Shale Boom: Early 21st Century Industrial Growth Engine

August 2014, Vol. 241, No. 8

Richard Nemec, Contributing Editor

“…the United States has become ‘a job magnet’ for manufacturing, which is really the first time in decades this has happened…”
–Former U.S. Interior Secretary Ken Salazar

At a regional energy meeting in Denver this spring among a dozen western state attorneys general some of the speakers wandered off the focus of the daylong conference – hydraulic fracturing – to talk about the ongoing U.S. shale boom and what it means for a resurgence of manufacturing in North America. What was once a fairly recent drive by U.S.-based global companies to build manufacturing plants overseas has been totally reversed. And the shale boom is the catalyst.

“What we see [in the shale boom] is a huge economic opportunity for the country,” said Thomas Clark, CEO of Denver’s Metro Economic Development Corp. “[A Denver-based global manufacturer] has told us they will start onshoring [in the U.S.] half their manufacturing plants around the world because of reliable energy sources here.”

Attending the conference as a guest, former U.S. Interior Secretary Ken Salazar, a former U.S. senator from Colorado, described why the United Kingdom was never going to develop a shale oil/natural gas industry, and thus, more would-be European manufacturers in need of abundant, inexpensive fossil fuel and electricity supplies are going to focus on North America.

Salazar thinks we are coming out of the 2008 major recession through jobs being created in energy and manufacturing. “So many of the companies I talk to are looking to bring jobs back to the U.S. because we have a reliable energy supply.”

Companies such as GE and Methanex Corp. have continued in the early months of 2014 to reinforce this assessment that has been outlined by a number of national studies completed in the past year or two. GE CEO Jeffrey Immelt told Colorado officials earlier this year that GE is going to start moving its manufacturing back to the United States. After the cost of labor, the second-biggest reason GE went offshore was the fear there would not be enough energy resources in the United States that it could effectively and efficiently utilize, he told the state, including Gov. John Hickenlooper.

Methanex is reviewing plans for relocating a third dismantled production unit from Chile to its Geismar site in Louisiana, following similar moves of two other units (Geismar I and II) and building of new production facilities elsewhere. Collectively, Methanex is looking at securing several hundred billion cubic feet of natural gas to fuel the expected level of added production. The company has a 10-year supply contract with Chesapeake Energy Corp. for the Geismar I plant, and a Louisiana-based Methanex spokesperson told P&GJ that the company is continuously evaluating project costs and opportunities in North America and globally.

“We continue to look for opportunities to grow our business and expand our operations,” the spokesperson says. “’No decision has been made [as of mid-spring] on a possible third relocation, but it is one of the opportunities being evaluated.”

Shale gas development has resulted in a competitive (North American) natural gas environment and a positive environment in which to make methanol, according to the spokesperson, underscoring a buzz around the energy and chemical industries for the past two years. On a cautionary note, however, she says the bullish outlook is not likely to add up to as many as five new North American facilities for Methanex, but three or four look do-able.

In addition to the relocated units in Louisiana, Methanex has plans for a new production facility in Alberta, Canada at Medicine Hat. It would be a 500,000 metric tons/year (mty) capacity addition to an existing 470,000 mty plant site.

“We are seeking to secure a similar [gas] contract to supply the second Geismar location, but we intend to proceed with the relocation even without such a contract in place,” the spokesperson says. “The gas for the plants in the United States will be sourced off the U.S. natural gas grid and the Canadian location would be sourced from the Alberta gas market.”

Another big name in the chemical space, Dallas-based Celanese Corp., announced in April that it was exploring plans for building a methanol production facility at its Bishop, TX site, eyeing the start of environmental construction permits for the project. A 1.3 million metric tons/year (mmty) plant is being contemplated, depending on some so-far undisclosed economic incentives from government entities. The proposed plant would depend on growing supplies of natural gas in the Gulf of Mexico region. On average, Celanese said it takes about 32 Bcf of gas to produce 1 mmty of methanol.

The Bishop facility would be in addition to another new plant that Celanese already has under construction in Texas at Clear Lake. Earlier, CEO Mark Rohr had publicly lauded the robust U.S. domestic energy sector and emerging gas supplies as allowing for his company to turn to more U.S. methanol use in acetylene production.

