Building a natural gas industry supply chain in New Brunswick

From a recent TJ column:

One of the strangest arguments being made by opponents of the shale gas industry is that there will be very little economic benefit from developing a natural gas exploration and production industry in New Brunswick. If you read social media, watch YouTube videos or pick up the local newspaper you will find someone talking about the “big American company coming up here taking all the gas and its economic value and leaving us with nothing but environmental problems”.

While there may be legitimate points of disagreement about the environmental aspects of the oil and gas industry, based on hard data a person would be hard pressed to validate an argument that the industry provides limited or no economic value.

According to Statistics Canada, the oil and gas extraction sector in New Brunswick generates 78 cents worth of total gross domestic product (GDP) in the province for every direct dollar of industry output. In areas where the industry is more developed, the value is even higher. Every dollar of oil and gas extraction output in Alberta generates 92 cents of total GDP within the province. Using available data, we can determine the total employment, taxes and other benefits that come from the oil and gas industry.

I guess it may be possible that Statistics Canada is caught up in a vast conspiracy to misinform the public but it is far more likely that opponents are trying every possible angle – fact or fiction – to turn public opinion against the industry’s development.

However, there can be a grain of truth in even the biggest lie. Because New Brunswick does not have a well-developed supply chain and workforce for the oil and gas industry, much of the new economic activity from shale gas development could go to firms and workers that are not based here.

Firms and workers from outside the province could be brought in to do the work and take employment income and profits out of the province. Therefore, in order to maximize the benefits we need to focus on building a supply chain and a workforce based here in New Brunswick.

Last week the consulting firm Deloitte issued a report entitled Shale Gas Supply Chain Opportunities in New Brunswick that details the wide range of business opportunities that would be available to local firms if the industry moves ahead and if these firms are able to build up the specialized expertise required to service the industry.  The report states that a typical shale gas well requires $13 million worth of development costs and supports 21.2 full time equivalent jobs.
The report also concludes there is significant potential for local New Brunswick firms to benefit from the industry. Firms are needed to provide a variety of services including environmental surveying, equipment rental, safety planning, site clearing, construction and lease agreement negotiation, land preparation, drilling, cementing, casing, wellhead installation, pipelines and maintenance.

Deloitte completed a survey of New Brunswick firms to determine their readiness to take advantage of the opportunities. The survey found that 93 percent of firms were either ready or willing to be a supplier to the industry. More than three out of five firms surveyed believed their companies would benefit from providing services to the shale gas industry.

However, because New Brunswick doesn’t have much history with the oil and gas sector, only a few firms currently have the expertise to be able to offer services to the industry.
New Brunswick companies need to start thinking about these opportunities now and figuring out how to take advantage.

It has been a while since a supply chain opportunity has come along with as much potential. The Deloitte study confirms the economic benefits could be distributed widely if New Brunswick firms step up and take advantage.

This entry was posted in Uncategorized. Bookmark the permalink.

8 Responses to Building a natural gas industry supply chain in New Brunswick

  1. mikel says:

    The $13 million and jobs numbers are garbage. First, they don’t even say where the numbers come from, second, they say in a footnote that the number is ‘highly variable’ depending on dozens of factors. Get two wells on a wellpad, and the number is cut in half. Next to a road and its even lower. And virtually ALL of it comes from setting up the well or dismantling it in 25 years. Which quite literally means a two year boom to set up hundreds of wells (if the gas is even there and if its even economically viable), then a bust (but don’t worry, some of those jobs will be back in 25 years).

    They sent out surveys to almost five hundred companies, and only 75 actually sent it back. Which tells you more about what businesses REALLY think about the industry. So lets not pretend the business community is chomping at the bit. I’d REALLY like to see how you ‘use the data to calculate jobs’, because they won’t say in this study how they came up with them. I did a quick study counting the number of wells active in the US and how many jobs the gas lobby SAYS its created, and found that apparantly one well will provide over a THOUSAND jobs. So, there’s either your point validated and you guys can now be smug, or if your like me your a little bit suspicious of that figure. To your and your readers benefit I doubt your that gullible.

