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An abundance of natural gas found in shale deposits nationwide and the sideways hydraulic drilling technique known as “fracking,” which makes it extractable, are poised to strengthen Louisiana’s industrial base, boost exports and create 35,000 jobs in the state, according to an October report released by the American Chemistry Council.

Petrochemical companies along the Mississippi River corridor use natural gas as a feedstock to make plastics and other materials used in everyday products.

On one hand, cheap natural gas lowers production costs. On the other hand, Europe uses more expensive oil as its feedstock, which allows regional companies to export oil competitively.

“Heavy industrial is the gorilla in this economy,” says Scot Guidry, an agent with Mike Falgoust & Associates. “And when they are up you can feel it.”

That strengthening gorilla has helped put a silver lining in industrial real estate, which still has a higher-than-average vacancy rate, hovering above 14%—a neighborhood where it has been stuck since 2008.

“That’s not good,” Guidry says. “What’s good is less than 10%.”

However, inventory last year shifted from the negative to the positive within the 25 million square feet of industrial space in the corridor, with 220,945 square feet of space absorbed compared to the 62,748 square feet vacated in 2010.

At the same time, industrial stalwarts and out-of-state newcomers are moving in together and sharing space, or simply merging or buying one another up, Guidry says. Southwest Stainless and Sunbelt Supply are prime examples of that type of merger, moving together in May into a new building of about 100,000 square feet at Perkins Road and Pecue Lane.

“Now we’re trending down to a lower vacancy rate,” Guidry says, “even with these companies vacating space to go into bigger buildings.”

Yet Guidry believes the vacancy rate will remain above 10% for the next two years, with mainly owners of smaller buildings (5,000 square feet to 10,000 square feet) making landlord concessions to tenants who still remain leery of long-term leases.

Land sales will remain stagnant as sellers cling to post-Katrina property values despite the high number of vacancies, according to the Greater Baton Rouge Association of Realtors.

If abundant natural gas is the gorilla, then the Tuscaloosa Marine Shale—stretching with oil north of Clinton to Wilkinson County Mississippi—may be the sleeping giant that could cause the Greater Baton Rouge area to rise from the post-recession doldrums if extraction proves profitable, according to Guidry.

“If it does, I don’t know how big the impact would be compared to Shreveport’s (Haynesville Shale formation of natural gas), but that would provide the need for service companies,” Guidry says. “So you will have a demand for office space, warehouse space, yards and equipment.”

Already, Guidry says, there are three to four companies with test wells in the Tuscaloosa Marine Shale producing oil and running the logistics of extracting it from the ground. As a caveat, Guidry suggests much of the area might not be zoned properly for growth if demand for property explodes following positive results on Tuscaloosa wells.

With or without the Tuscaloosa, and bearing in mind that natural gas remains cheap, the old stalwart petrochemical companies and newcomers like steelmaker Nucor are expanding and attracting subcontractors that work in plants: pipefitters, engineers, environmental cleaning services, construction contractors, welders and safety technicians. “That’s all growing,” Guidry says.

5 THINGS TO WATCH
TUSCALOOSA MARINE SHALE
 A deep reserve of oil in a shale formation in an area extending from central Louisiana to southwestern Mississippi has been known about for years but has recently raised hopes of turning profits with improved technologies in a drilling technique known as “fracking.” In May, Goodrich Petroleum announced acquiring 17,000 more acres in the play, while Devon Energy announced producing about 259 barrels of oil with a new horizontal well. “We know that this formation has vast potential to provide domestic energy for this nation, and jobs and economic growth for this state, but it will take companies time to learn and perfect the most effective means of drawing out the oil and natural gas locked within that shale,” said Scott Angelle, secretary of the Louisiana Department of Natural Resources, in May.

PLANT EXPLOSIONS 
NuStar Energy has begun a $365 million expansion at its crude oil terminal in St. James Parish, increasing its storage capacity from 8 million barrels to 11 million barrels. Ormet Corp. is reopening an alumina plant in Ascension Parish with a $21 million investment that will create more than 240 new jobs averaging about $57,000 in annual wages. BASF is investing $20 million into its Vidalia plant. Louis Dreyfus Corp. is making $200 million in improvements to its grain elevator at the Port of Greater Baton Rouge. And Nucor Steel is in the $750,000 phase of its $3.4 billion project in St. James Parish, which could produce 1,250 direct jobs at its facility. In Ascension Parish alone, 10 plants announced expansions that are together worth more than $1 billion.

NATURAL GAS PRICES 
Cheap, abundant natural gas is driving the industrial sector and helping lower real estate vacancy rates from their peak in 2010. But the energy market is finicky and can change at any moment. “Heavy industrial [real estate] can turn on pretty quick and it can turn off just as quickly,” warns Scot Guidry, an agent with Mike Falgoust & Associates. An uptick in the natural gas market could slow recovery while the rest of the economy slowly lifts itself up from the recession. “If [natural] gas prices spike real high in the next couple years, that could have an impact on it,” Guidry says.

