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CERAWeek: Petchem Sector Shifting with the Shales

Success at extracting natural gas and natural gas liquids (NGL) from North American shales has turned the conversation about NGLs and the U.S. petrochemical industry around 180 degrees. The abundance of feedstock and fuel coming from shale plays has caught the attention of the petrochemical industry, but still more confidence is needed before the real investment can begin.

"The fact that we're here today talking about new opportunities...that is a change," Doug May, Dow Chemical Co. vice president of energy and climate change, said during a panel discussion at CERAWeek 2011 in Houston Tuesday. "...[W]e are probably the remaining elastic user of natural gas, so when natural gas prices move, our industry tends to respond very quickly."

The North American petrochemical industry is in the midst of shifting to lighter feedstocks -- i.e., from naphtha to ethane -- in light of $100/bbl-plus oil prices and gas prices less than $4, making for a 25-to-1 price ratio. So far the transition has taken the form of debottlenecking of existing infrastructure to accommodate more ethane, which is used to make ethylene, a key component of numerous products.

Since 2008 the industry has shifted 15-20% more toward use of ethane, said Dennis Seith, CEO of INEOS Olefins & Polymers USA. "That's an enormous move since 2008...The incentives are there and clearly the industry is prepared to move."

Still, there has yet to be a new ethane cracker announced for North America, CERA's Lyn Tattum, group vice president for chemical business media, noted. "There seems to be an opportunity, but we're not really seeing the dollars on the ground yet," she said.

May characterized the outlook from the side of the petrochemical industry as "cautiously optimistic." Seith said the surfeit of gas and NGLs is "a chance to rejuvenate a national asset," the petrochemical industry. However, if Seith or one of his colleagues were to proceed with development of new North American cracking capacity today, "we might just get tossed out by any of our respective boards," he said.

The problem, the CERA speakers said, is that there is not enough clarity on U.S. regulatory policy with regard to development of natural gas resources, regulation of greenhouse gases and the export of energy and petrochemical products.

"We are competing against nations, other countries that can make a decision and move very quickly," May said. "We're not set up that way...As companies like Dow and others look to where we can go to meet demand...these countries are willing to commit energy supply...The U.S. needs to compete against that."

The recipe for growth in the chemical industry is a pretty simple one, according to CERA Director James Osten. Feedstock is one ingredient; growth in gross domestic product (GDP) is the other. Chemical demand will generally grow at a one-to-one ratio with GDP, he said. To expand markets for North American ethane, chemical sector investors need to be confident in the story of shale gas and shale gas liquids, Osten said.

While North America's natural gas crystal ball might be cloudier than the petrochemical industry would like, there also are plenty of uncertainties related to development of shale gas resources outside North America, according to Dmitry Kolobov, Sibur LLC deputy head of hydrocarbons feedstock business strategy.

For development of shale outside North America to gain traction, there needs to be a clear regulatory climate supporting development, he said. Also, there needs to be a transfer of U.S. drilling technology -- which has made shale development so successful in North America -- to other countries. Nations that intend to develop shale gas resources need to have a "drive for the domestic production of gas," he said. Finally, the price outlook needs to be positive.

"With these four conditions in place, shale gas can take off," Kolobov said. This will probably be the case in India and China, as well as Australia, he said, noting that Eastern Europe holds promise, too, but he is less optimistic about that. Wherever shale supplies take hold as they have in North America, the petrochemical industry will surely be watching.

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