    Good of you to admit a couple of pretty key facts that pretty much justify protestors opinions even about the economics. I haven’t heard too many complaints focusing on direct dollars to GDP output. The ‘conspiracy’ here is HOW those statistics are calculated, and if its like most economic statistics it does NOT include damage to natural resources in calculating ‘output’.

    What is REALLY ironic is that proponents don’t very often look at the consequences of SUCCESSFUL industry establishment. Like Wyoming, where for several years the industry generated more air pollution than Los Angeles. Or Pennsylvania, where so many people moved so quickly into an area that the companies had to build shantytowns, and housing costs went so high that most of the people who lived there originally had to leave. Or Virginia, where trucks did SO much damage that the companies themselves set up a fund to repair the roads (no government actually MADE them).

    So again, for a person living in this area what is the benefit even if it IS successful? And lets be serious, if SWN finds gas, are they going to hire a company from New Brunswick who is ‘trained’ but has no experience, or are they going to bring in experienced companies who are more cost effective?

    Now, THANKFULLY there are some people there with balls who are protesting. Thanks to them the companies know virtually the only way they will be accepted is if they hire as many local people even if it ISN”T cost effective, just for the PR. Those protestors basically have done the job of economic developers, because if all the people who just roll over for any industry that comes along had their way, there would be no new regulations, no profit sharing, and its a given that the companies would be sloppy with their work and do everything as cheap as possible. You might want to look at the current state of the forestry industry if you want proof of that.

    And again back to jobs, I went looking at the jobs listings for some of the areas with a lot of drilling, and was surprised to find so little. Meanwhile, an add for a company that does trucking for the industry is hiring for $13.50 an hour, and the person ‘must be able to consistently lift 100 pounds’. Wow, I hope they at least provide medical care for their back. Another job for a civil engineer had a starting salary of only $44 grand a year.

    So, now that we’ve established that virtually the ONLY benefit of this industry are those figures you mentioned, some more details on what they mean might be warranted. My understanding of GDP was that it included the cost output of all the industries. So I don’t understand why $1 of oil output only equals .78 cents of GDP (or .92). Shouldn’t it be $1 in all cases? Or are you talking about Value Added?

  2. Will says:

    Once the arguments about groundwater, methane leakage, etc were debunked the naysayers moved on to ‘there won’t be any jobs, or they’ll be imported from other locations, or there isn’t that much gas’. They can somehow look at a province like Alberta that is oil rich and conclude that this won’t happen here in NB. Actually now they’ve moved into illegal activities such as stealing trucks and blockades, even for just seismic testing. As humans, most of us are incapable of logical debate.

  3. mikel says:

    Uh, the problem with ‘logical debate’ is that you have to actually LISTEN to the other side. Actually, the industry itself admits most of them. Virtually all have been verified.

    HALF of sealed gas wells leak in Quebec
    http://www.cbc.ca/news/technology/story/2011/01/05/shale-quebec-bape.html

    HALF of Alberta’s gas wells MAY be leaking (some people may distrust The Tyee just because its not corporate, but the interview is with a geochemist from the University of Alberta:

    http://thetyee.ca/News/2011/12/19/Fracking-Contamination/

    Not just old sealed wells, but methane leaks during production:

    Methane ‘leakage’ said to be AT LEAST 4% total production output:
    2011 study from the National Center for Atmospheric Research
    http://link.springer.com/article/10.1007%2Fs10584-011-0217-3

    And from the journal Nature,
    Methane leaks during production may offset climate benefits of natural gas.
    http://www.nature.com/news/air-sampling-reveals-high-emissions-from-gas-field-1.9982

    For groundwater, this is from the EPA, hardly an environmental bastion: “For the first time, a federal report has verified that chemicals used in natural gas hydraulic fracturing, also known as “fracking,” can, and do, cause groundwater contamination. The (EPA) recently issued a 121-page draft report on the issue that contain evidence linking water contamination in Pavillion, Wyo., to fracking chemicals from nearby gas wells.”

