Cheap Shale Gas Leading to Chemicals Renaissance

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Cheap Shale Gas Leading to Chemicals Renaissance

The recent World Petrochemical Conference, held in Houston from March 25 to March 28, enjoyed record attendance . . .  and for good reason.

You see, cheap shale gas is fueling a renaissance in a chemicals industry that, just a decade ago, was in the midst of its worst downturn in history.

A report released in August by the Boston Consulting Group (BCG), Behind the American Export Surge, pointed to two industries as prime beneficiaries of low natural gas input costs – petrochemicals and the related plastics industry.

According to BCG, natural gas costs in the United States are 2.6 to 3.8 times lower than in competing countries. And since 2005, the price of natural gas has fallen by 51%.

At the same time, natural gas usage has climbed from 50% to 80% of the chemical industry’s feedstock, according to a report from research firm IHS.

This increased usage has translated into U.S. chemical firms running ethane crackers, which have boosted their profits by about $6 billion annually.

Booming Investment in the United States

Lower energy input costs and higher profitability have suddenly made the United States the investment center for the worldwide petrochemicals industry. Plans for nearly 150 factory and plant expansions across the country are on the drawing board, totaling $129 billion  . . .  all as a result of cheap shale gas.

In fact, thanks to new ethane cracker facilities in Pennsylvania and along the U.S. Gulf Coast, production of one key petrochemical product – ethylene – will expand by a robust 38% in the next few years.

The world’s most widely used chemical, ethylene fuels a $148-billion industry. And now, it can be made in chemical plants from the ethane found in so-called wet shale gas fields.

That’s led to a significant price drop in the United States, where it now costs only about $300 to manufacture a ton of ethylene, down from $1,000 per ton just a few years ago. In contrast, it now costs over $1,700 per ton to produce in Asia. Even in energy-rich Saudi Arabia, the cost is somewhere around $450 per ton.

Companies Investing in U.S. Chemicals

From an investment standpoint, there are a number of companies taking the plunge and making multi-billion-dollar investments in new or upgraded petrochemical facilities:

–        Dow Chemical (DOW) is spending $4 billion to expand its U.S. chemicals production. This investment includes a new plant in Freeport, Texas that will make ethylene.

–        Royal Dutch Shell ADR (RDS.A) is moving ahead with plans to build a multi-billion-dollar, world-class ethane cracker facility here in my native western Pennsylvania.

–        Other companies expanding their efforts in petrochemicals include the likes of ExxonMobil (XOM), LyondellBasell Industries NV (LYB), Sasol (SSL), Methanex (MEOH) and CPChem, a joint venture of Chevron (CVX) and Phillips 66 (PSX).

In the weeks and months ahead, I’ll keep an eye on developments and inform you of any new investment opportunities brought about by the petrochemicals renaissance.

And “the chase” continues,

Tim Maverick

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