PERSPECTIVE: SHALE GAS’S IMPACT ON CHEMICAL INDUSTRY

We believe that the Shale Revolution presents a once-in-a-lifetime opportunity unique to the United States that will have a profound impact on the chemicals industry.  Nearly 100 projects announced as of Q1-2013, $72 billion in potential chemical industry capital investments, $67 billion in additional output by 2020 (with new & permanent federal, state, and local tax revenue of $14 billion from increased chemical industry output by 2020, according to ACC)!

The Shale Revolution will create 17,000 new high-paying and knowledge-intensive positions in the chemical industry, will result in a $32.8 billion increase in United States chemical production, will cause $16.2 billion in capital investments to build new petrochemical and derivatives capacity, and will lead to $132.4 billion in United States economic output related to increased chemical production and capital investment.  The Energy Information Administration estimates that shale gas production will grow 113% from 2011 to 2040 and that its share of United States natural gas production will grow from 34% to 50%.  The primary end market consumers during this period will be the electric power generation end market and the industrial end market.

The shale gas benefit to some of the specific chemical manufacturing industries is most pronounced to the following: resins and synthetic material manufacturing grew by 1.7% in 2012, but is projected to grow by 8.1% in 2025, basic organic chemical manufacturing grew by 1.5% in 2012, but is expected to grow by 9.5% by 2025, agricultural chemical manufacturing grew by 1.2% in 2012, but is expected to grow by 7.7% by 2025, and plastics and rubber products manufacturing grew by 1.5% in 2012, but is expected to grow by 4.6% by 2025.

Due to the shale gas boom, in which the ACC expects a 25% increase in ethane supply, 99% of which is used for ethylene purposes and 82% of ethylene is used for plastic resins, the United States will be the lowest-cost ethylene producer.  As such, the ACC anticipates the additional chemical industry output generated by this 25% increase will result in an additional $18.3 billion from bulk petrochemicals and organic intermediates, $13.1 billion in plastics resins, $1.0 billion in synthetic rubber, $0.3 billion in man-made fibers, and $0.2 billion in carbon black.  These outputs are expected to require a new capital investment of $16.2 billion in the forms of debottlenecking, brownfield projects, and greenfield projects.  As a result, there is the potential for a raw material cost advantage of up to 60% for products in the ethane-ethylene value chain.

In addition to the shale gas impact on ethanol supply, production of ammonia will become more domesticized as well, leading to large growth possibilities in the agricultural chemical manufacturing industry.  Further, the increased shale production has led to increased United States capacity for methanol, which could lead to a significant opportunity because presently accounts for half of the world’s consumption.  Hundreds of chemicals are also used in the fracking process, where roughly 2.5 million gallons of water and 1.5 million pounds of sand represent 99.5% of the fracking mixtures, and the remaining 0.5% of the mixtures is made up of chemicals.  Projects directly synthesizing heavier derivatives will also benefit from increased shale gas because they are experiencing greater returns due to being in shorter supply because of cracker conversions to ethane.

The input cost advantage in North America that is being led by an increasing abundance of nat gas and helping both organic chemical producers through NGLs as well as the inorganics through lower energy costs (Middle East being the one exception), the North American chemicals landscape looks to be the most promising world-wide for years to come, justifying the heavy domestic investment that the industry is set to see.  Key questions would remain in our ability to manage typical risks for a complex industry, such as environmental, regulatory, specialized credits and equity investment approach, proper tax treatments, infrastructure and access to realize the Shale gas driven potentials. What are your thoughts?