    And:

    Some of the findings in the report also directly contradict longstanding arguments by the drilling industry for why the fracking process is safe: that hydrologic pressure would naturally force fluids down, not up; that deep geologic layers provide a watertight barrier preventing the movement of chemicals towards the surface; and that the problems with the cement and steel barriers around gas wells aren’t connected to fracking.

    Of course now that the gas lobby has pretty much overtaken the EPA, they then backtracked with their next study. So there is something to be said for the number of EPA studies that were initiated, then CANCELLED. Now, you may wonder why a study would ever be cancelled:

    http://news.yahoo.com/epa-changed-course-oil-company-protested-082012084.html;_ylt=AmveX8E14CsKyLcN.JfNSLQS.MwF;_ylu=X3oDMTQ2bTdpNTV2BG1pdANUb3BTdG9yeSBTY2llbmNlU0YgRW5lcmd5U1NGBHBrZwM2Yjg2NzM2OC00NWE2LTM1OWMtOTI5MC0wZTE4ZGU2YWVkYWUEcG9zAzEEc2VjA3RvcF9zdG9yeQR2ZXIDNWY2NjY5OTAtNWZiNi0xMWUyLWJlZmUtMzE1ZDMwNTQ3ZGFk;_ylg=X3oDMTFzMnBqYnA4BGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANzY2llbmNlfGVuZXJneQRwdANzZWN0aW9ucw–;_ylv=3

    Now, to be LOGICAL means a lot of things. For example, methane leaks are not ‘necessary’ and as the industry says, they WANT all the gas, and are getting better at limiting it. Fair enough, but thats a far cry from saying ‘it never happens’, particularly when it happens in half the cases. It’s true though, according to experts its because companies are often sloppy, and when they AREN’T sloppy then things are different. But thats a different argument, and has anybody ever even heard an NB official MENTION the gas industry in NB and whether they’ve checked for any leaks? There is a small industry there now, so whats the story, are there any leaks, when has the government tested for leaks, and where’s the data? Has ANYBODY ever heard a mention of that?

    For groundwater, its very true to say that even IF ‘some’ occurrences occur, and its been pretty much admitted that they do, then its only a tiny fraction and not that common. Fair enough, but you have to at least admit that it CAN and DOES occur. I mentioned this before, a potential problem occurs when people have a well that may have bad casing already, then local drilling will cause it to leak. The drilling didn’t ’cause’ the leak, but the leak did occur ‘because’ of the drilling. Thats a scenario that can be worked out, but hasn’t even been MENTIONED by the government.

    The truck is a questionable issue. I made a similar argument until I was told by several sources that the truck was actually on native land. Since it was ‘blocked’ and not ‘taken’, then technically its not ‘theft’, and I don’t think anybody was arrested in that case, so ‘illegal’ is a stretch. The protestors wouldn’t move off the road, and thats illegal and they were arrested for it. At a protest you WANT to be arrested because thats the only way you get any media attention, so nobody is complaining about that.

    See, logical debate isn’t so hard at all.

    Oh yeah, I did make a mistake in my earlier comment. That thousand jobs was way off, I should always recheck my numbers. There are about 550,000 active gas wells in the US, and the gas industry says there are 3 million people working in the industry. Which means each gas well employs six people. Of course not all those will be ‘in the field’, so I’d give it fewer than six.

  4. One of the things I notice about the NB economy is the vertical integration within a single company. So though there may be commerce through a supply chain, it is essentially constituted of transactions between one branch of the company with another branch. Though it may appear to be that there is a lot of economic spin-off, because it all occurs within one company (or in some cases, a very tight group of companies), there is little if any leakage, and the average NBer sees little or none of the benefit.

    More to the point, though, since these activities generate considerable expense for the government (everything from road reconstruction to environmental monitoring to policing) it would be relevant to ask about the tax revenues resulting from O&G activities in the province. It would be worth hearing more, with numbers based on actual royalty rates, not projections.

