The executive summary of a new IHS report on how shale gas and tight oil (i.e., unconventional energy) is changing the U.S. and the world. In 2012 alone, unconventionals created 1.7 million jobs and generated $62 billion in new federal and state revenue. The new study was released at the World Economic Forum in Davos, Switzerland in Jan. 2013.

1. IHS GlobalView Insights Davos 2013
Energy and the New Global Industrial Landscape:
A Tectonic Shift?
Energy and the Economy
Oil and Energy
Chemicals
Automotive

2. Nariman Behravesh
ENERGY AND THE ECONOMY Chief Economist, IHS
In a matter of a few years, the unconventional Improved competitiveness and more capital inflows.
oil and gas revolution has dramatically changed The boom in nonconventional gas and the resulting big
drop in prices have lowered feedstock costs for the petro-
the global energy landscape, and in its wake is chemicals and other industries, as well as electricity costs
altering the competitive global manufacturing for industries such as steel, aluminium, and glass. This
and industrial landscape. Initially, this has “competitive stimulus” has already attracted European,
been—and will continue to be—a big boost Latin American, and Asian energy-intensive investment
and encouraged US producers to “onshore.” For the
for North America. However, other regions
first time in many decades, a number of large global
and countries with large shale gas and tight oil chemicals companies have announced plans to build or
deposits can, with time, also participate in this expand facilities in North America for exports—capital
energy revolution and industrial “renaissance.” expenditures totaling around $95 billion in the next
In the meantime, it is becoming increasingly decade, focused primarily on ethylene production.
apparent that this development is improving Reduced global imbalances.
the manufacturing competitiveness of the As nonconventional oil and gas production ramps
United States. up in the United States, oil imports are declining
(US net oil imports are down from 60% in 2005
Why North America? to 42% today). We expect the United States and Canada
Thanks to a combination of forces, the large-scale to become exporters of liquefied natural gas (though
extraction of gas from shale deposits and oil from not without considerable political debate in the United
shale and other dense rocks has occurred first in North States). Exports of petroleum products, petrochemicals,
America. These forces include: a well-developed energy coal, and fertilizers will continue to increase. These trends
infrastructure, private-sector ownership of mineral rights, will dramatically reduce the US trade and current-
a competitive industry with lots of independent drillers, account deficits (already down from a few years ago).
access to risk capital, flexible and adaptive supply chains,
and supportive state regulations and fiscal regimes. This is Positive and negative environmental impacts.
primarily a story of market forces and entrepreneurship, The biggest positive environmental impact of the surge
not government incentives or intervention. in gas production is the 9% drop US carbon emissions
just since 2007. The US is back to its 1995 level—even
Large and positive economic impacts. as emissions have continued to rise in Europe and China.
According to a new study by IHS, in the United States This is mostly thanks to the switch by US electric
alone, the direct, indirect and induced effects of the surge utilities from coal-fired to gas-fired power generation.
in nonconventional oil and gas extraction have already Environmental concerns about nonconventional fuels
added 1.7 million jobs (with 3 million expected by 2020) relate to the potential hazards from the hydraulic
and $62 billion to federal and state government coffers fracturing process used to release oil and gas from
in 2012 (with $111 expected by 2020).1 The big winners shale and other dense rocks. These are manageable
are US consumers, domestic energy intensive industries, risks that technology, sensible regulations, and industry
energy producer, and electric utilities. “best practices” can mitigate.
Rapid Jobs Growth Projected in the Unconventional Policy challenges.
Oil & Gas Sector in the United States North American policymakers are faced with the task
(Millions of workers) Source: IHS of nurturing the energy boom, while protecting the
4
environment. Job-short Europe, Asia and other parts of
3
the world, face the risk of migration of manufacturing
to North America and the loss of competitiveness. For
2
countries such as Japan and Germany, the challenge is
compounded by policies aimed at abating or eliminating
1 nuclear power from their energy mix, and the consequent
need to close the power-generation gap with more expen-
0 sive sources of energy. Governments worldwide in regions
2012 2020 2035 of high resource potential need to consider whether they
These projections include direct, indirect and induced impacts want to establish the preconditions that will stimulate
1
IHS, America’s New Energy Future: The Unconventional Revolution and the Economy
http://www.ihs.com/info/ecc/a/americas-new-energy-future.aspx
2

3. ENERGY AND THE ECONOMY
the development of unconventional natural gas and oil trade flows for manufacturing. Cost competitiveness
resources, and the direct and indirect economic benefits of North American energy-intensive industries will
that will flow from such development. put downward pressure on pricing and costs in other
regions of the world. Moreover, lower price gas will
Industry ramifications. challenge the economics of new nuclear and renewables.
