A New Driver at the Wheel?

What they had to say, as always, depended on which end-user industry they were there to represent, but one theme that came from many of the speakers is that growth in North America going forward may well be driven by the abundance and availability of natural gas, which speakers say is taking on an ever-expanding role in the energy mix.

Mark Peters of Oil and Gas Financial Journal called this situation the “golden age” of gas. He explained that if the U.S. is allowed to develop offshore resources and shale, and Canada develops the oil sands as it should, the U.S. could reach fundamental energy resource independence within 5 to 7 years. Reasonable energy prices should encourage additional U.S. manufacturing capacity and a resurgence in domestic manufacturing.

“Gas has great potential that we know how to use,” he said, “and it has the capability to impact everything in the U.S. in manufacturing and in the petrochemical industry.”

His remarks were backed up by several other speakers, including Mark Eramo, vice president of IHS, who added that abundance and low price are encouraging petrochemical producers to bring production back to the U.S.

But natural gas is just one driver. Many factors are affecting the current economic situation, including consumer and business attitudes.

As popular speaker Alan Beaulieu, Institute for Trend Research (ITR), said in his presentation, a good portion of the nation remains pessimistic even while all signs point to recovery.

“Everything that we want to happen is happening, but still we’re not happy,” he joked, “proving that we truly are American.” He warned attendees not to wait to see what will happen next, but to take advantage of current positives, including low lending rates, and begin to plan now for bumps down the road.

SPEAKER-IDENTIFIED TRENDS

Natural gas is a game changer. If prices stay basically where they are, more natural gas power plants will be built, the petrochemical industry in North America may well be revitalized, and the economy as a whole stands to benefit.
Developing areas of the world will offer valve companies stronger markets. While the population of North America remains pretty constant, the population boom in developing countries combined with a shift toward urbanization in those developing nations will continue to have an impact on the price of commodities.
Caution is the norm. While the economy is not retracting at this point, it is also not rebounding as quickly or as definitively as people would like to see. Therefore, many manufacturers and end users are being cautious with spending and expansion plans. Growth will continue, but slowly.
China’s government will play a role. While China’s economy has not been growing as quickly as before, its government is working to stimulate growth, including starting big infrastructure projects. This could offset some of the negative effects of the economic troubles in the European Union.

DOMESTIC ECONOMY: INVEST NOW; TIMES ARE GOOD

Despite warnings by ITR’s economist Alan Beaulieu of economic troubles by about 2019, the overall feeling he left this year’s market outlook workshop attendees with is optimism. This was because, as he explained it, “The U.S. economy is going to continue to expand in the last half of 2012 and the first half of 2013,” and boom years are to come. Beaulieu stressed to attendees that even though 69% of the U.S. population currently has a pessimistic attitude, the country is in a real recovery. Business in the U.S. is hiring, and the job market is driving the economic expansion, he said. Retail sales are up and construction spending is improving, while credit card debt and delinquencies are down. “The problem is, we’re still comparing this [the current situation] to the bubble years before the recession,” he explained.

The realistic viewpoint is that the country will see a plateau in mid-2013 followed by a mild recession in 2014. However, “It will be nothing like what we just went through,” he said.

Meanwhile, however, he said too many companies are making the mistake of holding back.

“By holding onto money instead of investing, businesses don’t take the steps to drive efficiencies and get into new markets, meaning they will be out of position and ill-prepared for the relative boom years expected for 2015, 2016 and 2017,” he pointed out.

Beaulieu encouraged attendees to look forward for 10 years, figure out what people, training and other investments they will need to position themselves for growth and invest accordingly. “If you are qualified, borrow money,” he advised. “These are the cheapest interest rates you’re going to see for a long time. That investment can give you a good cash flow to bury competitors that can’t borrow,” he said.

However, he warned attendees to pay off that debt by 2019, when he said a major recession will hit. This recession does not have to be disastrous, however, and the country now has the past few years to use as an example.