  5. mikel says:

    That’s another sore spot Mr. Downes, and yet another reason why people simply don’t trust the government. The green party filed an access to information request for several government studies done with consultants on the shale gas royalty regime (and were told to get lost by the finance minister):

    http://www.greenpartynb.ca/en/newsroom/media-releases/240-green-leader-refused-information-on-shale-gas-royalties

    As for royalties, thanks to the research done by protestors we know that the royalty structure averaged about 5%, whereas in Alberta it averaged 17%. Corridor resources paid $600,000 in royalties on $30 million in revenues, I’m bad at math, but whats that, around 2%? I think I recall reading that this year they paid NO royalties because gas prices were so low. I don’t think the government has yet changed the royalty structure to revenues from ‘price at the well head’.

    http://roymacmullin.wordpress.com/2011/07/07/new-brunswick%E2%80%99s-approach-to-natural-gas-is-full-of-cracks/

    Had the province been on the ball and had a royalty structure similar to Alberta’s, it would have generated twice the amount just from this one company in one year (that would have been an extra 10 million just from that one time occurence).

    Some people may suspect that link, but the numbers are from a chart that claims its data comes from the company’s financial reports.

    For royalties themselves, thats been a problem since Shawn Graham. Just after the LNG deal with Irving was made, the government stopped accounting for gas royalties in its budget, and lumped all natural resources together. It also killed a deal to create a ‘natural gas business park’ near Sussex to benefit from local gas. It is now all shipped out, and people may even remember that Bernard Lord actually threatened to sue because NB was getting so few royalties from the pipeline that passed through the province. The NEB said it would ‘study’ the issue.

    Directly to the point is the example of Arkansas: “For example, since 2009, Arkansas has taken in approximately $182M in royalties but estimates its road damage from drilling to be $450M.” Now THAT one is directly from an anti gas group so should be taken with some salt, but there is some mention of it at this link, which paints a ‘fairly’ rosy view of gas IN THE PAST when prices were higher:

    http://www.arkansasbusiness.com/article/36226/neither-boom-nor-bust-fayetteville-shale-play-falls-short-of-expectations?page=all

    So, ‘logical debate’ about the concept really doesn’t apply. For us its of interest, but those protesting simply don’t trust the government, and hopefully any readers that have read these comments will have an inkling why. Not to be too judgemental, but when you look at all this I don’t see how ANYBODY can think the government capable of managing this industry with any kind of sense (Lepreau seems to be working out REAL well). It’s like arguing about applying a certain industry from Kansas when you live in Oz.

  6. mikel says:

    PS To counter Will’s argument, now that gas companies are making such low profits you may have noticed that since the heyday of McKenna’s ludicrous assertion, the ‘pro’ side have moved from crowing about royalties to job creation.

    A far better study was done in the US in Ohio:

    http://eidohio.org/wp-content/uploads/2011/09/Ohio-Natural-Gas-and-Crude-Oil-Industry-Economic-Impact-Study-September-2011.pdf

    There you have an industry of 4000 wells, which the study claims produced over 200,000 jobs ‘over all industries’. The largest growth in jobs was actually in the early stages when going from 27 wells to almost 200. The study also claims that 70-80% of THOSE jobs came from outside the area. That sounds good for jobs, but I suspect reinforces the earlier claim that outside workers are brought in initially, then local jobs are created to service those jobs. But again, what happens when all those jobs are gone? 4000 wells is a lot of wells, so you’d have to get a LOT of wells going to keep those job numbers climbing. Its a good study though, worth checking out. I think its quite coincidental that the Deloitte study came to the same development costs as this study. Most of what is found in the NB study I found in this one. Hmmmmmm:)

  7. Oliver Dueck says:

    @Stephen Downes Despite the vertical integration that exists, you can’t really say that the average NBer sees little or no benefit. These large companies still employ thousands of people, who directly contribute to the economy by consuming goods and paying tax.

  8. Alan says:

    Creating a suitable supply chain and workforce in New Brunswick is bound to create employment opportunities for people staying in nearby areas.

Comments are closed.