U.S. Reindustrialization An Offshoot Of Natural Gas Boom

July 2012, Vol. 239 No. 7

Richard Nemec, Contributing Editor

At the March 2012 version of the annual IHS CERAWeek energy conference in Houston, one panel discussion concerned the petrochemicals industry and its growing renaissance in the lower 48 states riding the wave of plentiful and low-priced natural gas supplies. It was generally agreed that the opportunities for gas and related infrastructure in the chemicals industry were “wide and deep,” and likely to grow.

At the time of this conference there were 30 separate proposals for building new or expanding existing chemical plants in the United States, and the building boom was/is being driven not just by low-priced, plentiful gas supplies, but the widening spread between the gas and oil prices, according to Cal Dooley, CEO at the American Chemistry Council (ACC), which has become a vocal advocate for stepped-up shale development.

By ACC estimates plentiful shale gas adds up to about $25 billion in domestic investment. (Natural gas is to a chemicals plant like flour is to a bakery, Dooley says.)

“That level of investment is predicated on the absolute confidence that we are going to have competitive-priced natural gas for decades in the future,” Dooley said during an energy industry online interview. “Some 96% of the products sold in the United States have some chemicals in them, and the vast majority came from natural gas,” he said.

With the domestic oil/gas production boom brought on by shale and hydraulic fracturing (fracking), a growing synergy has developed between the energy industry and the industries that rely heavily on gas as a feedstock. The two sectors are now much more globally competitive, something that should boost the U.S. economy in a global context over the long term.

Jim Teague, the COO at Houston-based Enterprise Products, a midstream firm that prides itself as a key link from the wellhead to the petrochemical plants, called the shale gas and oil development a huge shift for the nation, allowing America to begin producing products that in recent memory have been made somewhere else in the world.

“At today’s low energy prices, there can be a $300 million cost advantage over naphtha in a $1.5 billion cracker plant,” Teague told the worldwide energy audience at CERAWeek. “When we have this sort of cost advantage, we don’t worry, we just build pipe (for the needed gathering and delivery infrastructure).

“Shale gas is an unbelievable opportunity. It makes me wish I were 50 years old again because the next 10 years are going to be pretty exciting.”

The midstream players like Enterprise Products have tens of thousands of miles of existing pipelines transecting the various shale formation areas and they are building more or upgrading existing infrastructure. Teague views this as a U.S. competitive advantage globally now that the energy resources have begun to catch up with the physical infrastructure.

People like Teague on the energy infrastructure side and representatives at Dow and other large petrochemical companies talk in terms of billions of dollars.

“All you have to do is turn a valve. You don’t have to go charter a ship. It is an unbelievable infrastructure advantage that we have going that now has a resource advantage. We’re building processing plants and pipelines, and I am not really worried,” Teague said.

The first half of this year has been awash in reports of new, multibillion-dollar industrial ventures, mostly in the Gulf of Mexico region and many involving the process of transforming natural gas into liquids (GTL). The two world leaders in GTL – South Africa’s Sasol and Royal Dutch Shell – are exploring plans for building massive plants in Louisiana for converting gas into diesel and other products. Loads of more than 1.5 Bcf/d can be turned into upwards of 130,000-140,000 barrels of petroleum products, primarily naphtha.

This past spring it was hard to turn the page of any energy journal or blog without encountering more proof that the U.S. manufacturing revival is well under way. Dow Chemical unwrapped its plans to build a $1.7 billion world-scale ethylene production plant as part of its existing extensive operations in Freeport, TX. It is part of a larger, longer term building boom envisioned in the U.S. that Dow estimates at $4 billion, offering peak construction employment of nearly 5,000 new jobs.

At the same time, Shell, Chevron and ConocoPhillips have all announced plans for new or expanded plants. This unprecedented build-out means further new investment jobs in the gas and liquids pipeline and infrastructure space. And it is not confined to petrochemicals; the U.S. steel industry is reacting to the new natural gas environment with plans to change traditional manufacturing processes to tap the inexpensive plentiful gas supplies.

Aside from the gas infrastructure and adequate supplies of the fuel, the key to these plans are the investment in the plants, which can exceed that of a refinery. The key to those investments is the price spread between the cost of gas as feedstock and the prices the refined liquid products can command. “If the current spread narrows back to where it was at the start of 2009, plant profitability disappears,” said a GTL blog commentator, Sandy Fielden.

The turnaround for U.S. chemical industry facilities was not driven entirely by the low natural gas prices, said ACC’s Dooley. The real driver is the widening spread between crude oil and gas. In the United States about 85% of the chemicals produced are derived from gas, while internationally the industry depends on oil, or naphtha, for about 70-80% of the chemicals produced everywhere else.

“Right now (early May) gas has about a 7-to-1 advantage over oil,” Dooley said. “If gas is $4 and oil is selling at $28/bbl, we’re in parity. With oil more than $100/bbl and gas at $2, the United States now has about a 50-to-1 margin gas to oil. We see that wide ratio being sustained for some time.”