“Think about what you would have done before the past recession if you’d known it was coming, and do that,” Beaulieu advised.

Beaulieu said that one of the most troublesome problems facing the U.S. economy in the long term may be health care spending.

“In the U.S. we spend much more per person and as a percentage of GDP [gross domestic product] than any other country,” he said.

Although the overall short-term economic outlook is good, Beaulieu also reminded the crowd that things can go awry. For example, “Oil prices could break through $120 [per barrel], and that could slow things down,” he pointed out. Such a development would put a crunch on both consumers and businesses, which means “a bit of a downturn in the economy because higher oil prices are inflationary.”

As far as what has happened most recently, Beaulieu pointed out that manufacturers enjoyed a break from commodity prices as copper and other metals came down because China’s economy slowed. But, he said, this situation will stabilize this year, and prices will go up in 2013 because China is spending to stimulate its economy.

Beaulieu also warned manufacturers they must face the issue of paying more for qualified labor. “Job openings are at a four-year high, but employers can’t find the skilled people to meet the positions for which we want to hire,” he said.

The debt situation in the U.S. is not presenting an immediate crisis, Beaulieu pointed out, but there are also no immediate fixes. Meanwhile, the U.S. is still the largest economy on the planet so there will not be a world currency anytime soon. Even though the country has only 4.9% of the world’s population, the U.S. is still the nation the world looks to for currency guidance, although he does not expect the euro or the European Union to collapse.

With respect to Canada, Beaulieu reported that Canada’s economy will be very healthy over the next 10 years, and won’t suffer from recessions as much as the U.S., partly because it is reducing exposure to this nation. It has an immigration policy that works and has had no housing bubble burst like the one the U.S. experienced.

When asked during a question and answer session whether the election in November 2012 would have any impact on the economy in 2013, Beaulieu said probably not, partly because there will be no significant legislation in the first half of the year that would affect the last half of 2013. However, if a conservative government stepped in and started aggressively dismantling federal spending and healthcare reform, he predicted problems down the line if the dismantling is not done gradually. He also said that if taxes go up by, for example, 4% in 2013, it wouldn’t really affect spending. A cutback in federal spending could negatively impact 2014 but there would be no cliff—effects would be gradual.

FORECAST: The economy will be on a positive footing until at least the middle of 2013. Commodities will level out in 2012 and go back up slightly in 2013. The dollar will be slightly weaker and there will be a plateau in mid-2013 followed by a mild recession in 2014. The years 2015, 2016 and 2017 will be boom years, but 2019 will see a huge recession.

WALL STREET: MIXED SIGNALS

Both U.S. and global industrial production growth rates remained positive through 2011 and the first quarter of 2012, according to Michael Halloran, senior research analyst and vice president, Robert W. Baird and Company. However, the deceleration in growth rates, to about 3.9% in May 2012 from the peak of 6% in December 2010, may indicate a mid-cycle slowdown.

Halloran pointed out that indicators are somewhat contradictory. For example, banks’ lending standards remain loose, but the June Institute for Supply Management Purchasing Managers’ Index (PMI) trended below 50 for the first time since July 2009, which reflects expectations for a modest industrial contraction. (PMI above 50 implies economic expansion.) Also, the stock market remains volatile, a reflection of the recent uncertainty, including the political and economic turmoil in Europe, soft China economic data and inconsistent U.S. economic data.

“What people are focused on is divergence of PMI trends,” said Halloran. U.S. PMI performance has exceeded global levels most notably in Europe and to a lesser degree China.

“With the globalization of most of the companies that deal with industrials, the question of how bad Europe’s economy can go—and if and when the shoe would drop for the U.S.—has been a factor,” he said. But, products that increase energy efficiency or productivity, or have exposure to emerging markets, power infrastructure or oil and gas infrastructure have higher growth prospects.

The best strategy for manufacturers is to be as low cost as you can, but compete on quality, according to Halloran. Domestic players have responded by increasing production in lower cost countries and staying ahead of the curve with respect to technology and service capabilities.

