Energy Sector Continues to Generate Buzz

by: Smith and Howard

December 2, 2015

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The energy sector has shown and continues to show robust growth. It was one of the first industries to bounce back from the Great Recession, and one of the few that has been consistently thriving for several years. This growth has been driven partly by the desire to reduce U.S. dependence on foreign oil, and partly by efforts to develop more renewable energy sources.

Growth has been further accelerated by advances in horizontal drilling and hydraulic fracturing techniques that make it possible and profitable for energy companies to extract oil and gas resources from within shale formations. The initial impact of these advances has been felt most strongly in a handful of hot markets — including North Dakota, Pennsylvania, Texas and Colorado — where oil and gas companies have invested heavily in drilling and production facilities.

The energy industry’s investment in facilities and infrastructure is expected to continue during the next 20 years, with cumulative capital expenditures estimated at more than $5 trillion by 2035. Such massive investment clearly offers opportunities for construction businesses.

Facilities and pipelines

Companies with expertise and experience building industrial facilities will continue to be in demand — and not only in areas where oil and gas are being extracted. The largest share of investment in midstream infrastructure will include oil refineries as well as liquefied gas production, storage and export facilities.

These projects are expected to initially take place in southwestern states, including New Mexico, Texas, Oklahoma, Louisiana and Arkansas. But infrastructure expansion is eventually projected to grow into the central and northeastern United States, along with Canada.

Pipeline construction will also likely continue to expand, as pipelines are used to transport most oil and gas resources around the country. And, with the availability of abundant and relatively low-cost gas, observers anticipate a boost in power plant construction — with projects to convert or replace coal-fired and nuclear plants particularly on the rise. (See the sidebar “Power plant emission standards may spark construction.”)

Ripple effects

The prospective construction work in the energy sector is exciting. But the booming activity may provide other construction opportunities as well. Specifically, the abundance of well-paying jobs in the energy industry is driving residential relocation. The resulting population growth has increased the demand for single- and multifamily housing, schools, retail stores and commercial buildings in many areas.

Two examples are the Bakken shale zone in North Dakota and Eagle Ford in Texas. Over the next five years, about $80 billion annually will be invested in local infrastructure and real estate development in these areas. If energy projects are under development or underway in your market, look beyond the jobs themselves to see whether there are ancillary opportunities for your company.

Labor impact

Not every consequence of the energy sector’s growth is positive. Many young people who might otherwise have entered the construction trades have found lucrative jobs in energy.

Electrical Contractor magazine reported last January on a projected labor shortfall of 1.5 million workers because of people leaving the construction industry during the recession. These workers are unlikely to return. The magazine also cited the results of a member survey by the Associated General Contractors of America in which more than half of respondents said they were having trouble finding electricians, plumbers, equipment operators, roofers and carpenters to fill existing jobs. Some of this labor scarcity is likely because of departures to the energy sector.

But there’s still a bit of a silver lining. In 2008, about 3.8% of the construction workforce was engaged directly in oil and gas construction. By 2012, that number had increased to 6.4%, and the demand for workers on energy-related building projects has continued to increase.

Close attention

For contractors, the increased construction activity both directly and tangentially related to the energy sector warrants close attention. Bear in mind, however, that you may need to factor in higher labor costs when bidding on these typically expansive projects. So be prepared to offer competitive salaries and bonus compensation packages, as well as training and advancement opportunities to attract and retain talented employees.

Sidebar: Power plant emission standards may spark construction

In August, President Obama and EPA Administrator Gina McCarthy outlined details of the Clean Power Plan, which sets the first-ever national standards to limit carbon pollution from power plants. The regulations are designed to benefit public health by:

  • Cutting pollution levels,
  • Driving investment in clean energy technologies such as wind and solar power,
  • Ensuring reliability of the power grid, and
  • Addressing climate change.

Existing power plants represent the largest source of carbon emissions in the United States, and the plan’s goal is to reduce emissions by 32% from 2005 levels by 2030. Although the plan offers states some flexibility in how to achieve that goal, the imposition of a national standard should lead to construction activity across the country over the next 15 years. 

Among the types of projects likely to be encouraged by the Clean Power Plan are the decommissioning and replacement of some aging power plants, and the modification and adaptation of others. States will develop their own plans to meet the standards, using all low-carbon electricity generating technologies — including renewables, energy efficiency, natural gas, nuclear, and carbon capture and storage. Savvy contractors should be alert for opportunities on related projects.

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