Wheeling, West Virginia, tells a typical tale of Marcellus- driven growth. In 2010, occupancy hovered around 40%, but less than 18 months later, the rate was 75%. Some nights, the house is completely full. The property’s attributes the turnaround to one factor: natural gas drilling.

16 It’s the same story 15 minutes away in St. Clairsville, Ohio. During the three-month period from July-September 2011, a survey of seven area hotels revealed a 93% occupancy rate, compared with 75% for the same time just one year earlier.77

And in a four-county region in northeastern Pennsylvania, growth in lodging demand has outperformed the nation as whole in every year but one since 2008. Cumulative occupancy in Bradford, Lycoming, Susquehanna, and Tioga counties has risen from a sluggish mid- 50% rate pre-2007 to more than 70% in 2011. Better still, between 2008 and 2011 two key indicators of hospitality financial health were up significantly: Revenues per available room and average daily rates increased at an annual pace of approximately 14.8% and 7.8%, respectively. During the same period, those metrics fell 1.7% and 0.7% for the national hotel segment overall.78

The Marcellus isn’t the only hospitality hot spot. Not to be outdone are Texas hotels. In the Eagle Ford shale region, new room construction rose 5.1% between the first quarters of 2011 and 2012, but there’s still a struggle to keep up with greater demand. Perhaps more indicative of market strength, though, is the May 2012 listing of top-performing hotels. Thanks to Eagle Ford activity, coming in 19th place was the Express in Cotulla, a 79-room hotel that had been open less than a year. In Cuero, 150 miles away, the Best Western Park Heights shot up an astonishing 144 slots to finish 34th.79

In the hospitality business, counting “heads in beds” is a gauge of success. With that numbers game achieved, hotel developers and investor groups are in the enviable position of having to increase their inventories.80,81

• At 6 and Studio 6 franchises in Midland and Odessa, Texas; Miles City, Montana; and Bakersfield, California—all located near shale deposit drilling sites—more than 80% of occupancy is associated with oil or the oil shale gas business. • Likewise, Microtel Inn & Suites in Dickinson, Lewiston, and Minot, North Dakota, are 70% to 90% full, night after night. And the chain currently developing properties in Fairmont, West Virginia; Steubenville, Ohio; Aztec, New Mexico; and Texas’s Permian basin. • Vantage Hospitality Group, parent company of Americas Best Value Inn, has broken ground on five ABVI hotels near Texas shale deposits—in Pearsall, Cuero, Dilley, Midland, and Cotulla—since the first of the year. • Across the Bakken, the hotel industry is building from Williston to Minot. Statewide, the number of rooms increased from 15,207 in 2009 to 16,221 in 2011; currently, there are 2,088 new hotel rooms under construction. • In rural Oklahoma, which is benefiting from the extraction of shale oil, 1,242 new rooms have been added in recent years.

17 HOSPITALITY TAXES BOOST LOCAL ECONOMIES Beyond adding dollars to hotel company coffers, higher occupancy rates provide an economic bonus through hotel taxes funneled back into local . In Pennsylvania, hotel tax receipts must by law be used to promote and build public venues.

Take Washington County, part of the Pittsburgh metropolitan area. Between 2007 and 2013, hotel occupancy rates posted gains from the mid-50% level to the low-70% range. Washington County’s 3% hotel occupancy tax brought in $1.1 million in 2010, double the collection in 2006. The Washington County Tourism Promotion Agency is the biggest beneficiary of the increase: the money will defray the costs of building exhibition and meeting space at the county fairgrounds, help renovate a minor league baseball field, and advertise tours of historic homes and area museums.

The raw numbers are smaller in Tioga County, but the proportion is significant. Hotel tax revenues there jumped 38% in one year, reaching $365,000 in 2010 from $264,000 in 2009. In Bradford County, where the county commissioner told a state Senate panel in 2009 that hotel rooms were scarce because of shale drillers, hotel climbed 65% between 2009 and 2010, from $158,457 to $262,600. In Fayette County, the hotel tax brought in $858,147, a more than 60% increase from 2008. The influx has allowed the Laurel Highlands Visitors Bureau to give advertising and construction grants to nonprofits that cater to tourists, propping up another regional income stream.82

Lawrence County was one of the last places to be explored along the shale play. Although the county budget reflected an expected $60,000 in hotel tax revenues for 2012, the actual number turned out to be nearly double that. As a result, tourism promotion that was slashed by budget-cutting at the state capital has been restored.83

RESTAURANTS SEE SUSTAINED GROWTH ON THE TABLE Dining establishments are getting in on the shale action, as well. Exactly how much job growth in food services is directly tied to oil and gas activity is difficult to pin down. But this is known: Overall US food service employment was relatively flat from 2011 to 201484—but during that same period, North Dakota, Ohio, and Pennsylvania all added jobs in the and hospitality segment (which is where the Bureau of Labor Statistics places food services).