A global cost-competitiveness study released this spring by the Boston Consulting Group (BCG) found that manufacturing in Mexico is now less expensive than China, the United Kingdom is the low-cost manufacturer of Western Europe, and many emerging markets known for low costs are no longer cheaper than the United States. “Manufacturing cost competitiveness around the world has changed dramatically over the past decade,” the BCG report states.

“The overall manufacturing-cost structures of Mexico and the U.S. have significantly improved relative to nearly all other leading exporters across the globe. The key reasons were stable wage growth, sustained productivity gains, steady exchange rates, and a big energy-cost advantage that is largely driven by the 50% fall in natural gas prices since large-scale production of U.S. shale gas began in 2005.”

According to the BCG report, overall U.S. manufacturing costs are 10-25% lower than those of the world’s 10 leading goods-exporting nations other than China. “While labor and energy costs aren’t the only factors that influence corporate decisions on where to locate manufacturing, these striking changes represent a significant shift in the economics of global manufacturing,” says Michael Zinser, a BCG partner who is co-leader of the firm’s manufacturing practice.
An artist’s rendering of Sasol North gas-to-liquids (GTL) complex in Lake Charles, LA.
Other studies popping up regularly this year tout North American gas prices and supply advantages, and the chemical industry in particular has been taking note. The U.S.-based energy price/supply number crunchers at RBN Energy LLC called shale gas’s implications for U.S. manufacturing “revolutionary,” predicting the sector’s demand to increase by 5 Bcf/d during the next 10 years, hitting 24 Bcf/d in 2024.

“There have been numerous announcements [in recent months] about new plant builds and expanded capacity projects in primary industries,” the RBN report states. “Less well-documented are the wider ramifications of abundant shale natural gas and natural gas liquids (NGL) supplies for the U.S. manufacturing industry as a whole.

“Many people are less aware of the larger and more far-reaching impact that the plethora of natural gas produced by hydraulic fracturing [fracking] is having on [the U.S.] industrial economy and the eventual boost to [its] manufacturing competitiveness that will result.”

In late March in a speech at the IHS World Petrochemical Conference in Houston, ExxonMobil Chemical Co. President Steve Pryor predicted that shale energy can help build a more extensive middle class in the developing nations globally while revitalizing the U.S. middle class simultaneously. A central driver is ExxonMobil’s forecast that global ethylene demand, the world’s largest petrochemical building block, will increase by 150% between now and 2040, driven by what he sees as a broadening middle class in the developing world.

According to Pryor, U.S. chemical industry investment linked to robust, affordable natural gas and NGL supplies has topped $100 billion, including his own company’s planned multibillion-dollar expansion of its Baytown, TX manufacturing complex, slated to start up in 2017.

Noting that volumes of chemicals traded between regions has jumped from 5% a decade ago to about 10% today and are expected to rise to 20% by 2020, Pryor says this growing globalization of chemicals is developing at an advantageous time for the United States as it emerges as a major exporter of chemicals.

Chemical industry investment in the United States topped $100 billion early this year, according to the American Chemistry Council (ACC), driven by plentiful and affordable natural gas. It is widely accepted in the industry worldwide that there are extensive plans for expanding U.S. production, and the ACC is touting the jobs, “growing payrolls,” and added tax revenue this means for the U.S. economy.

By February this year, the ACC reported 148 different projects totaling $100.2 billion with half of that investment coming from companies based outside the United States. The new and expanded production capacity is expected to result in an added $81 billion annually in new chemical output. The ACC estimates that this level of output equates to 637,000 new jobs as part of a 2014 update of its 2013 analysis, “New U.S. Chemical Industry Investment – An Analysis of Announced Projects.”

ACC CEO Cal Dooley calls the latest data “a historic milestone of America’s chemical industry and proof that shale gas is a powerful driver of manufacturing growth. Thanks to the shale gas production boom, the United States is the most attractive place in the world to invest in chemical and plastics manufacturing.” Dooley calls the transformation “an astonishing gain in competitiveness.”

Earlier the ACC completed case studies of eight manufacturing industries and other studies that chart the economic multipliers from expansions in the ethane and other chemical sectors.

While the bullish outlooks for growth don’t try to dissect the oil/gas industry’s ability to provide infrastructure to satisfy the increased industrial energy demand, ACC’s assessments generally caution that manufacturers investing in new and expanded facilities still face what it calls “a complex permitting process.” Obviously, both energy and chemical companies would like more certainty in the processes and timing of permitting at all governmental levels.

