Energy

Conventional oil and natural gas drilling and production were
generally flat since our last report, with little change expected in the
upcoming weeks. Our contacts attributed these conditions to eroding
natural gas prices and the regulatory environment. Well-head prices for
oil were mainly steady. We heard two reports of energy companies
redeploying drilling resources from dry gas to the wet gas areas of the
Marcellus shale in Pennsylvania and West Virginia. The Ohio Department
of Natural Resources has issued 32 Utica shale drilling permits since
January 1 and 39 Utica wells are currently being drilled in Ohio. The
outlook for coal production during 2012 is similar to 2011 levels.
However, output may decline due to lessening demand from electric
utility companies and offshore markets. Spot prices for metallurgical
and steam coals continued to decline. Almost all of our contacts
reported upward pressure on the cost of production equipment and
materials. Energy payrolls are trending higher, especially in shale gas.
A few small oil and gas producers are experiencing wage pressures
brought on by competition from large firms engaged in shale gas
exploration and production. Transportation. Freight transport volume has
been trending higher during the past few weeks, and for the month of
January it was above year-ago levels. Strong demand was seen from
automotive, food, and shale gas producers. Our contacts expect volume to
grow at a moderate pace during 2012. We continued to hear numerous
reports about rising prices for parts, diesel fuel, and other materials.
Most of the cost increases were recovered via fuel surcharges and rate
adjustments when contracts came due. Capital outlays reached targeted
levels for 2011. Almost all of our contacts expect to increase their
capital budgets during 2012 over prior year amounts for fleet expansion,
replacing aging equipment, and infrastructure improvements. One
executive noted that his capital budget for 2012 will be at a
pre-recession level. Operators reported hiring for driver replacement or
adding capacity, although recruiting qualified drivers is difficult.
Some wage pressure exists due to a tightening of the driver pool.

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** Market News International Washington Bureau: 202-371-2121 **

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