Downstream oil and gas capital expenditures increased 7% in 2011 and are expected to increase again in 2012 and 2013 with the highest growth regions forecast for Latin & Central America, North America and the Middle East. Halloran pointed out that refining capacity in the U.S. is partly driven by demand, but over time it will be driven by new ways to access supply, and that will come from shale plays.

As for the chemical processing sector, the good news is that three or four years ago, the world was not expecting $3 natural gas prices. With the lower prices, however, “you see that people wanting to reinvest in U.S. manufacturing can move back [to this shore],” he said.

Low feedstock, raised international oil and gas prices, which have increased transportation costs, and higher labor costs in China “are all compelling reasons why manufacturing should come back to the U.S. This is good for anyone making process equipment for the chemical industry,” Halloran said.

In the power sector, capital spending is stalled and near-term power trends remain constrained by the global economic uncertainty and government fiscal issues. However, capital expenditure (capex) trends have begun to move off the bottom globally, and Halloran expects improving trends through 2013 to meet demand requirements.

The U.S. water/wastewater equipment market is expected to grow 6.5% annually to $101.7 billion in 2016, driven by increased access to water supply and sanitation in developing regions and the need for repairs and upgrades of aging water infrastructure in developed regions, said Halloran. The EPA estimates the U.S. must invest $334.8 billion over the next 20 years for drinking water. Global Insight projects water infrastructure spending in Asia Pacific from 2011 through 2020 will be greater than $1 trillion.

FORECAST: According to The Robert W. Baird and Co. analysis, the world is in the midst of a mid-cycle slowdown and a slower, though still positive, growth environment exists in almost all process controls end markets in 2012. For the power sector, while economic and regulatory uncertainty could delay projects, an aging electricity infrastructure and new growth mean that global investments in the sector are expected to exceed $13 trillion from 2007 to 2030. Global downstream oil and gas capex is expected to increase 6% in 2012 and 10% in 2013 provided there is not a more significant global slowdown. Chemical markets should remain healthy through the second half of 2012 and stable in 2013.

WATER/WASTEWATER: FOLLOWING THE ECONOMY

The water market is a reflection of the changing economy, according to Tom Decker, vice president and Mid-Atlantic area manager of Brown and Caldwell, in that there are pockets of activity that look brighter, but overall, 2011 was a bad year, 2012 will be a little better and 2013 better yet. In other words, “Don’t Think Twice It’s All Right,” as he put it. The theme of his presentation this year came from that famous Bob Dylan song and others.

In 2011, engineering decreased between 1-2% from 2010 to 2011, sales of equipment were down about 5%, and construction sank 10%. The good news is that as of the workshop, there had been no further drops in 2012. Meanwhile, “There is a market in water/wastewater and opportunity exists,” he said, “though some companies are growing by basically taking market share away from others.” The bidding is still very aggressive, prices are being cut and margins are being slashed on construction jobs.

Decker said many utilities are going to Basic Ordering Agreements (BOAs) for engineering and sometimes construction services.

“These give manufacturers a kind of license to participate in their business for a number of years, and they will run a lot of their capital programs through these BOAs. It’s good for the utilities, but makes it hard for the providers because you don’t know what’s going to come down the pike.”

The EPA and state agencies are pushing for storm water systems to be upgraded, and many systems now fall under consent decrees. Decker pointed out that, while expensive for municipalities, these decrees are creating business opportunities for suppliers as many utilities are being faced with compliance schedules. A National Stormwater Rule is in the works, which could also be an important driver of business by 2014, Decker said.

Meanwhile, water transmission projects in Nevada, California, Wyoming and Texas are planned, and the recent drought will have a positive short-term impact on business and opportunities, said Decker. People are concerned about running out of water, so the sentiment is much more positive when the subject of water pipelines is broached.