“[New} policies key to realizing the shale gas opportunity include access to domestic natural gas resources, responsible state-based regulation of production, and rapid development of infrastructure to transport supplies,” an ACC spokesperson says. “Cumulative potential investment is growing.”

Pipeline and other midstream operators should relish the future as outlined by an ExxonMobil strategic planner in May at an annual alternative transportation fuel conference in California. He underscores the importance of unconventional gas supplies in a dynamic global energy outlook covering the next three decades through 2040. Technology is behind all of the optimism in the ExxonMobil scenario, according to Tahmid Mizan, a Ph.D. in chemical engineering who operates as a strategic technical adviser with ExxonMobil.

Mizan’s view is the world’s economies will grow at an average of 2.8% annually, while energy growth to fuel it will grow at about 1% each year through 2040, reflecting great strides in efficiency, which will be enabled by technology advances – not just in the oil patch – throughout the industry. In 2040, fossil fuels will still account for the vast bulk of the energy consumed across the globe (75%), he says.

Global industrial companies will continue to be attracted to North America if Mizan’s projections for oil and natural gas supplies for the next 30 years continue to pan out. He’s looking at oil reserves of 5.6 trillion bbls, compared 3.3 trillion bbls in 2000 and 1.7 trillion bbls in 1980. What he called an “astronomical figure” – 28,000 Tcf — for natural gas will be around in 2040, or basically a 200-year supply of natural gas.

Highlighting the ExxonMobil outlook are reports earlier this year of U.S. crude oil production reaching levels not seen in a quarter of a century. The U.S. Energy Information Administration (EIA) notes that in mid-March output increased by 33,000 b/d, topping 8.2 million b/d, a level not seen since 1988. At the same time crude oil imports fell to their lowest levels since January 1997, dropping to 7.19 million b/d, according to EIA.

EIA is predicting that U.S. oil production will rise to 9.16 million b/d next year, closing in on a domestic record set in 1970 at 9.6 million b/d. Oil industry analysts are now predicting that the United States will continue to see more oil production and fewer imports for the years to come.

In this economic gusher that is clearly pushing domestic capital investments that were not contemplated just a few years ago, there is concern in some states about grassroots efforts to curb or ban oil/gas activities, particularly hydraulic fracturing (fracking), which is the catalyst for much of the nation’s recent growth.

California and Colorado have experienced growing local government concerns, prompting some recent academic studies that have found oil/gas development to be a clear winner when it comes to increased jobs and government tax revenues. The California Policy Center (CPC) completed one of the studies, along with a separate one by the University of Colorado (CU Boulder) Leeds School of Business.

A University of Wyoming economist, Tim Considine, did the CPC think tank’s work, determining that average annual employment gains between 67,000 and 299,000 are linked to the potential development onshore and offshore of California’s Monterey Shale. Similarly, the CU Boulder business school’s research warned that a proposed statewide ban on fracking in Colorado could cost jobs and a substantial decrease in the state’s gross domestic product GDP).

These studies and continuing business announcements underscore the magnetic global attraction of U.S. shale gas supplies. In the spring, a fertilizer cooperative in India launched plans to build a major new plant in Quebec, Canada, along the St. Lawrence River, drawn by anticipated shale imports from the Marcellus and Utica formations in Ohio and Pennsylvania.

Farmers Fertilizer Cooperative Ltd. of New Delhi told Canada’s National Energy Board (NEB) it is planning to spend up to $1.1 billion for a plant at Becancour, an industrial town on the south shore of the river. The proposed plant would use about 80 MMcf/d of natural gas to make bulk cargoes of nitrogen-based urea fertilizer.

Noting the potential for 1,500 construction jobs, and 250 permanent fertilizer plant employees, along with an estimated 500 indirect jobs supporting the supply and services, the Indian cooperatives backers stressed to the NEB that access to competitive U.S. gas supplies at the Dawn storage and trading hub in Ontario was critical.

“Uncertainty around the issues of transportation of natural gas and its toll has the potential to derail this investment and send a wrong signal, particularly to foreign investors,” the fertilizer cooperative officials emphasized to Canadian regulators.

Once again the power of gas infrastructure and its ability to spawn further industrial development was never any clearer. Pipelines, storage and processing equipment appear to be the bread and butter for a manufacturing renaissance in North America.

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

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