Other ramifications of the new global energy and All of this will require companies in the most affected
industrial landscape that will emerge over the next sectors to rethink their medium- and long-term strategies
few years. For example, the pattern of global trade vis-à-vis sourcing, production, and investment.
in natural gas will likely change substantially, as will
Daniel Yergin James Burkhard
OIL AND ENERGY Vice Chairman, IHS Managing Director, IHS CERA
Oil Market Outlook: Non-OPEC’s Big Chance
The price of Brent crude set a new record international community remain elevated. Sanctions
high in 2012 at $111.67 per barrel—and is are keeping about half of Iran’s normal levels of exports
out of the market. Iran has shown no signs of halting
at a similar level in so far in early 2013. Yet
uranium enrichment, and some believe that this is the
the oil market remains well supplied and signs year when the “red line” of enrichment will either lead
suggest fundamentals may be loosening. to some diplomatic resolution or to some kind of conflict
This is primarily due to increased Saudi output that could shake the oil market. Yet, at the same time,
and to the growth in non-OPEC supply and, high levels of supply from Saudi Arabia and growth from
the United States and Canada have helped the market
in particular, the unconventional oil and gas adjust to the losses from Iran, as well as those from Syria,
revolution in the United States, which has Yemen, and South Sudan.
pushed up US oil output by 25% since 2008
The global downturn and “post-peak demand’
and turned North Dakota into the second- in the OECD.
largest oil-producing state in the United States. The impact of the global recession continues to be felt
It is here where we see the first effects of on the global market. World oil demand growth in 2012
the unconventional revolution on world was 750,000 b/d—an increase of 0.8% from 2011. That
is well below the trailing 10-year average increase of
energy markets.
1.4% annual growth. Demand growth is expected to be
Indeed, it looks as though 2013 may see a rare occurrence somewhat stronger in 2013, at around 1 million b/d.
for the world oil market: supply growth from non-OPEC Asian demand—led by China—is the key source of
may exceed the growth in world oil demand. This has growth while demand in the OECD is generally flat.
happened only four times since 1986 and two of those
years were during the Great Recession of 2008–09, when Indeed, even without the current downturn in Europe,
oil demand fell. Meanwhile, Iraq could see production we believe that the OECD demand picture reflects a
rise by around 400,000 barrels per day (b/d) to an structural change. The OECD is at “post-peak demand.”
average of 3.4 million (b/d)—making it the second OECD oil demand peaked in 2005 at a high point of
largest producer within OPEC for the year. 50.5 million b/d. We do not expect it to exceed that level
again—owing to demographics and government-mandat-
Why have oil prices been trading in a high, narrow range ed policies. As it is, OECD demand in 2012 stood at 46
if the market is well-supplied? Supply outages—actual million b/d.
and feared—in the Middle East and also elsewhere
continue to keep prices high. Syria’s civil war is raging But can non-OPEC actually deliver on the potential for
on, with President Bashar al-Assad’s regime increasingly a major production increase? Oil supply growth outside
on the defensive. Tensions between Iran and much of the of OPEC—led by tight oil development in the United
3

4. OIL AND ENERGY
States—could meet or even exceed the total gain in world The new year offers the prospect of a break from trend in
oil demand growth. IHS CERA projects that non-OPEC the form of strong non-OPEC growth—and this could
supply will expand by about 1.1 million b/d in 2013 be a moderating influence on the oil price. But some
compared with a year earlier—slightly higher than the seemingly intractable geopolitical worries—such as Iran’s
expected increase in world oil demand. nuclear activities—could put further upward pressure
on oil prices. The relative strength of these counteracting
The impact on price. forces—along with the health of the global economy—
If strong non-OPEC growth materializes, what would will determine the direction of the oil price in 2013.
it mean for the oil price? Assuming demand shocks are
avoided, two potential outcomes loom. Going global.