18 And there’s plenty of anecdotal evidence to support the notion that drilling is having a positive effect, with restaurants of all types reporting an upswing in business related to the drilling industry.

A Youngstown, Ohio, Ponderosa Steakhouse is serving 30 to 40 extra people per day, most of them providers of auxiliary services to drilling operations. Nearby Gionino’s Pizzeria has also noticed a spike in business—mostly from deliveries to local motels occupied by drillers. And at neighboring Jimmy’s BBQ, the volume from the lunch crowd and deliveries to local oil derricks often catches the staff off-guard, occasionally forcing them to closing by 6:00pm after running out of food.85

Although it hasn’t reported a dearth in Big Macs, the McDonald’s in Williston, North Dakota, has experienced a serious shortage of workers. So much so that, in 2012, it announced it would pay new workers $15 an hour—plus a $500 immediate signing bonus and full medical benefits.

Even in far-off New Auburn, Wisconsin—more than 700 miles from Williston and the heart of the Bakken action—the effect of the shale boom has percolated to a downtown diner. Wisconsin doesn’t have any oil or gas production, but it does mine quartz sand, one of the essential elements used in fracking. Since 2007, more than 40 frac sand mines have either opened or expanded their operations in Wisconsin and neighboring . The owner of New Auburn’s Sunshine Café says those mine workers coming off the night shift are filling tables at breakfast.86

REAL ESTATE MARKETS IN SHALE REGIONS MOVING UP With a record number of new oilfield workers looking for shelter, housing is in short supply in and around major shale plays. While hotels solve a short-term crunch, workers want to settle into a permanent home—and the real estate industry has taken off nationwide as a result, expanding by 9% since 2012.87

From “man camps” to mansions, the impact of shale drilling is spilling over into the US residential market. While the rest of the country creeps slowly out of the worst housing bust since the 1930s, the comeback is significantly more robust in some small, formerly stagnant cities like Youngstown, Ohio; Yorktown, Texas; and Williston, North Dakota. As the real estate mantra “Location, location, location!” suggests, geography is key: Each of these towns is benefiting from its proximity to a prolific shale formation.

Youngstown Shrinks No More: Once a steel boomtown second only to Pittsburgh in total mill output, Youngstown, Ohio, was devastated by the decline of the US steel industry during the latter part of the 20th century. In 2010, the city’s population was less than half what it was in 1950.88 But with the continuing development of the Marcellus shale, the population of the greater Mahoning County area (where Youngstown is county seat) rose slightly more than 20% since 2000.89 And with more jobs becoming available as new energy companies enter the market,90 home prices are rising in response. Between July 2013 and October 2013, year-over-year, the median price jumped 17.7%. During the same time, average price per square foot spiked 13%.91

In Youngstown alone, the number of homes sold has grown from a 4th quarter 2010 low of about 100 units to more than 800 just three quarters later. Over the past five years, selling prices have fluctuated between $65,000 and $100,000, although the figure has been leveling off around $80,000 since 2011.92

19 An hour south of Youngstown is the Ohio Valley region. A beneficiary of shale-related growth since 2006, the area has seen home sales increase 17.5% in just the first eight months of 2013. Equally significant is the fact that house prices rose 11% during the same period.93

Across the state line in Pennsylvania, real estate activity is also surging in places like Canonsburg, population 9000. Between 2000 and 2011, house and condo values in this suburb 17 miles outside Pittsburgh climbed dramatically, from $76,900 to $127,537. Nearly half of the residents of two large single-family developments under construction are energy-related newcomers. Local realtors think an already-brisk sales pace would be even better if the soft national market wasn’t making it more difficult for natural gas professionals to sell the homes they’re moving from.94

Yorkstown’s Premium on Parking Spots: Located in one of the Eagle Ford’s busiest regions, Yorktown, Texas, sits in DeWitt County, a little more than an hour’s drive east of . The county has grown 1.8% since the 2010 Census. The entire previous decade, the change was only 0.4%.