Other potential drivers of business are the EPA’s move to have a numeric criteria for phosphorous and nitrogen, and efforts to reduce energy consumption. There is a big push for combined heat and power at treatment plants in which excess heat from treatment of water is used to create power, which can then be used to treat more water. Another push is for green infrastructure to handle runoff and stormwater to reduce flows that would otherwise end up untreated in local bodies of water. “Green infrastructure is really starting to catch on and should be looked upon as an opportunity,” Decker said.

Pushing down on opportunities for growth is a decline in U.S. population growth—at its slowest rate since 1945. Also, water use per capita keeps dropping as people attempt to conserve. Worldwide, though, population growth and urbanization are factors for overseas business opportunities.

“In countries all over the world, when everybody clusters in a city, that spells business for water and wastewater,” said Decker. “This trend means drinking water distribution/treatment/ wastewater treatment and disposal.”

FORECAST: 2012 will be flat, and 2013 is likely to remain flat or see a slight uptick. Major opportunities will be in foreign markets and, on this side of the ocean, reclaimed water and the push to use wastewater/heat systems for power plants. Internationally, 57% of the business will be in drinking water and 43% in wastewater, whereas in the U.S., 60% will be in wastewater and 40% in drinking water.

POWER: INTERNATIONAL IS KEY

The best bet for manufacturers selling to the power industry is the international market, especially in coal, according to Kevin Geraghty, vice president of Power Generation for NV Energy. While a huge push towards making renewables a larger part of the energy mix is occurring in the developed world, in the developing world, the push is for low-cost, high-efficiency baseload power to improve citizens’ standard of living.

General energy growth for developed nations is slowing as it increases for the developing nations. This is partly because of the push for clean energy and partly due to the economic downturn. It is also because people are trying to conserve more energy.

For parties seeking a power market, China holds the most promise as far as sheer volume, especially in steam markets. Like other developing nations, China is looking for the lowest-cost energy to provide its people. The cheapest forms of energy—coal, gas and nuclear—will be built internationally while the developed nations will be spending much more for power. That will have an effect on competitiveness in manufacturing, Geraghty said.

Contrary to popular wisdom, the planet is not running out of coal, so a project planner in a developing nation will often opt for that fuel. The price of coal is also stable, and while the U.S. is using less coal, it is exporting more. Some predict that pressure from environmental groups will force the government to prevent shipping of coal to developing nations, he said.

He also pointed out that many shuttered domestic coal plants are low-use facilities, so the amount of power coming out of the grid is still relatively small. More coal-fired plants will be retired from 2013 to 2035 than previously thought; however, the reason is not as much air quality or pollutants as it is the lower price of natural gas, he said.

At the same time that coal is decreasing in use, natural gas is receiving much attention as a fuel source for new plants. He predicted that if producers can get a guaranteed price around $3 for a 10-year supply (market price during this year’s Market Outlook was $2.50), then “that will be the death of coal.”

The future of gas is very strong, but it depends on access, he said. Fracing is under attack, and some environmental groups have come out against any new combined cycle plants in the U.S. “We worry about that in the power industry,” Geraghty said.

Geraghty currently does not see nuclear growing to be a big part of the U.S. energy supply. However, “We cannot have just one source of energy,” he stressed. “If coal really does go away, nuclear has to step in. Renewables are not a solution because the cost is just too high.”

Power producers are planning for CO² taxes, which will hit sometime in the next 10 years. As of Jan. 1, 2013, California is adopting CO² taxes on power generation. That will have an impact on production and cost, which will put added pressure on developed vs. developing nations.

FORECAST: The developing world is growing faster than the developed world and will seek traditional baseload power sources—coal, nuclear and combined cycle gas turbine. Policymakers in the developed world will require the replacement of existing power sources with renewables, energy efficiency and combined cycle gas turbine. Renewables, which constituted 10% of energy in 2010, will grow to 16% by 2035. If natural gas stays low in price, is really abundant and can be recovered in an environmentally acceptable way, it will take a larger share of power production.