SCRAP METAL ON THE MOVE
 Louisiana Scrap Metal Recycling has begun construction on a new 26-acre site on the Intracoastal Canal in Port Allen. Barge access will allow the facility to grow operations and exports.

RAILROAD EXPANSION
 Union Pacific Corp. is investing $200 million into a new expansion, including a rail yard in St. James Parish and 29 miles of new track from Livonia to Addis. At its peak this June, the expansion is expected to create 1,500 jobs while permanently bringing on board 225 new jobs averaging about $45,000 in annual wages.

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The governor also signed a pair of bills — House Bill 618 and Senate Bill 555 — that will change the complex legal process for dealing with so-called “legacy lawsuits” that seek millions of dollars in damage claims and that the oil and gas companies claim are stymieing energy exploration in the state.

At issue is the state’s procedures for cleaning up environmental damage to property caused years ago when energy companies searched, developed and exploited oil and natural gas fields. Following acceptable procedures of the time, the energy companies often left messes on-site, then sold the leases to others, usually smaller oil companies.

Landowners contend that litigation, which carries the threat of an expensive verdict, seems the only motivation to get the oil companies to clean up.

Big oil companies counter that agreeing to a cleanup opens them to much larger verdicts for less documented damages, such as financial losses from being unable to use the land.

In order to accelerate cleanup, the compromise outlined in SB555 and HB618 would allow a party to admit responsibility for environmental damage and to clean it to the regulatory standard.

The changes would set certain benchmarks and timelines in handling cases.

Once the oil company admits responsibility, the Department of Natural Resources would draft a feasible cleanup plan, according to the two bills. Two other agencies, the Department of Environmental Quality and the Department of Agriculture, would also weigh in on the cleanup plan.

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Oil giant Royal Dutch Shell is set to invest more than $300 million to build out a series of liquefied natural gas filling stations at America’s biggest chain of truck stops. According to James Burns, Shell’s manager of LNG transportation fuels, the oil and gas giant will pay the costs of setting up 200 LNG pumps at 100 locations in the Travel Centers of America chain. Burns wouldn’t say where Shell intends to set up these pumps, but insisted that Shell aims to create an tempting value proposition for the owners of trucking fleets who are thinking about investing in trucks that run on the super-chilled natural gas.

“They want to have some comfort that the fuel is available,” says Burns. “We want to be the company that provides that comfort.” In a statement, Travel Centers said the locations will be chosen with the objective of enabling LNG trucks to travel across the entire country.

Burns says Shell will entice truck fleets to buy LNG-powered trucks and to pump their LNG by selling long-term contracts that guarantee the price they pay for the natural gas derived fuel will be at least 30% cheaper than diesel (on an energy-equivalent basis) for the lifetime of their trucks. “They can lock in their fuel savings for however long they keep that truck,” which is often as long as five years.

Shell set up its first network of LNG filling stations in Canada last year after building a small LNG plant in Calgary that makes the equivalent of 300,000 gallons of diesel a day. The Canadian venture installed the pumps at Flying J truck stops. Burns says Shell doesn’t yet have any set plans to build one of these small LNG chillers to supply the U.S. network as it’s secured supply from a third-party LNG producer. “We see a future where infrastructure for LNG is not a concern,” says Burns.

With its deep pockets, Shell shouldn’t have much trouble growing its LNG network bigger than early mover Clean Energy Fuels, which maintains 300 fueling locations in the U.S. and Canada. Publicly traded Clean Energy Fuels lost $31 million in the last quarter, up from a loss of $9 million a year ago. The company has received $150 million in loans from Chesapeake Energy‘s venture capital arm.

I’ve written recently about the oddity of cash-poor Chesapeake investing in such risky ventures as Clean Energy Fuels and “green” gasoline maker Sundrop Fuels. Chesapeake’s high cost of capital can’t justify such moves, nor does it have any experience in operating filling stations. Shell, however, is a very different beast. It’s been operating gas stations for decades, it’s developed its own LNG technology, its market cap is about 20 times Chesapeake’s, and its bond rating is AA versus Chesapeake’s BB-.

Shell is precisely the kind of company that should be investing in fueling trucks with LNG.

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The Tangipahoa Parish Council on Monday unanimously introduced and set for public hearing a proposal to regulate oil and gas drilling in the parish.

It’s the council’s second attempt to adopt an ordinance that, if passed at a June 25 meeting, would regulate the drilling and production of crude oil, natural gas and other minerals from formations located deep below the surface of the parish

Over the past year, thousands of acres of land have been leased in the parish for possible drilling sites.