Although Yorktown isn’t attracting many new homebuyers, there’s a strong rental market. One realtor recently rented 30 area homes to oil workers. Other workers are living in campers and recreational on the outskirts of town. It’s said that a good parking spot in the area goes for as much as $500 a month.95

South and west of San Antonio, the town of Pearsall’s soft rental market has completely reversed. Complexes that hovered around 85% occupancy before the Eagle Ford boom now have two- and three-year waiting lists, and rates have never been higher. One landlord, whose 30 rental homes were mostly unoccupied, now for every one of them.

The effect of the Eagle Ford development on Pearsall home sales has been equally impressive: a three-bedroom, two-bathroom house was sold 15 minutes after it was listed. According to the who handled the deal, the selling price was twice what it would have been before the drilling boom.96

Williston Boosts Housing with “Man Camps”: At the epicenter of the Bakken boom, Williston, North Dakota, is the fastest growing metropolitan area in the nation.97 The official permanent population is 16,000—but the city estimates that 6,000 additional people live in and around the town in temporary conditions.

Towns in and around the Bakken are experiencing skyrocketing population growth from workers eager to participate in the profit-taking. Many of these workers come from out of state: North Dakota leads the nation in net migration. Not surprising, either, is the severe shortage of available housing. A state study predicts that the population of western North Dakota—where the bulk of the oil industry is concentrated—will grow by 50% over the next two decades.98

Williston and surrounding Williams County are working hard to keep up with the influx of workers and their families. In 2011, for example, 534 single-family homes were built in the county, bringing in $72 million in local income and $3 million in local taxes, and creating 698 local jobs. New residential (single- and multi-family) housing was the third-largest employer in the county with 1,383 jobs.99

20 Permanent fixes are on the horizon:A private equity firm recently purchased the land to develop a community for 4,000 people. But in the meantime, all those new workers need roofs. To keep up, “man camps” are being built to deal with the housing shortage. Two such camps have sprouted near Williston, and the state’s largest—Target Logistics’ “Tioga Lodge” six miles from the town of Tioga—can accommodate 1,238 people.

Amazingly, although it’s 1,500 miles from Bakken and nowhere near any other direct shale activity, Arizona’s real estate market has gotten an unexpected boost from North Dakota’s oil bonanza. Because home prices in Phoenix and other cities are still low, North Dakotans whose or land were purchased by oil and gas companies are heading south to warmer climes. A suburban Phoenix real estate agent originally from Minot, North Dakota, sold eight homes to former North Dakotans in recent months.100

PROFESSIONAL SERVICES SHARE THE SHALE WEALTH Shale, it appears, is an equal opportunity enterprise. It’s not only those directly involved in oil and gas ventures who are feeling the gale forces—it also encourages other professions that provide planning and assistance efforts for shale workers. So even with a degree or two of separation, shale development still links the professional services sector to increased bounty.

Insurance agents, for one, are helping support private transactions with new millionaires. From cattle ranches in North Dakota to strawberry patches in Louisiana, landowners- turned-millionaires are cropping up all over US shale country. By selling their rights to oil and gas companies, these individuals are not only harvesting personal riches but also plowing money into insurance services to help them protect and grow their newfound fortunes. Complex economic decisions abound, and most of the newly affluent are ill-equipped to manage lease considerations, financial planning, estate strategies, and other issues on their own.

Other services are also riding the shale-induced wave. are seeing increases in commercial loans and deposits. Law firms are expanding their energy practices. And accountants are tapped to manage escalating portfolios.

TURNING SHALE DEPOSITS INTO BANK DEPOSITS Because banks are highly leveraged to their local economies, it’s no surprise that financial institutions in shale-producing regions are growing—even when the industry as a whole shrinking, with about 417 banks across the US folding between 2007 and 2011.101 In Pennsylvania alone, the Marcellus is credited with adding about 4,200 jobs in and insurance, while the rest of the country can tell similar stories.102

21 According to Minneapolis Federal Reserve Bank data, deposits in banks with branches in the Bakken—from central North Dakota to the northeastern corner of Montana—were up 27% in 2011 and another 15% last year, reaching $3.9 billion.