Increasingly, both companies and governments are
The first is non-OPEC growth is matched with cutbacks asking the same question: will the unconventional oil and
from key OPEC producers. This would diminish the gas revolution go global? The answer will have a major
likelihood of a big increase in oil inventories that would impact on global energy markets and the global industrial
weigh on prices. It would also increase the amount of landscape. The geological conditions likely exist. There
spare production capacity, which should be a downward is no reason that North America would be unique.
force on prices. How? By reducing the geopolitical “fear Moreover, technology migrates very rapidly in the world’s
premium” from what it would otherwise be. The fear oil and gas industry.
premium in the price of oil is pronounced when there
is a relatively small cushion of spare capacity that can be At this point, the expectation is that these kind of
called on to offset supply disruptions. In this case, there resources will be developed in other parts of the world…
is a moderation in oil prices, but no severe and sustained but with a lag. As noted earlier, the circumstances that
decline. Spare production capacity would increase from promoted this development in the United States differ in
around 2.8 million b/d in 2012 to about 4 million b/d important aspects from other parts of the world: a large
in 2013. number of independents, private ownership of mineral
rights, infrastructure, and service ecosystems. Moreover,
Actually, something along these lines is already the development of these resources requires experience,
happening, with Saudi Arabia cutting back its production the build-up of knowledge, and trial and error. It also
in the past two months. Saudi oil output has dropped involves different kind of work practices and mind-set.
by 200,000 b/d in November 2012 and by another Governments also have to create fiscal and regulatory
400,000 b/d in December to bring the average output regimes that permit work to go ahead and avoid being
in the latest month to 9.1 million b/d. At its peak during overly prescriptive with evolving technologies.
the spring of 2012, the kingdom was producing at
average monthly rates of 9.9 million b/d. With that said, major opportunities have been identified
around the world—ranging from Mexico and Argentina
A second potential outcome is a significant increase in to Western and Eastern Europe, West Siberia, Algeria,
world oil inventories. This would occur if the supply and parts of Saudi Arabia—to name just some. Our own
gains from non-OPEC (and Iraq), are not accommodated research indicates that the resource base in China may
with cutbacks from OPEC members. Large inventory be larger than that in the United States. However, it is
builds would be a bearish signpost for the oil price and in very early days, and we believe that it will take several
could potentially shift market psychology from concern years before significant amounts of unconventional oil
about supply adequacy to worries about too much oil in and gas begin to appear in other regions.
the market.
The critical assumption in either of these outcomes is,
of course, strong non-OPEC oil production growth. The
non-OPEC supply story is based on real potential—no-
tably further large gains from the ongoing revival of
North American oil production. However, non-OPEC
supply projections have a history of disappointment due
to technical and weather-related difficulties and security
challenges. A strong year of non-OPEC gains would buck
the past decade’s trend of underperformance—but such
growth is far from assured.
4

5. Oil Gas Sector in the United States
(Millions of workers) Source: IHS
4
3 Gary Adams
CHEMICALS Chief Advisor, IHS Chemical
2
Chemical Industry Impacts
1
0
2012
These projections include
nonconventional 2035 and
2020
The North American direct, indirect and induced impacts
oil materials represent as much as 75 percent of the total
gas revolution is having profound impacts on petrochemical production cost, therefore playing a key
role in capital investment decisions. Production
the global chemical industry. Consider the
expansion from 2000 to 2012 has occurred mostly in the
following historical trends and future prospects: Middle East and China, driven by competitive feedstock
A North American Chemical Industry Renaissance incentives (in the Middle East) and a desire by China to
Is Underway: maintain a higher level of self-sufficiency in chemicals
manufacturing (relative to the amounts of required
North America Basic Chemicals Plastics imports to meet growing domestic demand).