HYDROCARBON PROCESSING: GOLDEN AGE OF GAS

“Gas processing has been around for a long time and has traditionally been the smallest segment of the hydrocarbon industry, but it’s becoming more important due to the surge in natural gas production,” said Mark Peters, group publisher of Offshore Magazine.

While there is plenty of activity in the natural gas sector remaining, since November of 2011, there has been more rig drilling for oil than natural gas in the U.S., the first time in 20 years that situation has happened. This is partly because of the high price differential between natural gas and crude oil, he explained.

Regarding oil, new extraction technologies, new regions and new ways to exploit regions previously discovered have combined to create a significant increase in production in the U.S. According to Peters, two factors keeping hydrocarbon prices higher is the situation in Iran where sanctions had just been posted (as of the workshop) and the low U.S. dollar. Since everyone pays dollars for crude oil, the falling dollar means the actual value that most producers are getting is not much higher than a year ago. That is incentive for those producers to keep oil prices higher than they normally would be based on economic activity. Prices could go down, though, if the euro falls apart, which would impact construction and exploration.

To get gas from the new shale plays, new pipelines will be needed, and there will be a shift in the kinds of products those pipelines are carrying. Other pipelines are being reversed. Shell is planning to build an ethane plant in the Marcellus shale area, and “we’re seeing the need for pipelines and processing in Wyoming and North Texas and Pennsylvania,” said Peters. “The shift in production of oil and gas to different states creates potential to change the political climate,” he said.

Though there is much talk about exporting liquefied natural gas, the concern with permitting large exports is that the U.S. would then be tied into the global price of $11 to $12 per thousand cubic feet, which could impact domestic manufacturing, according to Peters.

For the longer term, oil and natural gas will still account for 57% of the energy mix by the year 2035, Peters said. Also, despite the U.S. cutting back on use, coal is expected to go down only 1% in its proportional use in the energy mix. While the U.S. is discontinuing domestic use of coal, the nation is starting to export coal into China and the Far East. Liquid biofuels may go as high as 4% of the energy mix in 2035. Renewables excluding liquid biofuels are currently 7%, and should be about 11% in 2035. Nuclear will remain about the same, at around 9%.

FORECAST: Peters expects that worldwide natural gas will continue to grow as a percentage of the world’s primary energy while coal and oil will continue to decline. Increased natural gas production is driving the need for more gas processing capacity and the low prices for natural gas liquids is fueling petrochemical expansion in the U.S.

Valve spending should increase this year for the hydrocarbon processing industry. For control and on/off valves, maintenance has been higher than capital spending for the last five to seven years, and this is expected to continue.

OIL AND GAS: THE UNEXPECTED

The general consensus at last year’s Market Outlook was that the world would see slow growth economics in 2012, relatively stable commodity prices with oil hovering around $90 and gas at about $4, and an increase in drilling activity, John Spears of Spears & Associates, reminded this year’s attendees. However, things didn’t quite go that way, partly due to the very warm winter, he said.

Natural Gas

“Consequently, for awhile, natural gas was trading lower than the BTU [British thermal units] price of coal,” said Spears. For power production companies, “The year-over-year change in gas consumption shows a 20% increase this year, and for a period this year, gas provided as much fuel to the market as coal.”

That situation gave an overall lift to gas consumption, “maybe as much as 5%,” Spears said, and at $3 to $3.40 per 1,000 BTU, gas can retain its power share.

According to Spears, oil demand is currently expected to increase, but the estimate of surplus oil production capacity that exists in the world, as of the second quarter of 2012, is only 2.5 million barrels per day (MBD) spare capacity compared to 90 MBD. That’s an historic low 3%, and even though capacity will jump as additional sources of supply grow faster than demand, the world is not going to have any more commercially available crude than it does today because of the sanctions on Iran. That’s one of the reasons why Spears said oil prices would remain around $90 to $100 for the rest of 2012.