First International Bank, headquartered in Watford City, North Dakota, added 65 lenders, trust officers, and insurance agents at its 21 community branches during 2012. Neighboring McKenzie County Bank responded to increased customer demand by hiring a commercial banker (who moved from Montana) and a residential loan officer (a Minnesota transplant) to its 17-person staff.103

The First National Bank out of Hermitage, Pennsylvania, has even assembled a Shale Energy Team, which it touts on the “Energy Resource Center” page of its . Described as “a selection of financial experts who remain current on issues related to the Marcellus and Utica Shale,” the team offers financial solutions for everything from retail banking to leasing and insurance.104

ENERGY TRANSACTIONS FUEL BANKS’ REVENUE GROWTH Don’t think that it’s just the retail banks that have capitalized on increased shale activity. With countless financial transactions involved in each step, oil and gas exploration continues to prop up the profits of investment banks as well. According to the independent firm Mergermarket, the number of mergers, acquisitions, joint ventures, and asset divestitures in the oil and gas sector doubled during the past five years. Many of these transactions involved investment in areas targeted for possible major oil or gas deposits in shale rock. During the first three quarters of 2012, energy transactions accounted for more than 23% of all transactions in the US Four of the 10 largest US deals announced during the first nine months of 2012 involved oil and gas companies.105

At one Columbus, Ohio-based investment banking firm, energy-related transactions have grown from 10% of company revenue to more than 40% in just five years. The firm has helped land lease owners with traditional wells sell their holdings to companies that can afford to develop the pricier horizontal wells needed for shale drilling.

But not all developers buy from investment bankers. Some oil and gas companies say they tend to work directly with land and mineral owners.106 Although banks are staffing to assist individuals in negotiating leases, this is where the legal industry boasts a competitive edge. As business skyrockets at powerhouse firms with long-established energy practices, the market for local law firms is also hotter than ever.

22 GROWING—AND PERFECTING—THE LAW PRACTICE In North Dakota, it’s said that lawyers are in as much demand as geologists. In 2012, the state Bar Association saw a jump of more than 20% in the number of out-of-state lawyers seeking admission to practice in North Dakota.107

Law firms in major Ohio cities are expanding their “shale teams”—some have more than 25 attorneys in their enlarged oil and gas practices—and are partnering with industry veterans from Texas and Oklahoma. At the same time, small-town practitioners are foregoing other prospects to turn their energies strictly to shale-related opportunities.

One Steubenville-area attorney tells of two consecutive 12-hour days during which he helped 550 families execute leases with oil and gas companies. Before the shale boom, his practice had been concerned with real estate and probate, he said, and had been a big part. It only made sense to transition to oil and gas, which now consumes 100% of his time.

The managing partner of a Canton firm is helping property owners form consortiums, combining their land into bigger parcels that will be more attractive to developers. A Columbus attorney is representing nine landowner groups that have more than 350,000 acres along the eastern side of Ohio.108

And attorney Roger J. Gaydos of Canonsburg, Pennsylvania, has branded himself the “Marcellus Expert”—he even owns the domain name marcellusexpert.com.

PREPPING FUTURE ADVISORS FOR MORE BUSINESS With all the demand for accurate legal and financial advice, prolific shale regions are focusing on educating future .

Law schools around the country are seeing a boost from the shale gale. In Ohio, both Cleveland-Marshal College of Law and Case Western Reserve University School of Law have added energy law classes. The Ohio State Bar Association, for one, has also stepped in to help educate lawyers.

Meanwhile, educating certified public accountants (CPAs) and auditors about unique petroleum accounting procedures is a continuing focus at places like the University of Tulsa. Long recognized for its petroleum engineering curriculum, the school is gaining a reputation for expertise in energy accounting, including oil and gas taxation. And it’s sharing its knowledge through classes offered to professionals in other states.

ACCOUNTING FOR THE SHALE WEALTH In Ohio, the state’s CPA professional society is also helping accountants learn more about shale development and how it will affect their business, specifically in the areas of tax planning, estate planning, and wealth . Not only do accountants need to learn the unique aspects of the industry, the association insists, they also must understand its unique terminology.109

23 Pennsylvania’s CPA groups, meanwhile, have begun instructing both members and the public. The Marcellus Shale Task Force, formed by the state’s Institute for CPAs, is equipping its members with tools to help individuals and family businesses—people who never dreamed about the wealth opportunities shale has presented to them.110

WHO PROFITS? WE ALL DO. Clearly, consumers and companies across the country are cashing in on the benefits of unconventional drilling activity. Whether it’s a family saving on their home heating bill, a chemical refinery turning a bigger profit because raw materials cost less, or even the government earning sky-high tax revenues, the good money is on shale.

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