A Shale Gas Boom In Its Infancy Signals Positive Growth
In the summer of 2013, Liberty - a combined cycle power plant in Pennsylvania- placed an order with Siemens Energy for a delivery of two power blocks. The order, which has a total value of approximately $400 million, includes two H-class gas turbines, two steam turbines, two generators and two heat recovery steam generators, as well as electrical equipment and control systems. When Liberty goes into commercial operation in 2016, it will have a combined cycle output of approximately 829 megawatts and will be able to supply up to one million homes with clean power that is being generated using domestic fuel. It will also be one of the most advanced gas-fired power plants in the northeastern U.S.
Liberty is an affiliate of Panda Power Funds which is currently managing the construction of three high efficiency natural gas-fired power plant projects in Texas. When these power stations come on line in the next two to three years, they will be among the cleanest natural gas-fueled plants in the U.S., with carbon monoxide (CO) emissions of less than 10 parts-per-million (ppm), and nitrogen oxide (NOx) emissions less than 2.0 ppm. The Panda Power Funds' projects have something else in common as well: they represent the first merchant power transactions with construction risk in the Texas power market to be financed in nearly a decade.
These infrastructure projects not only demonstrate the current direction of the energy market, but are a harbinger of something else equally exciting. Energy and infrastructure project investing tends to be an early indicator of the broader economic outlook. Global capital markets are starting to heat up. Deals are oversubscribed. Margins are being driven down. In my view, all signs point positive.
In the U.S. and globally, infrastructure projects that are soundly structured and provide reasonable returns have no trouble raising capital, including equity and debt. The Texas Panda Power Funds project deals are good examples of this as they were supported through a nontraditional hedge supplied by the pension fund of a corporate entity. Despite the nontraditional deal structure, the debt side of all three deals was oversubscribed by two to three times signaling intense interest from debt investors.
This interest is largely due to a rapidly expanding trend that is having a major, positive impact on the economy. No recent development in the energy industry has had as profound an effect on global business as tight formation (better known as shale) gas. In the two decades since horizontal drilling and hydraulic fracturing were attempted in Texas, shale gas-related news has come to dominate the business headlines. In 2014, a number of global companies are expected to shift production to North America because of the long-term prospect of cheap, clean, abundant energy. Just a few years ago, the trend was in the opposite direction.
The trickle-down effect of this shale gas activity has been equally impressive. The hydraulic fracturing process has revitalized the U.S. oil & gas industry and has helped increase employment in the sector by 53% over the last 7 years, according to the American and Common Wealth Foundation. The World Economic Forum has recently released an updated study on energy and economic growth in the U.S., which shows that shale gas is essential to both: The shale gas industry alone employs 600,000 people in this country and the oil and gas sector is projected to grow at 6.9 percent through 2015.
The shale gas boom is broadbased. Natural gas is a reliable source of power, as a dependable back-up to intermittent wind and solar generation. As the momentum of using shale gas gathers pace, the Liberty plant in Pennsylvania points to yet another trend: more and more gas-fired power stations will be developed on sites near the shale gas fields to take advantage of this cheap fuel source. In many ways, it is often more efficient to transmit electricity than to transport natural gas.
I recently had a chance to drive through Western Pennsylvania where the Marcellus Shale industry is helping revitalize the region. The shale industry here is credited with creating a range of jobs from drillers and riggers to work in ancillary services such as trucking, metal fabrication and engineering. And while the estimates on the number of Pennsylvanians the industry employs vary, there is consensus on the economic and broader community benefits. One local business illustrated it best. As I drove by, I noticed that the shop sign that previously said simply, "Industrial Equipment Rentals," had been quickly altered to read, "Marcellus Shale Industrial Equipment Rentals."
The U.S. shale gas boom is still in its relative infancy. As the country continues to shift away from coal and towards natural gas-fired power plants, there is little doubt that shale gas projects will attract investment, create jobs and help move the economy forward. And that can only be good news for 2014 and beyond.
