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The Shale Gale Revitalizes U.S. Chemical Production

Analysts and executives gather in Houston to discuss the new U.S. advantage in petrochemicals

by Alexander H. Tullo
April 8, 2013 | A version of this story appeared in Volume 91, Issue 14

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Credit: IHS Chemical
ExxonMobil’s Pryor addressed the IHS petrochemical conference in Houston last month.
Photo of Stephen D. Pryor speaking before the IHS Petrochemical conference on March 20, 2013.
Credit: IHS Chemical
ExxonMobil’s Pryor addressed the IHS petrochemical conference in Houston last month.

A decade ago, the U.S. was one of the world’s worst places to make petrochemicals. But that was before oil companies learned how to economically tap into abundant shale natural gas resources. Now the U.S. petrochemical sector is among the most competitive in the world.

Shale gas dominated discussions at the IHS World Petrochemical Conference, held late last month at the Hilton Americas hotel in downtown Houston. One presenter after another approached the podium to analyze from every perspective the new world order in petrochemicals brought about by shale gas production.

Gary Adams, chief adviser for IHS Chemical and former head of the IHS predecessor Chemical Market Associates Inc., told the packed ballroom of nearly 1,200 attendees that he hasn’t seen a turnaround like this in his entire career, which stretches back to 1975. “The only regret I have today is that I am not 40 years old,” he said. “We spent 20 years in many of the sectors of this industry managing a decline. Many of us now have the opportunity to spend the next 20 years managing an expansion.”

But that isn’t to say the event was a victory lap for U.S. petrochemical makers. Talks also delved into potential threats to the U.S. industry. Among them are natural gas exports and the possibility that the “shale gale” will blow into other regions that possess hydrocarbon-rich shale formations.

IHS Chief Economist Nariman Behravesh opened the conference with an upbeat prognosis for the global economy. “A lot of bad things that could have happened in 2012 didn’t happen,” he told the audience. The U.S. didn’t plunge over the fiscal cliff, the European Union did not have a currency meltdown, and the Chinese economy didn’t experience the hard landing that many observers had predicted.

Overall, Behravesh expects global economic growth to approach a robust 3.5% clip this year, beating the respectable 2.5% expansion posted in 2012. Several risks loom, he cautioned. The “manufactured crises” over the federal budget in Washington, D.C., could trip up the U.S. economy. Europe is still teetering, as seen recently in the Cypriot banking crisis. And empty Chinese apartment buildings signal a possible real estate bubble in that country.

Behravesh assigns shale gas much of the credit for the relatively strong U.S. economy. Oil development has created 1.7 million jobs in the U.S. over the past four years, he said, and the next four years could see that figure doubling. Downstream sectors, including chemicals, could add more than a million jobs of their own.

Shale gas has made the U.S. the second-most cost-competitive place to make ethylene, behind the Middle East, noted Russell Heinen, director of technology and analytics for IHS Chemical. The U.S. enjoys a similar advantage in chlorine, propylene, and synthesis-gas-based chemicals such as methanol.

This advantage is precipitating a massive amount of new investment. Since 2010, some 13 million metric tons per year of capacity to manufacture these chemicals and their derivatives has been added in the U.S. Heinen expects another 40 million metric tons of capacity to be built by 2018 and a further 45 million metric tons by 2030. This amounts to a 60% expansion of the U.S. chemical industry. “The Gulf Coast is under construction,” he remarked.

Shale gas is making the petrochemical world bipolar. On the one hand, gas-rich North America and the Middle East are raking in hefty profits. On the other, regions such as Asia and Europe, which primarily derive chemicals from oil, a more expensive raw material than natural gas, are barely getting by.

Graeme Burnett, senior vice president of refining and petrochemicals in the Americas for Total, touched on the new landscape in his talk. “A game changer affecting Europe has been shale in the U.S.,” he said.

Until about five years ago, the two regions had been on similar footing. Since then, shale gas production has driven down the cost of making petrochemicals in the U.S. by 50%. In Europe, rising oil prices have pushed costs up by 20%. Owing to the disadvantage, he said, Europe will need to cut as much as 2 million metric tons of polyethylene capacity over the next five years.

Europe does have shale, Burnett noted, but the obstacles to developing it are significant. Europe doesn’t have the infrastructure to bring shale gas to market. Environmental concerns are every bit as strong as in the U.S. And landowners in Europe don’t have rights to minerals under their land as they do in the U.S. “Having a big drilling rig in your own backyard to produce gas for the state doesn’t exactly excite the landowners,” he quipped.

Paul Pang, senior director for China at IHS Chemical, noted that the U.S. isn’t alone in developing a domestic resource to produce chemicals. Abundant coal in central and western China has been used for decades to make methanol and polyvinyl chloride. However, Pang predicts a boom in Chinese olefins manufacturing that will be bigger than the one experienced by North American shale gas. From now through 2020, China will add some 20 million metric tons of coal-based light olefin capacity. The U.S. will add 15 million metric tons over the same period.

The Middle East, which constructed some 13 million metric tons of new ethyl­ene capacity between 2008 and 2010, is hardly out of the picture, Sanjay Sharma, managing director for the Middle East and India at IHS Chemical, reminded the audience. He said plans are in place for some 8.5 million metric tons of new ethylene capacity by 2018.

The event wasn’t without controversy. Normally, the U.S. oil and chemical industries march to the same drummer on political issues. Today, though, they are out of step over liquefied natural gas (LNG) exports. Oil companies say they want to build LNG export terminals so they can earn the profits necessary to encourage more upstream development. A number of U.S. chemical firms, including Dow Chemical, the country’s largest, worry that unlimited LNG exports will drive up natural gas prices and undermine the chemical industry’s advantage.

Stephen D. Pryor, president of ExxonMobil Chemical, spoke about the controversy. ExxonMobil is planning a $10 billion LNG export terminal in Sabine Pass, Texas, with partner Qatar Petroleum. At the same time, it is spending billions of dollars to build new ethylene and polyethylene plants in Baytown, Texas. Despite its chemical plans, ExxonMobil has been a vocal supporter of LNG exports.

“Protectionist pleas are often wrapped in pious appeals to nationalism, but the real agenda is to unlevel the playing field and stifle the competition,” Pryor said.

Specifically, Pryor warned of a “chilling effect on trade” if the U.S. puts limits on LNG exports. “Why should the EU drop tariffs on U.S. chemicals, made from advantaged natural gas, if the U.S. blocks exports of that gas in liquefied form?” he asked.

Pryor also cited analysts who say LNG exports won’t have a dramatic effect on domestic gas prices. One such analyst was on hand. Bill Sanderson, vice president of downstream research and consulting for IHS’s Energy Insight unit, predicted that natural gas prices will rise to only about $4.50 to $5.00 per million Btu by the end of the decade, from a little less than $4.00 today. “We don’t think that LNG exports will have a large volumetric effect,” he told the audience. “They will probably have more of a psychological effect.”

Even if such rosy analysis is wrong, the U.S. won’t see a serious threat to its competitive advantage anytime soon. In the meantime, the global chemical industry will have to grapple with a revitalized participant.

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