Cumulative Production Trends
(MM metric tons) Significant differences in prices for natural gas and crude
70
oil have developed due to extremely diverse market
60 dynamics associated with a steep increase in North
American supply of natural gas. Consequently, the
50
significant difference between North American natural
40 gas based raw materials and those related to crude oil
has transformed North America into a low cost region
30 for chemicals production. This advantage is attracting
20 significant capital investment as producers across the
region link up new sources of low cost raw materials with
10 retrofitted or new facilities capable of leveraging this low
0
costs into a global supply position. For the first time in
90 95 00 05 10 15 20 more than a decade, a number of global chemicals
companies have announced plans to build or expand
facilities in North America. As much as 10 million metric
tons of new ethylene capacity (a basic building block for
Expansion and growth in the 1990’s turned to the chemical industry) is forecast to be built in North
closures and stagnation in the 2000’s due to energy America in the near term. Producers of other chemical
market dynamics:
products linked to natural gas economics (methanol for
The North America market for basic chemicals and example) are also advancing new capacity plans.
plastics enjoyed a period of strong growth during the
1990s, adding almost 50 million metric tons of new Finished goods production continues to migrate
basic chemicals and plastics production. Annual growth to low-labor-cost countries, adding opportunity
averaged an impressive 5.0 percent during this period for cost-advantaged producers of commodity
of strong manufacturing of durable and non-durable chemicals and plastics to expand exports:
finished goods. The economic slowdown of 2000-2001 Expansions in new chemicals capacity will require a
combined with a steep rise in raw material prices abruptly major commitment to the export market, as growth in
eliminated further chemicals production growth. A North America domestic consumption is expected to
steep decline in competitive position forced closures of remain moderate. Fueled by exports, basic chemicals
chemical plants and off-shoring of significant finished and plastics production from 2013 to 2020 is forecast
goods manufacturing while at the same time attracting to increase at an average rate of about 5 percent per year.
finished goods imports. North American closures became Longer term (2020 – 2030), given expectations that
a stark reality despite markets such as China continuing North America will remain a low-cost energy and feed-
to require increased levels of basic chemicals and plastics stock source for the chemical industry, the region could
imports to meet growing demands. return to more downstream manufacturing of durable
and non-durable goods based on these low-cost chemicals
Petrochemical investment in North America is and plastics. The result will be a stronger growth rate for
being reignited by hydrocarbons from unconventional domestic consumption of basic chemicals and plastics
sources, reshaping the global capacity profile and relating to “on-shoring” of certain products such as those
trade patterns:
consuming polyethylene (film).
Chemicals production costs are highly related to the
value of the hydrocarbon inputs as energy-derived raw
5

6. Philip G. Gott
AUTOMOTIVE Senior Director, IHS Automotive
A New Automotive Landscape: No Shortage of Big Challenges
Despite some short term good news, the New powertrain and vehicle technologies require
massive investments at a time when the market for
automotive industry is facing unprecedented
these technologies is uncertain at best.
long term challenges. Near term, the impact of Mature market participants are investing heavily in RD
government policies and incipient recovery in for advancing technologies to meet the world’s toughest
North America will be apparent in 2013 when performance standards for safety, air quality and energy
it is expected that 15.1 million light vehicles will efficiency. Regulators in these markets are promoting a
variety of solutions ranging from electric vehicles and
be sold in the United States, compared to natural gas, on the one hand, to severe restrictions on the
11.6 million in 2010. China is also expected use of selected vehicles in problematic areas on the other.
to do well, with sales of 20.5 million this year, The industry needs greater clarity and long-term visibility
compared to 17.0 million in 2010. In other major in regulatory policy to make more effective the
investments needed in RD.
markets the story will be less upbeat. Consider
18.1 million sales in Europe for 2013, compared The advantage goes to new entrants who can
to 18.4 million in 2010, and 4.68 million in embrace new markets and technologies with no
“legacy” costs.