By 2013, prices will most likely be closer to $80 per barrel, meaning caution in U.S. drilling activity, Spears said. This will make producers more conservative and reluctant to increase capital spending.

Natural gas rigs went from 900 to just about 400 over the past eight to nine months, but during the same period, oil rigs increased to 1,400 as compared to the end of 2011 when there were only 1,000.

FORECAST: A small decrease in the cost to drill and complete new wells is offsetting the 5% increase in drilling activity, leaving overall U.S. drilling and completion expenditures little changed in 2012. Spears expects these trends to remain in place for 2013. Net additions to the North American frac fleet are unlikely from year-end 2012 to mid-2014, and activity is expected to remain sluggish through 2013, depending on the weather. Drilling activity in Canada is forecast to fall 5% in 2012 to an average of 400 active rigs, although activity should pick up there in 2013.

U.S. capex on new oilfield equipment is projected to exceed $14 billion in 2012, down 8% from 2011. A sharp fall in spending for new frac equipment will drive another 15% drop in U.S. oilfield equipment spending in 2013.

NUCLEAR MARKET TO DOUBLE

The world’s population is expected to balloon to 9 billion by 2050, much of it in developing nations; because that growing population wants a higher standard of living, global energy demand will double by 2030, according to Mike Higgins, director of Corporate Strategy at AREVA.

In a world that seeks to constrain carbon output, that presents a challenge—renewables simply can’t meet demand with current technology, which cannot sufficiently store intermittent solar and wind power. Meanwhile, hydro power is near to being tapped out, and natural gas, while popular in North America, is not carbon-free and has suffered from price volatility. According to Higgins, that leaves an obvious energy source: nuclear.

Still, Higgins asserted that, in addition to the events at Fukushima, the lower cost of natural gas has been a disruptor to what was touted as a Nuclear Renaissance a decade ago. Only two new nuclear plants are under construction in the U.S. Meanwhile, natural gas prices dropped by 75% between 2008 and 2012.

Also, while nuclear power is extremely reliable and the cost of fuel is very low, historic cost and time overruns in new builds have made new nuclear less enticing in the U.S. than in other parts of the world. Natural gas is not as abundant or inexpensive elsewhere. Meanwhile, coal still accounts for 41% of world energy production, but nuclear is becoming more viable throughout the developing world.

“A huge growth area for nuclear is in India, China and Russia,” Higgins said, because of their economies and growth in population. “U.S. operators can sit back and wait as demand is flat, but they can’t do that in those markets.”

Throughout the world, 63 nuclear plants were under construction as of July 2012: 26 in China, 10 in Russia and 7 in India. The challenge is to build on budget and on time.

”Experience makes the process more efficient,” Higgins said. “Once you’ve been through it, you learn and correct mistakes. That encourages utilities to sit back and wait, letting the learning be on somebody else’s dime.” The newest builds, like Taishan, are being watched closely for these reasons.

In planning for the future of nuclear, the events at Fukushima are constantly scrutinized. “In Fukushima,” Higgins reminded the audience, “the reactors were fine for seismic events. They performed as they were supposed to. They shut down. The loss of the backup power from the tsunami is what caused the problems and this brings home that lesson of the unknowns—you design for everything you think you can predict, then something comes along that exceeds it.”

Because the country is very resource-constrained, two reactors are coming back online in Japan. This shows how important nuclear is, which is a theme in most developing nations. “While Germany and Switzerland have backed off nuclear and decided to shut down existing plants, the rest of the world has at least publicly come forward with a statement saying that we recognize the value of nuclear and intend to push forward,” said Higgins.

FORECAST: More than 160 new nuclear units are planned globally, and numerous plants are moving through the U.S. regulatory process. Because of the intensity of valve use in nuclear technologies, there can be a huge impact when nuclear plants are developed, but manufacturers must understand local sourcing regulations in this heavily regulated environment.

Kate Kunkel is senior editor of Valve Magazine. Reach her at kkunkel@vma.org.