For the American chemicals industry, the availability of large, low-priced supplies of gas means the same can be said for ethane, a natural gas liquid (NGL) derived from shale gas that is essential throughout the chemicals space. This was underscored in a report published in 2011 by ACC, “Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs and U.S. Manufacturing.”

“After years of high, volatile natural gas prices, the new economics of shale gas are a ‘game-changer’, creating a competitive advantage for U.S. petrochemical manufacturers, leading to greater U.S. investment and industry growth.”

Just before the start of 2012, Chevron Phillips Chemical Co. announced plans to build a 1.5 billion-ton ethane cracker on the U.S. Gulf coast. Longer term it eyes export markets for the U.S.-produced fuel used widely throughout the global chemicals industry.

Less than two years ago the new U.S.-based Chevron Phillips plant would have been unthinkable. The lack of investment and the high feedstock costs took their toll, but now there is a new dynamic and the petrochemical firms have a new bounce in their step.

For those who make various common products out of the NGLs, they hope the lingering conditions will yield absolute lower polymer prices and greater polymer price stability because that is what drives demand for the products they plan to produce at expanded U.S. plant sites.

“We really do think that in the next couple of years there will be some great opportunities for our nation to export all sorts of petrochemical products and derivatives,” said Mark Lashier, executive vice president with Chevron Phillips and a participant in the CERAWeek panel discussion.

“We know polymer will move offshore; that’s expected. But we hope we can use the opportunities here to add full value to the product (ethane). I think North American converters are ready to hire people and invest; to make goods for home and abroad, but they won’t do it in the face of the volatility and lack of price stability we experienced in the past.”

Analysts, consultants and industry strategists have begun to dissect the “renaissance” that PricewaterhouseCoopers LLP (PwC) identified for U.S. manufacturing as an outgrowth of the shale gas supplies. The infrastructure challenges are generally viewed as manageable in the next two years, but oversupply of the NGL products, particularly ethane, has sparked more debate.

In a presentation in Houston by Tudor Pickering Hold & Co. Managing Director Dave Pursell in the spring, the potential ethane glut was laid out as a still unresolved issue, while Pursell assumed NGL pipeline capacity problems would be fixed by late 2013 or early 2014.

If he is right about a surplus of ethane through 2018, then the prices of gas and ethane may remain fairly close, and some of the expanding pipeline infrastructure to handle the NGL could be under-utilized at times. So far, however, infrastructure companies like Enterprise Products haven’t publicly expressed any concern.

Last year when the ACC looked at ethane in its whitepaper on shale gas and petrochemicals it analyzed the impact of what it called a realistic 25% increase in ethane supplies in terms of the impact on the petrochemical sector, finding large economic multipliers.

The benefit included 17,000 new chemical industry jobs and an added 395,000 jobs in other industries tied to U.S. chemical production growth. That in turn generates $4.4 billion in additional federal, state and local tax revenues ($43.9 billion during 10 years), $32.8 billion in increased U.S. chemical production, $16.2 billion in new capital investment in the chemicals industry, and $132.4 billion in additional U.S. economic output.

Since those staggering numbers, the PwC analysis clearly married the development of shale gas and related infrastructure to the rebirth of U.S. manufacturing. And in this regard, it advocated for the manufacturers becoming proactive stakeholders in the shale space. This is already manifested in some of the proactive, pro-shale initiatives by the ACC among policymakers in Washington, DC.

Basically, manufacturers as evidenced by NAM and ACC members, have heeded the call and are supporting tax and regulatory approaches that help advance the shale industry, along with supporting “safe and transparent” approaches to gas extraction methods and public education.

To get these desired outcomes, the PwC report said that a key will be the energy and manufacturing sectors “effectively communicating the value that shale gas can create for U.S. workers and communities.”

Investment in both sectors will symbiotically help both in ways it never would have a few years ago.

If Enterprise Products’ Teague is correct, the growing North American combination of vast energy and infrastructure resources eventually will give the United States, particularly its Gulf of Mexico region, the age-old advantage of “location-location-location.” A case in point that is still unfolding involves Vancouver, British Columbia-based Methanex Corp., the world’s largest producer of methanol. Early in 2012, Methanex announced tentative plans to physically relocate to the U.S. Gulf region one of its idle processing plants now located in the extreme southern tip of Chile, near Punta Arenas at the Strait of Magellan.

Methanex is holding a site in Geismar, LA, planning to move and reconstruct one of the methanol plants from Chile, looking toward resuming operations in the United States by the second half of 2014.

“The outlook for low North American natural gas prices makes Louisiana an attractive location in which to produce methanol,” said Methanex CEO Bruce Aitken, who noted that the Gulf Coast is also a large methanol-consuming region. Aitken also praised the U.S. energy work force and infrastructure as “world class.”

Methanex anticipated making a final investment decision on the move in the third quarter of 2012.

The shale boom and existing infrastructure helps create what Aitken touted as a unique opportunity – a chance to add capacity at a lower capital cost and in about half the time of a new greenfield project.

“The timing is excellent with strong demand growth for methanol globally and little new production capacity being added to the industry during the next several years,” Aitken said.

Richard Nemec
is a Los Angeles-based West Coast Correspondent for P&GJ. He can be reached at: rnemec@ca.rr.com.