At its May 14 meeting, an attempt to pass a similar measure failed. At the time, Council President Carlo Bruno and Councilmen David Vial and Lionel Wells agreed to meet with representatives of the Louisiana Oil and Gas Association in an attempt to rewrite the original proposed ordinance.

Bruno said Monday that the trio had worked well with representatives of LOGA and that both parties seem to be in agreement over the new version of the proposed ordinance.

The council will vote on the proposal following a public hearing set for 5:30 p.m. June 25 at the parish Courthouse Annex.

The proposal requires that companies planning to drill for minerals in the parish obtain permission from the Parish Permit Office.

Companies planning to drill will pay a $750 per well fee. The original ordinance called for a $2000 drilling fee.

Potential drillers must also disclose the type of hydro fracturing fluid they plan to use in their well. Such fluids are used to smash or “fracture” holes in domes that potentially hold petroleum deposits.

The ordinance also requires that drillers secure appropriate state and federal drilling permits before seeking a parish permit.

The ordinance encourages drillers to use non-drinking water in their process and to recycle water used in production.

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East Baton Rouge is attempting to go green, and it’s starting with its vehicles.

Department of Public Works Director William Daniel said the city-parish is beginning the process of transforming its vehicles into a fleet that’s run by compressed natural gas.

Natural gas is a less expensive alternative fuel source to diesel and gasoline, and its harmful emissions are lower, Daniel said.

“We can save money (on fuel costs) and serve the people of the parish more efficiently by doing this,” Daniel said, noting that the switch is part of Mayor-President Kip Holden’s sustainability plan for city-parish government.

The city-parish selected a consultant, Professional Engineers Consultants Corp., to oversee the transformation, Daniel said. The contract is still in negotiations and will go before the council for approval within the next few weeks.

Next, the city-parish will seek requests for proposals from contractors. Costs, funding strategies, the time line and scope will be determined by the contractor who lands the bid, Daniel said.

There are hundreds of vehicles operated by the city-parish, but the contractor will ultimately recommend how many vehicles and what departments should be converted to CNG, Daniel said.

David Guillory, assistant DPW director, said his agency will be particularly interested in replacing its maintenance and operations vehicles, which include heavy dump trucks, tractors and large pickup trucks.

“We do have a lot of passenger vehicles, but it’s the heavy-duty pickups that we’d really like to save on fuel and burn cleaner fuel sources,” Guillory said.

The initial investment to convert to CNG is expensive because it requires new vehicles and fueling stations.

Gifford Briggs, vice president of the Louisiana Oil and Gas Association, said it costs about $10,000 to convert a vehicle to CNG, and fueling stations are between $1 million and $2 million to build.

Daniel said he expects there will be federal and state funds available to assist with financing. Also, he said, the city-parish could make an arrangement with the contractor to finance the project through the city-parish’s expected fuel cost savings over several years.

Briggs said CNG costs about $1.79 per “gasoline gallon equivalent,” and can run as cheap as 50 cents a gallon equivalent if an entity is using its own fueling station.

Baton Rouge follows in the footsteps of Lafayette and Shreveport, which already have some city buses that run on CNG.

Baton Rouge’s bus system, the Capital Area Transit System, is quasi-independent from the city-parish and has opted to pursue hybrid-electric buses rather than CNG partly because of the initial investment.

Lafayette also has about 41 other “nonbus” vehicles, Briggs said, ranging from police to public works vehicles, that use CNG.

But Briggs cautioned that it does not always make financial sense to convert.

“It depends on the source of the funding, and it depends on the mileage that a vehicle travels in any given year and how much fuel they consume,” he said. “If you’re using local or state tax dollars it may not make much economic sense because of the conversion costs.”

Briggs said converting makes sense for the “heaviest users of fuel,” which includes buses, street sweepers, garbage trucks and vehicles that travel more than 12,000 miles per year.

But, he added, “if the money comes from a grant, and you get the conversion costs for free, then anything makes sense because you’ll save on fuel regardless.”

Briggs said there should be plenty of federal funding opportunities for the city-parish, noting that when federal stimulus money was made available to the state in recent years, there were not enough applicants to spend the money.

Baton Rouge has a few CNG stations already, Briggs said — including at least three that are run by Entergy.

The city-parish also has a CNG station that was funded by a grant more than five years ago, Guillory said.

The grant also paid for five Honda Civics that run on CNG and are used by DPW inspectors.

But, Briggs said, the technology has changed since that station was built, and CNG vehicles are now built differently.

He said those cars have smaller fuel tanks than new CNG vehicles, and the station fuels cars very slowly.

Daniel said he hopes the first phase of the conversion will begin by next year.

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