Japan, compared to 4.87 million in 2010. New entrants in growth markets in the emerging world
Even in the US, however, 2013 sales are can invest in production of required new technologies
well below the peak of just under 17 million with advanced manufacturing techniques without the
achieved in 2005. burden associated with the obsolescence of older
technologies and factories and of legacy labor and
Overall, growth expectations for emerging markets will pension costs. The rapid expansion of their home
propel the number of worldwide cars and trucks from “growth” markets often affords them the opportunity
900 million today to between 2 and 3 billion by 2030 for better capacity utilization than their mature
(there are many diverging views on just how many cars market counterparts.
there will be and how much they will be driven). With
most of the world’s population living in urban areas by At the same time, regulatory requirements in emerging
then, the prospects for congestion are daunting, not markets are lagging those of mature markets. New
to mention the demand for energy and the challenge entrants based in the new growth markets can adopt
of dealing with the waste products. To address these technologies developed at the expense of their mature
issues, there are so many possible alternative scenarios market counterparts. In some cases this is a boon to
that making the affordable investments necessary to global suppliers, but puts mature market vehicle makers
prepare products and business models for any likely at a relative disadvantage as they bear the brunt of
combination of plausible energy and policy outcomes development and integration costs.
is a huge challenge. We have entered a new age in
which collaboration and cooperation amongst all the The different bases of competition in each market, can
stakeholders is the best—if not the only—course to also favor the new entrants. The organic growth of new
ensure the long term survival of the players as the markets is fueling public and private investment in
automotive and energy industries evolve. new automakers and their suppliers who are anxious to
compete in all the world’s markets. Manufacturers based
The global recession has coincided with a global in the mature markets are competing for share with
shift towards emerging markets. increasing numbers of competitors. This means that large
Over the next decade, compound annual growth rates investments in differentiated products are needed just to
(CAGR) for the mature markets of Europe and NAFTA hold market position. Automakers based in expanding
are forecast to be 2.2 and 1.4% respectively. But this markets are enjoying organic growth while required to
growth is exaggerated from trend due to the recent deep meet less stringent standards for emissions and safety in
recession. From 2000 to 2024, CAGR is expected to their home markets. Margins in the mature markets are
be just 0.77% in Europe and 0.12% in NAFTA versus thin while the potential for profits in the growth markets
12% in Greater China, 7.7% in S. Asia, 6.4% for Latin is much greater.
America and 4.6% for the Middle East and Africa. For
Japan and Korea, the combined CAGR for this same
period will be negative.
6

7. AUTOMOTIVE
Encouraged by concerns over congestion, social Optimizing the benefits to society and the transport
pressure and regulatory mandates, the consumer’s sector will require a coordinated approach by
“love affair” with the car may be turning into a star- regulators, energy (including electric power)
crossed relationship. companies, the auto industry and fleet operators.
For most of the history of the automotive industry, Energy, transportation, clean air and climate change
consumer demand has been taken as a “given.” This is policies need to be aligned so that limited vehicle and
no longer the case. In some countries, the percentage engine development resources can be focused on a cost
of under-40 age cohorts holding driver’s licenses is effective path to maximize the long term returns without
declining. With over 50% of the global population living compromising achievement of other societal objectives
in urban areas, the congestion and other inefficiencies or the competitive position of the industry participants.
of owning a car are giving rise to new forms of mobility Those countries who take a coordinated approach to
from virtual travel on the internet to new business meeting transport energy demands will minimize the
models of public and private car ownership, all with the financial challenge to their domestic energy and
encouragement of local politicians and regulators anxious automotive industries, ensuring their long term
to reduce noise, pollution and the inefficiencies of competitiveness.
intra-city travel. It is unclear how much longer the love
affair will survive even in today’s high-growth markets.
Some of the most aggressive access restrictions and
burdensome licensing requirements are appearing in
the cities of China and India, while innovative new
car-ownership models are appearing in Latin America
as well as the US and Europe. With future motorization
rates in some cities at less than half that of their country
averages, the magnitude of future market growth is far
from certain.
Unconventional energy sources are a major cause
of uncertainty and raise questions about the need
for greater collaboration and coordination between
automotive and energy industries as well as policy
makers.
What powertrain and vehicle technologies and associated
manufacturing and post-sale customer service capabilities
are needed in the future? In Europe, the United States,
Japan and China, the industry has invested heavily in
electric vehicles. Some European countries and provinces
in China provide incentives for natural gas vehicles,
while in the US the future of this fuel for light vehicles is
unclear. How much emphasis should be put on aggressive
pursuit of any one of these technologies, and for which
markets? Or should investment continue to focus on
advanced gasoline- and diesel-fueled vehicles?
7

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